Half-year report
Embargoed until 7:00am 9 November 2023
Downing Strategic Micro-Cap Investment Trust
plcLEI Code:
213800QMYPUW4POFFX699 November
2023Half-Yearly Financial Report for the six
months ended 31 August 2023
The Directors of Downing Strategic Micro-Cap Investment Trust
plc announce the company's results for the half year ended 31
August 2023.Key points
► 8.2% decrease in NAV per share and 8.3% decrease in
the share price, compared to a 12.8% decrease in the FTSE AIM
All-Share TR index over the 6 months to 31 August 2023, driven by
increasing negative sentiment towards UK smaller companies given
the macro-economic headwinds.
► Catalysts to increase shareholder value across all
holdings.
► Handful of companies recently refinanced,
positioning them more strongly in a weaker market.
► Agreed bids for two portfolio companies.
► Board planning for an orderly wind up of the
Company with an initial distribution of at least 20% of capital
planned in early 2024.
Judith MacKenzie, the lead manager, said:“The overhang of 2022
has seen the negative markets sentiment towards UK smaller
companies continue. This is despite DSM highlighting its portfolio
of well-run, niche businesses that have largely weathered a
challenging economic backdrop. Meanwhile, the catalysts in the
portfolio are being recognised and realised, with over 20% of
net assets now 'in play' with agreed bids or strategic reviews that
should lead to exits and a return of capital. With that corporate
activity in mind, and the continuing negative sentiment towards
smaller companies and small investment trusts, the Board and
Manager have decided that it is timely to begin a managed wind-down
of the Company, with the intention to make the first return to
shareholders of at least 20% of capital in early 2024. This
will be followed by further returns of capital as liquidity/trade
exits permit.”
Financial
highlights |
|
|
|
|
(Unaudited) |
(Audited) |
|
|
Six months ended |
Year ended |
|
|
31 August |
28 February |
Change |
Assets |
2023 |
2023 |
% |
Net assets (£’000) |
33,939 |
38,355 |
(11.51%) |
Net asset value (‘NAV’) per Ordinary Share |
71.57p |
77.99p |
(8.23%) |
Mid-market price per Ordinary Share |
60.25p |
65.70p |
(8.29%) |
Discount |
15.81% |
15.76% |
|
|
(Unaudited) |
(Audited) |
|
|
Six months ended |
Year ended |
|
|
31 August |
28 February |
|
Revenue |
2023 |
2023 |
|
Revenue return per Ordinary Share |
0.17p |
(1.32p) |
|
Capital return per Ordinary Share |
(7.07p) |
(6.22p) |
|
Total return per Ordinary Share |
(6.90p) |
(7.54p) |
|
Ordinary shares admitted to trading on 9 May
2017 at 100p per ordinary share. Starting NAV of 98.04p per
ordinary share.
Chairman’s
StatementOverviewFor most markets and
investors, it has been a tiresome six months. For micro-caps it has
been dispiriting for two or three years. Despite holding a
promising portfolio, your board has taken a blunt decision to start
the return of capital earlier in 2024 than originally anticipated
and that is outlined later in this statement.
All relevant UK indices (FTSE All-Share, Small-Cap, and AIM)
have declined. The S&P 500 has wandered through a small amount
of uplift but faltered again. Valuations are relatively high in the
leading market of the US but remain depressingly low in the glum
markets of the UK. Investors and institutions seem to have lost
direction and have retreated from even those equity markets that
are cheap. Advisors do not know what to make of interest rates
which, although not much different from the long-term historical
trend, are now starkly different from recent bull years. The herd
is confused. Even bonds have been uncertain and property prices
challenged. Uncertainty has led investors to shelter in money
markets for returns. The prospects of small caps and value have not
featured at all – yet. Compared with a FTSE AIM All-share TR
decline of 13% over the period, DSM’s portfolio NAV declined by 8%,
leading to a complementary share price decline of 8%. Given that
our peer group has also lost market value in the period since DSM’s
last year end, it is barely an accolade to say that DSM has done
marginally better than ‘middle of the pack’. In truth, even good
micro-cap stocks continue to be overlooked by markets, brokers,
analysts, commentators, and investors. Trading has been thin. The
story seems to be similar for much of the FTSE All-Share TR. Global
drift, uncertainty, advisory fog and bouts of political dysfunction
hardly help.
Meantime, DSM’s portfolio of good companies presses on and the
undervalue of that portfolio has just been illustrated by the
agreed sale of OnTheMarket plc at 110p which is an uplift of almost
100% on its average share price over the previous 3 months and a
46% uplift on cost and now we have the agreed bid for FireAngel
Safety Technology Group plc at a 46% uplift on the last funding
round. Most of DSM’s portfolio is performing well and more is ripe
for M&A or rerating.
PerformanceA decline in DSM’s NAV per share
from 77.99p to 71.57p in the period reflects the continuing
downbeat view of equity markets, particularly in the UK, with low
multiples even on the valuations of DSM’s portfolio companies, most
of which are performing much as the managers expect and are
adequately financed, either holding cash or in other ways able to
sustain exposure to continued high interest rates (see the
manager’s typical in-depth report).
As to your company’s shares, your board keeps a close eye on the
discount. With modest buy-back activity, the discount remained
around 15% to 17%. The share price reflected the NAV, declining
from 65.7p to 60.25p in the period and the discount widened a
little in recent market doldrums.
Return of capitalLast year the board announced
its intention to give shareholders the opportunity in May 2024 to
opt for a subsequent return of 50% of their investment in the
company. Since then, given the market’s continuing undervaluation
of both micro-cap stocks and small investment companies -
demonstrated in part by the discount of your company’s share price
to NAV, the board has been considering what would be the best and
fairest way to meet that commitment of returning capital to
shareholders, realising best value for them equitably. It 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. That will require shareholder
approval which, along with further details, will be the subject of
a circular shortly. It is expected that an initial return of
capital equal to at least 20% of net assets can be delivered in
early 2024 (subject to the two agreed bids noted above completing
successfully) with further returns over a period of complete wind
down. The board is consulting with its investment manager on the
timescale for such a wind down, given current markets and the need
to generate best value for shareholders who can see from the
investment manager’s report that disposals by acquisition have been
at values well above carrying value. The managers have been most
helpful and set out more detail on this proposal in their
report.
Meantime, the board is consulting with its advisors on means to
ensure that any return is of a capital nature and on fee
structures. Further details on the timing and likely quantum of
returns of capital will be announced once we have concluded those
consultations.
Throughout the process your board will continue to support and
encourage one of the most active, influential, and resourceful
management teams in micro-cap investment. The sector remains in
need of their level of involvement and of much greater market
interest.
Providing information to shareholdersI talk to
the larger shareholders every six months. I am happy to correspond
with others if they wish. We have a much-enhanced website.
Shareholders can register for monthly news and notice of everything
we and the managers say publicly. We continue to try to reach
thousands of shareholdings held in nominee names via platforms. We
are told that our efforts are more successful than most – even if
the results are frankly modest.
GovernanceI set out what we do in the annual
report. DSM has a very open and communicative board. In turn, we
have high expectations of our investee company boards. We support
our managers, who are plain speakers on that. Failings by boards
are tiresome as well as economically damaging. A DSM principle is
to be constructively determined in aiming for effective boards. The
managers’ report carries yet another successful example this time
leading to a sale.
Company Secretary and administrationOur much-respected company
secretary and head of admin, Grant Whitehouse, is planning his
future retirement. We have appointed ISCA, run by two equally
well-respected and ex-Sinclair Henderson (for those with long
memories) investment company administrators and company
secretaries.
Wider issuesWe are resolutely intolerant of misstatements or
misleading statements by investee boards, management, and their
companies.
Forward viewPolitical and economic dysfunction
continues almost globally. The UK now lacks direction. Central
bankers seem determined to retain the monetary brake, having
pedalled in the opposite direction for years. We desperately need
growth and the creation of economic and social values, but central
banks and economic policy makers also need economic foundations of
entrepreneurial new business, re-thinking of productivity, depth of
technology, process, skill levels, determination, and education
that will take far more than an electoral span to achieve.
Short-term muddle and short-term, often ineffectual, initiatives
will continue meantime. Corporate UK needs more drive, still more
determined entrepreneurs, more investment in the future and,
wherever possible, constructively challenging governance. DSM’s
managers press on all those fronts and DSM’s portfolio remains a
healthy portfolio for the future of a more determined UK.
A longer-term optimistic viewSmall companies
are the seedbed of growth for the UK. Our institutions and our
future well-being need 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. Centrally the
country has become so bound by departmental defensive statements
that cold feet too often respond to opportunity and a confused
‘establishment’ fails to foster a culture of personal and local
determination that drives growth. Was it Hayek who said all
information is on the edges (meaning locally, where enterprise and
people meet); the centre knows nothing? We are still a nation too
much centrally governed. Nationally we drift through central
caution, isolation and missed opportunity. Success demands
determination (vide the USA over the last 150 years) not a country
that is in a state something akin to administration (for those who
recognise the Insolvency Acts) with decisions ruled centrally by
the bank manager – HM Treasury struggling in a furrow largely of
their own making over many years. I would suggest that over the
last 75 years centrally bungled direction has now run its course.
The ‘private’ governance of public money has not helped national
wealth. Once that wealth was fired by drive and innovation well
outside London – Birmingham, Manchester, Leeds, Newcastle, all long
ago. Recently some future wealth creation has been born in places
like Cambridge and a bit elsewhere round the UK. If the inward
restriction of central thinking has truly run its course, as I
believe it has, the time has come for the devolution of drive,
energy, determination, funding, and the needs of national future
growth to be allowed to be taken up by local enterprise and
management and to be given much more equity funding by a greater
risk-taking nation and its institutions. Some of the West Midlands,
maybe Manchester, are seeking to do that.
Building a seedbed of knowledge, skill and determination
probably takes a generation – far beyond the vision of politicians
or government departments, but not beyond corporate drive and
institutional investment. Pension funds will not service their
liabilities with bonds alone, neither will the nation; they need
thriving small and then growing enterprise.
Micro-Caps will have their day again – but in the longer
term!
The Government has accepted the July UK Investment Research
Review which means, if the industry has the will, access to
research will be available to retail investors and there might be a
research platform to help disseminate it. MIFID II amended, at
last!
ThanksThanks continue to DSM’s determined
managers, Judith MacKenzie and Nick Hawthorn, to Grant Whitehouse
for many years of valued service, to my fellow board members, to
shareholders with helpful views and to the Downing support team who
have revamped our website (with board enthusiasm) and are helpfully
constructive.
As we embark on our return of capital in these poor markets,
shareholders might respect our managers’ determined, active role in
small companies. There is not enough of that in UK fund management.
Judith MacKenzie is also the Chair of the Quoted Companies Alliance
which provides excellent governance guidance for small companies in
the UK. Thank you to Judith and Nick for their determination in
difficult markets.Hugh AldousChairman9 November
2023
Investment Manager’s ReportThe
NAV of the Company was down 8% per share versus the wider FTSE
AIM-All Share TR index which was down nearly 13% (please note the
Company does not have a benchmark). Meanwhile, the share price was
down 8.3%, reflecting the continued diligence of the board and the
buyback policy, which saw c.£1.1m of equity bought back in the
period.
The decline and demise of the smaller companies’ markets in the
UK are now part of the daily narrative of the ecosystem. The facts
are stark:► The number of UK-listed companies has
halved since 1997. New issues have fallen by 33%. 2022 was the
worst year for new issues since 1980. ► The UK
equity market has shrunk relative to GDP over the last 20 years.
From 104% of GDP to 94%. Meanwhile, the US has increased from 101%
to 156%.► The reasons why this de-equitisation
continues are multiple and complex, however, they point to one
thing. There are more investors (institutional and private) selling
small companies than buying them. This needs to change before
sentiment towards small companies improves. ► The
UK market is dominated by traditional sectors, with just 16% coming
from companies that would be described as growth (vs 42% in the
US).► UK growth companies rely on non-UK investors
for 60% of their funding (and more than 70% for deals larger than
$100m).► Pension fund allocation to UK companies
is at the lowest level in history.
We believe that the reason for these depressing features
includes:► A disconnect between the value of
companies in the UK versus the rest of the world due to perceptions
of enhanced political and economic environment concerns compared to
other markets. The UK is therefore a geopolitical risk. The way to
mitigate this is to have UK pension funds invest in UK companies.
The Mansion House reforms need impetus. We must revitalise the
small end of the market – using enhanced tax incentives for private
investors.► Liquidity risk – the perception that
lower market caps equal lower liquidity and therefore higher risk.
This is fed by fear and regulation. Responsibility sits with both
the FCA and relevant Exchanges – to make it easier for investors to
invest, raise new funds, and make it cheaper to maintain a UK
listing.
Market inefficiencies breed opportunity. They mean that
investment companies like DSM can use strategic catalysts that
counteract market malaise. Smaller companies tend to thrive after
downturns. The US has begun to take notice of the fact that small
caps were trading at historically cheap valuations whilst EPS
growth was trending upwards, and analysts’ EPS forecasts had begun
to improve. The Russell 2000 index rose by 14% from January to the
summer months, and small caps outpaced larger peers at points
during the summer. The change in sentiment towards smaller
companies in the UK will happen at some point.
Our PortfolioOur portfolio companies have
already demonstrated that they are cheap and attractive to trade
and private equity buyers. Our holdings are largely ungeared (or
where there is gearing it is shareholder debt or asset backed),
growing, and niche. Below, we cover the main attractors and
detractors to performance in the six-month period to 31 August
2023.
Main contributorsVolex plc
(9.8% of NAV – contribution +2.6%, share price up 44% in period)
has returned to being the largest position in DSM following a
strong share price performance, and due to the Company adding to
its holding. There have been plenty of positive developments at the
business which have driven a re-rating, and others which build the
foundations for future growth.
Prior to the improvement in share price, the overhang on the
share price was due to:► Margins: the group
reported operating margins in excess of 10% in the first half of
FY21, and since then these had declined by c.100bps through FY22,
troughing at 9% in H222 and H123. FY23 delivered an operating
margin of 9.3%, but more notably that meant 9.6% in the second half
of the year. We think this has alleviated margin concerns where the
most bearish view was that, as a contract manufacturer, Volex was
destined to see margins decline back to the low single digits where
they began around 2017. This view took no account of the
transformation of the group over the last few years. With the group
now firmly recovering margin on an underlying basis and expected to
sustainably generate over 10% operating margin following the
acquisition of Murat Ticaret, we think this concern has
diminished.► Cash and debt: real free cash
generation had been anaemic over the last few years, with healthy
EBITDA and operating cash flows consumed by increasing cash
interest and tax costs, working capital, and capex, as the business
has generated growth in more capital-intensive opportunities. Also,
through the requirement to fund inventory investment as supply
chains remained stretched through Covid. Combined with
acquisitions, net debt had increased materially over the last few
years. If one viewed the business as highly economically sensitive/
cyclical, then it was probably at an uncomfortable level. The FY23
results showed net debt to EBITDA reduced to 1x, aided by a
significantly improved net operating cash flow of
$55.7m.► Demand: despite good structural drivers,
we had been concerned that demand could soften across some of the
sectors, namely consumer and electric vehicles. Neither concern has
played out. Admittedly, the consumer business did decline in H223,
however, there is strong evidence of this business taking share and
winning large new customers as the lowest-cost operating model
shines through. Our concern over electric vehicles was based on
monitoring the order backlog at one of Volex’s largest customers.
This backlog declined significantly through 2022 and has normalised
at lower normal levels through 2023. However, Volex’s EV segment
remains very strong because of winning more new business and strong
price inflation. The recent NACS coupler announcement – Volex
stating that it is the licensed partner of Tesla for the North
American Charging Standard EV Charging system – may generate
further interest from new OEMs.
With a strong set of full-year results, Volex made further
strategic progress through the proposed (now completed) acquisition
of Murat Ticaret, the largest acquisition to date at €178m. This
adds a fifth market segment to the group in the off-highway space.
Like previous Turkish acquisition, DE-KA, Murat provides access to
this market via a low-cost, vertically integrated operator at
scale. Unlike DE-KA, Murat is primarily in high mix, low volume
cable assemblies, similar to the wider Volex businesses. This
drives highly accretive EBITDA margins of over 20% and should drive
group margins north of 10% with a full year of earnings in FY25.
While this acquisition adds scale and a new growth vertical, there
remains significant untapped potential in leveraging Murat’s
capabilities into the substantial US off-highway market where Volex
has previously been unable to compete on price. The acquisition at
c.5x 2022 EBITDA was funded through debt and an equity raise of
£60m, of which management contributed £15m. FY25 will be the first
full year of Murat earnings, at which point the current share price
will value the business on less than 11x P/E, which continues to
significantly lag peers despite the structurally improving margin
profile.
Journeo Plc (5.8% of NAV, contributing 1.62% to
performance with share price up 37.8% in the period). Journeo is a
leading Intelligent Transport Systems provider, delivering
solutions in towns, cities, airports, and the public transport
networks that connect them. The company works extensively with
local and combined authorities, Network Rail, and many of the
largest multinational transport operators, supporting them as
systems converge toward a more efficient and sustainable
future.
Journeo has seen the benefit of the successful integration of
its acquisition of InfoTec which DSM helped fund when we invested
in January 2023. Since then, the company has announced 11 contract
wins. These amount to £10.8m of purchase orders or contract wins,
which help contribute to the £27m order book and £55m of sales
pipeline which was announced in the interim results in September.
There are several tailwinds for Journeo, many of which are not
within the forecasts in the market. These
include;► Move to recurring SAAS revenue which
will increase with the recent acquisition of MultiQ which has 70%+
recurring revenues. This should lead to a general re-rating as the
quality of earnings improves.► Further contract
extensions including the next phase of the New York Subway contract
(phase 1 was worth £15m over c.3 years). Extensions to other
Frameworks including Arriva Bus.► Macro tailwinds
that are not in forecasts include infrastructure initiatives that
are funded – including the Bus Service Improvement Plan (BSIP
£1.2bn), Zebra (£220m) and of course the next phase in rail
infrastructure spend which is CP7, which starts in April 2024.
Journeo will benefit from these initiatives. None are accounted for
in forecasts or pipeline numbers.► Opportunities
provided through acquisition. As we have seen through the
acquisitions of InfoTec and MultiQ, Journeo’s management team is
prudent and will carefully manage the timing of acquisitions so as
to not distract from organic growth. We expect that there will be
further acquisitions in the coming 12 months, with a particular
focus on rail.
We bought Journeo on a very modest PE of below 5x earnings,
mainly due to the fact that the company had come through a
turnaround and had to prove the acquisition of InfoTec. However,
the management team has delivered, and interims reflect the
transformation. The house analyst notes that Journeo looks
compelling on an FY24E Adj P/E of 10.1x vs peers on 13.2x and
reiterates their 1-year target of 338p (current 208p). They note
that further upside could be seen if cash balances are deployed on
additional acquisition opportunities leading to earnings accretion.
We expect that there is upside in the forecasts through the macro
tailwinds highlighted above.
Equals Plc (5.2% of NAV, contributing 0.71% to
performance over the period. Share price up 15.6%). Equals is a
fintech payments group focused on the Enterprise and SME
marketplaces. We have enjoyed seeing the scalability and organic
growth coming from this company. It is generating strong
double-digit sales growth, 50%+ gross margins, and cash generation.
Unlike many smaller companies, there is a degree of appreciation of
this growth profile, and the share price has rewarded holders,
albeit we believe that there is continued scope for this to be
recognised further.
Interim results posted adjusted EBITDA and EPS coming in at
£9.8m and 3.27p, respectively, on revenues up 43% to £45m – driven
by standout transaction volumes from large/medium-sized clients.
Gross margins improved to 52.4% from 47.4%. Cash at the end of June
was £16.6m. The optimistic outlook allowed analysts to upgrade FY23
guidance helped by Equals announcing a maiden FY23 dividend of
1.5p.
With technology growth companies, it is critical to see that
growth comes with as capital lite model as possible – otherwise
true cash generation can be stilted. Therefore, it was good to see
that H1 software capitalisation was £2.4m, in line with
amortisation costs of £2.5m, allowing adjusted EBIT margins (13%)
are now in balance. The recent Oonex acquisition (rebranded Equals
Money Europe) should allow it to provide the same essential
offering that it does in the UK in Europe (this includes own name
multicurrency IBANs and bank-grade connectivity).
We see the gap between value here and current share price
continuing to widen as the earnings are upgraded. EPS is set to
climb to 12.1p by 2026, providing 24% CAGR growth over the period
(from 6.2p this year). We can see upside of c.70% to the current
share price. Since the period end, Equals has put itself into play,
announcing that it has embarked on a strategic review to
potentially realise value through an exit.
Main Detractors in the periodFireAngel
Safety Technology Group PLC (3.5% of NAV. Detracted 4.1%
from performance and saw share price fall by 61% in the period).
FireAngel, the provider and supplier of fire safety products in the
UK and Europe, continued to disappoint as it ran out of cash runway
to deploy its strategy. It is particularly disappointing given that
previous management had committed to only raising additional cash
on the back of funding exponential growth. This made the status quo
challenging for shareholders to support and therefore a new Chair
and CEO were appointed at the same time as the £6.1m fund raise,
and a strategic review was launched. The new CEO and Chair are well
known to us, having successfully exited a position in Universe
Group Plc to private equity in 2021. It is encouraging that
together, they have invested £500k in the placing.
This company has great macro tailwinds with regulatory
influences in their markets. However, to date, FireAngel has failed
to successfully monetise these. Therefore, the terms of the
fundraise reflected the lack of delivery to date – an issue price
of 5.05p, a discount of 25.2% to the pre-announcement share price.
Subscribing shareholders getting one warrant for every three
existing ordinary shares priced at 3p per share reflected the
stress that FireAngel was under.
New management had a clear remit to realise value for
shareholders through any means, including that of a sale of the
business. It is therefore encouraging that FireAngel has received a
bid from ISE/ Siterwell Electronics at 7.4p. This was a healthy
premium of 225% to the prevailing share price at the time, albeit
on a very depressed share price post a rescue fund raise. We are
disappointed to see the company sold at this market capitalisation
however the execution risk associated with this business means we
are comfortable supporting the board’s recommendations.
Centaur Media Plc (7.5% of NAV, 3.0% detractor
to performance, 26.9% fall in share price over the period)It is
disappointing to see Centaur (the international provider of
business intelligence, learning, and specialist consultancy) within
the group of detractors to performance in the period, when in our
view, management is delivering on earnings growth despite
macro-headwinds in the sector. Although revenue reduced by 3% to
£19.3m due to a fall in non-strategic advertising, adjusted EBITDA
increased modestly to £3.5m from £3.4m thanks to careful cost
management and a focus on profitable revenues.
Cash was strong, with 115% cash conversion delivering a balance
sheet of £8.8m of net cash (the previous year was £14.2m), but this
was after distributions to shareholders of £8m of ordinary and
special dividends. We can understand why the market can take a
blanket negative approach to valuing (or devaluing) certain sectors
that may have macro-headwinds but here they are ignoring the
quality of earnings, the self-help mechanisms that management has
shown they are so able to enact, and the commitment to deliver
adjusted EBITDA of over £10m on margins of 23% and beyond this full
year.
Looking forward, unlevered FCF of £5.4m equates to a yield of
10%, rising to 17% in FY24, making this a highly attractive value
opportunity on well-underpinned profit forecasts. Here there is
optionality, given that the board has delivered 16% of its market
capitalisation back to shareholders over the last 12 months. The
cash will either be used for accretive M&A (which we deem as
unlikely), there is the likelihood of further shareholder capital
returns, meanwhile, shareholders get a 3% dividend yield as they
wait for a strategic initiative to close the gap between the share
price and true tangible value of this quality asset.
Flowtech Fluidpower plc (7.5% of NAV. Detracted
2.3% from performance and saw share price fall by 22.8% in the
period) had a profit warning in the period combined with a tweak to
the strategic direction of the business. In some ways this was
inevitable with a change of CEO and now the business is led by a
through-and-through distributor with Mike England having come from
Electrocomponents and prior to that Brammer and Hagemeyer/ Rexel.
If anyone should know what good looks like for Flowtech, it ought
to be Mike.
The new strategy will build on many of the foundations already
put in place but will create a simpler and more cohesive customer
proposition going forward. Distribution relies on delighting
customers consistently and Flowtech stumbled through a
reorganisation in the first half of the year which resulted in
negative growth in the highest margin segment of the group. While
we had no direct evidence of a reduction in customer confidence in
previous periods, we had noticed some negative commentary around
some of the reorganisation undertaken by management previously. In
hindsight, this was probably already being reflected in some weaker
than expected performance, which we unfortunately boiled down to a
weaker market overall. The simpler operating model going forward,
consolidated under a single brand, should return focus to the
customer and the business can build from here on its already strong
market position.
The other significant change introduced by Mike is to increase
the size of the addressable market by moving into the power,
motion, and control sector. This will triple the market size and
provide the opportunity to accelerate growth from a low base. The
e-commerce offering, while receiving a lot of attention, still
lacks traction and is not as progressed as it should be. Once
running properly, and with a refreshed sales and marketing effort,
the opportunity to generate incremental cross-selling should begin
to play through.
Overall, whilst it’s disappointing that progress has been slow
and, in some cases, negative, the strategic shift sounds sensible
driven by an experienced distributor has significant merit and
increases revenue and earnings potential for the future. We remain
of the view that Flowtech can be a mid-teens EBITDA business if run
correctly and that presents attractive upside over the coming
years. Management will have to work hard to achieve the £13m
expected EBITDA in 2024 but a prospective EV/ EBITDA of sub 6x and
free cash flow yield well north of 10% provides sufficient reward
if execution is flawless from here.
Strategic catalysts enacted through the
period► New NED appointment at Journeo
PLC► Improvement and commitment to Investor
Relations at Synectics ► New management at
FireAngel and Strategic Review started► Board
representation at Real Good Food► Board monitoring
at DigitalBox► New NED appointment at Norman
Broadbent ► Interviewed new CEO at
Flowtech► Discussed capital allocation with
Chairman at OnTheMarket► Various calls with
National World management
We made small additions and follow-on investments into Volex,
Tactus, and FireAngel, and we sold down some of our position in
Hargreaves Services and Ramsdens.
Future of the CompanyAs we highlight above, the
negative sentiment towards UK small companies has continued in
2023. Value and micro-cap strategies have been equally out of
favour and despite outperformance against the relevant indices over
the last two years, DSM has struggled to attract any new investors
with the company itself being largely the only acquiror of its
shares.
Discounts of investment trusts are wider than they have been in
the last 20 years and as wealth management investment trust buyers
themselves consolidate, there is little interest in a small
specialist investment trust like DSM.
This continuation of negative sentiment has coincided with a
period of intense M&A activity in the portfolio with
investments representing more than 20% of the net assets now under
offer or in a strategic review process. Given the redemption option
in May 24 and the negative sentiment to UK smaller companies the
board and manager believe that it is in the best interests of
shareholders to begin a phased and managed return of capital to
shareholders. In order to achieve this, shareholders will be asked
to approve the alteration of the Company's investment policy to a
managed wind-down strategy. Pursuant to this strategy, it is the
board's plan to return at least 20% of current net asset value in
Q1 2024 (assuming the current offers for portfolio companies
complete as expected). Thereafter it is intended that there will be
regular distributions to shareholders as realisations permit, with
a commitment to return cash as it reaches an appropriate level such
that the cost of making distributions is not prohibitive. The
manager believes that it is likely that further corporate activity
in the portfolio that will enable this to be realised.
Inevitably, due to the nature of some of the investments,
natural liquidity will be limited and hence there could be some
time before a full and complete return of capital is made. Further
details of this will be outlined in the coming weeks, however the
manager has identified key catalysts within portfolio companies
that point to an estimated intrinsic value of the portfolio, which
if the divestments are carefully managed, would indicate an upside
of at least 50% to current market cap. It is therefore the priority
of the board and manager to realise this value and return capital
to investors in the most efficient and effective way possible.
Further details on the proposed divestment plan, expected
running costs, board composition, return of capital and revised
management arrangements will be detailed by the end of the calendar
year.
Judith MacKenzieHead of Downing
Fund Managers and Partner of Downing LLP9 November 2023
Investments
As at 31 August 2023
|
As at31 August 2023 |
As at28 Feb 2023 |
|
Market Value(£’000) |
% of Total Assets |
% of Total Assets |
Volex plc |
3,309 |
9.75 |
4.09 |
Flowtech Fluidpower
plc |
2,552 |
7.52 |
8.53 |
Centaur Media
plc |
2,546 |
7.50 |
9.08 |
Real Good Food 10%
Loan Notes1 |
2,528 |
7.45 |
6.59 |
Hargreaves Services
plc |
2,375 |
7.00 |
8.52 |
Synectics plc |
2,017 |
5.94 |
6.26 |
Journeo plc |
1,957 |
5.77 |
3.70 |
Ramsdens Holdings
plc |
1,952 |
5.75 |
6.57 |
Equals Group
plc |
1,746 |
5.15 |
3.90 |
National World
plc |
1,724 |
5.08 |
5.32 |
Inspecs Group
plc |
1,702 |
5.01 |
4.61 |
Real Good Food 12%
Loan Notes1 |
1,420 |
4.18 |
3.70 |
OnTheMarket
plc |
1,319 |
3.89 |
3.77 |
Digitalbox plc |
1,264 |
3.73 |
4.50 |
FireAngel Safety
Technology Group PLC |
1,191 |
3.51 |
4.96 |
Tactus Holdings
Limited2 |
829 |
2.44 |
1.98 |
TheWorks.co.uk
plc |
812 |
2.39 |
2.26 |
Norman Broadbent
plc |
412 |
1.21 |
0.87 |
Real Good Food 12%
Secured Loan Notes1 |
288 |
0.85 |
- |
Norman Broadbent
10% Loan Notes1 |
114 |
0.34 |
0.56 |
Real Good Food
plc |
75 |
0.22 |
0.25 |
Adept Technology Group plc |
- |
- |
6.24 |
Total investments |
32,132 |
94.68 |
96.26 |
Cash |
1,914 |
5.64 |
3.93 |
Other net current assets |
(107) |
(0.32) |
(0.19) |
Total assets |
33,939 |
100.00 |
100.00 |
1 Unquoted. Stated inclusive of the fair value of unpaid
interest income.2 Unquoted equity. |
|
|
|
All investments are in Ordinary Shares and
traded on AIM unless indicated. As at 31 August 2023, DSM held
investments in 17 companies (28 February 2023: 18). Details of the
equity interests comprising more than 3% of any company's share
capital are set out below. As at 31 August 2023, loan note
principal represented 11.41% (28 February 2023: 9.64%) of total
assets and the total of loan note principal and interest
represented 12.82% (28 February 2023: 10.85%).
The table above includes net current assets of
£1,807,000 (28 February 2023: £1,428,000) that are also disclosed
in the Statement of Financial Position.
Background to the investments
(unless otherwise stated, all information provided as at 31 August
2023)
Centaur Media PLC (Centaur) (7.50% of net
assets)
Cost: £3.58m Value: £2.55m
BackgroundCentaur 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 EBITDA margin performance and
progress on strategy to drive profitable revenue growth
► Revenue down 3% primarily due to macroeconomic
headwinds, however, earnings came in on plan due to efficient cost
management
► Robust balance sheet at £8.8m following £8m paid in
ordinary and special dividends
► An interim dividend of 0.6p which represented a 20%
increase on the 2022 interim dividend
► Flagship 4 brands and higher quality revenue
streams drove profitability
Progress against investment case – See comment in the
Investment Managers ReportThere is value in the Flagship 4
brands which management considers 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 the end of 2023.
Digitalbox PLC (Digitalbox) (3.73% of net
assets)
Cost: £1.13m Value: £1.26m
BackgroundDigitalbox 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► Profit warning after significant downturn
in audience numbers
► Strategic pivot required to return business to
sustainable earnings
Progress against investment caseThe group
announced on 1 August 2023 that it had exchanged contracts to
acquire the digital assets of 99 Problems, Student Problems, and
The Life Network Shopping from Media Chain Group for a total
consideration of $800,000. Media Chain houses 20+ social pages with
over 60m followers. The transaction provides Digitalbox with the
opportunity to extend its audience reach through the 99 Problems
10m Facebook followers, Student Problems 1.4m TikTok followers, and
The Life Shopping Network’s 1m Facebook followers. The combined
follower bases will more than double the number currently owned by
Digitalbox, at approximately 8m Facebook followers. On 1 September,
the group announced that it had completed the acquisition, with the
final agreement resulting in the 99 Problems Instagram page and
90's Life Facebook page forming part of the acquisition, and
Student Problems removed. It was completed at improved terms for a
total of $600,000 in cash and is expected to be earnings enhancing
as the engagement is built with the 20m followers the business now
has within the social media channels.
The acquisition of some of the Media Chain should allow the
group to significantly extend the audiences currently being served
by the Digitalbox brands. With 99 Problems having started life as a
social page called Student Problems, there are plenty of synergies
to build around The Tab whilst there is very strong common ground
between Entertainment Daily's audience and those who follow The
Life Shopping Network.
Aside from this acquisition, the Company recently reported that
earnings would be below expectations due to a sharp reduction in
audience driven by algorithm changes from the social platforms. The
business requires a strategic pivot to drive sustainable earnings
and growth going forwards.
Equals Group PLC (Equals) (5.15% of net
assets)
Cost: £1.19m Value: £1.75m
BackgroundEquals 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► Continued significant revenue growth and
record transaction values
► Record adjusted EBITDA
► Two acquisitions completed and integrated
► Strong balance sheet
► Intention to introduce maiden dividend for FY to 31
December 2023
Progress against investment case – See additional detail
in the Investment Managers ReportEquals issued a very
strong set of interim results and highlighted significant revenue
growth, record adjusted EBITDA, and a strong balance sheet. The
group reported record transaction values, with revenues up 43% to
£45.0m. The gross profit margin increased to 52.4%, adjusted EBITDA
more than doubled to £9.8m, and it held £19.9m in cash despite
£2.9m spent on acquisitions. The group made two acquisitions in the
period, Oonex (now Equals Money Europe) which provides access to
the EU market, and Roqqet, an open banking platform. In an update
on trading for the 49 trading days from 1 July to 8 September 2023,
YTD revenue was 39% ahead of the same period the year prior,
revenues per day increased to £370k from £265, and the robust
pipeline in the Solutions business underpins further growth. The
group also announced a proposed capital reduction to put the
company in a position to pay dividends, with the board intending to
pay a maiden dividend of 1.5p in respect of the financial year
ending 31 December 2023.
FireAngel Safety Technology Group PLC (FireAngel) (3.51%
of net assets)
Cost: £6.54m Value: £1.2m
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► Revenue and gross profit
down► Headwinds from adverse impact of unsuccessful
currency hedge► Inventory reduced► New
contract wins ► Senior team
reinvigorated► Strategic review
introduced► post period end the company has had an
agreed approach at 7.6p per share (approximately 250% premium to
share price) subject to shareholder approvals
Progress against investment case – See additional detail
in the Investment Managers ReportFireAngel issued interim
results for the period to 30 June 2023 and reported revenue down
16% to £21.4m, with UK revenue growth of 11% offset by a 63%
decline in international revenue. Gross profit in the period was
down 32% to £3.8m, and there was a loss of £4.0m before tax.
More positively, the group won new business contracts with Yale,
British Gas Services, and a Middle East government agency, and
delivery and production contracts were signed with Techem and a
long-term manufacturing partner. Price rises were agreed with major
customers. A strategic review commenced, and actions have been
taken to reduce inventory and operating costs. The senior
management team was refreshed, with the chairman replaced and three
key appointments made. The business continues to face significant
headwinds, but these are being addressed, the benefits of which are
expected to result in improvements in 2024.
Flowtech Fluidpower PLC (Flowtech) (7.52% of net
assets)
Cost: £2.60m Value: £2.55m
BackgroundFlowtech 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 £110 million,
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► Revenue up by 2.8% with varying
performance across segments► Solutions and Service
divisions operating well► 5.7% revenue decline in
Flowtech division► Out-turn for FY23 expected to be
significantly behind expectations► Adverse market
headwinds expected in HY2► New CEO addressing issues
head-on
Progress against investment case – See additional detail
in the Investment Managers ReportThe group issued a
trading update and notice of interim results for the six months
ended 30 June 2023 and reported that overall group revenue grew by
2.6%, with a mixed performance between the divisions. The Solutions
and Services divisions continued to operate well, showing strong
growth, however, the performance of the Flowtech division was
disappointing, with a decline in revenue of 5.7%. Given the lower
gross margins in the Solutions and Services divisions and the
underperformance of the Flowtech division, group EBITDA in HY1 2023
is behind board expectations.
Actions to address the commercial and operational shortfalls
adversely impacting performance in the Flowtech division are in
progress, some of which require targeted new capital investment and
some to address legacy issues. The HY1 growth and contribution from
the Solutions and Services divisions have been more positive.
However, adverse market headwinds are expected into HY2, and
activity across the broader industrial markets is anticipated to
slow. For these reasons, the board now expects the out-turn for
FY23 to be significantly behind previous expectations.
Mike England took over as CEO in April and is focused on
establishing a stronger platform for market share growth and
improved margins in 2024 and beyond. He has introduced changes in
managerial leadership and implemented a plan to further simplify
the group’s operating model which should improve the overall
service and value proposition for customers and deliver greater
efficiencies as the business scales. This also includes maintaining
tight control of costs whilst making the right strategic
investments for the future.
Hargreaves Services PLC (Hargreaves) (7.0% of net
assets)
Cost: £1.82m Value: £2.37m
BackgroundHargreaves 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 companies’ significant land bank which includes
planning for residential, logistics and industrial space.
Update to the investment
case► Strong renewable energy land asset
valuation and realisation plan set out► No update on
releasing excess cash from the German JV► Land and
Services performed well and generated strong
margins► Shares remain exceptionally cheap
Progress against investment caseThe group set
out a strong value proposition and realisation case from its
renewable’s portfolio over the next five years in its full-year
results announcement. The assets are held on the books at £6.6m and
the realisation case set out is between £21.6m and £28.9m depending
on the development and commissioning undertaken. We would be
disappointed if realisations aren’t made significantly ahead of the
five-year target.
We were disappointed not to see further commitment to releasing
more cash from Germany, particularly as commodity prices have
retreated and this should mean that the commodity trading business
requires less capital. We hope to receive further updates on this
at the interims.
The operating segments – Land and Services – performed well in
the period. The Services business in particular generated strong
margins and has a good pipeline of work with the Sizewell and Lower
Thames projects which will run beyond HS2. With the shares trading
around 450p and a net assets per share, which is also understated,
of 618p per share, the shares remain exceptionally cheap. The
catalysts to drive a re-rating will be centred around progress on
the realisations and return of capital, and continued resilience in
the operating companies.
Inspecs Group PLC (Inspecs) (5.01% of net
assets)
Cost: £1.54m Value: £1.70m
BackgroundInspecs 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► Improved trading and cash generation
performance ► Norville losses reduced substantially
► Net debt (excluding leases) reduced by
£5m► New Vietnam facility will significantly increase
manufacturing capacity
Progress against investment caseWhen we
initiated our position in Inspecs earlier this year, we broadly
expected that 2023 would be a recovery year as cost savings and
improved demand played through. The group reported interim results
for the period to 30 June 2023 and that it had made steady
progress, characterised by improved trading and cash generation
performance. Revenue increased by 6.1%, operating profit increased
by 25.1%, gross profit margin increased to 51.4%, and net debt
reduced from £27.6m to £22.7m. Operational highlights included the
sale of 6.9m eyewear frames, compared to 6.2m in the same period
the year prior. Revenue growth was strong in the UK and North
America but was significantly higher in LATAM where it grew by
277%. Management remains focused on achieving operational
efficiency gains and identifying integration opportunities. The
construction of a new facility in Vietnam which is expected to be
completed in H1 2024 will significantly increase the manufacturing
capacity of the group.
Journeo PLC (Journeo) (5.76% of net assets)
Cost: £1.13m Value: £1.96m
BackgroundJourneo is a relatively new addition
to the portfolio and the company 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 ► Demonstrating the ability to generate
strong organic and acquisitive growth ► Strong order
book and sales pipeline ► Revenue for the FY expected to
be significantly ahead of current market expectations
Progress against investment case – please see Journeo
discussed in the Investment Managers ReportThe 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.
The group issued a market update for the six months ended 30
June 2023 and provided further information on its trading
expectations through to 2025. In the period, group revenues
increased by 145% to £21.8m, which represented 41% organic growth
in core business revenue and £9.3m revenue from Infotec. The sales
order intake increased to £18m, including £4.2m from Infotec, which
provides increased visibility into H2 2023 and beyond. The order
book carried forward into H2 2023 was £27m and the sales
opportunity pipeline was over £55m.
Revenue for the full year is expected to be significantly ahead
of current market expectations, and profit before tax for the full
year expected to be marginally ahead of current market
expectations. This demonstrates Journeo’s resilience and ability to
maintain its performance despite the challenging macroeconomic
environment.
National World PLC (National World) (5.08% of net
assets)
Cost: £2.92m Value: £1.72m
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► Acquisitions and product launches signal
return to revenue growth► Total revenue down
4%► Digital revenue up 9%► Strong balance
sheet with cash balance of £22.1m► Five acquisitions
completed, boosting revenue expectations
Progress against investment caseThe group
issued a positive interim financial report and highlighted that
continued investment in acquisitions and new product launches
signals a return to revenue growth, despite the headwinds for the
sector. Total revenue was down 4% over the period, however, there
was some improvement in the second quarter with flat year-on-year
performance, following an 8% decline in the first quarter. Digital
revenues were up 9% to £8.9m, with average monthly page views of
141m, up 21% on the same period the year prior. Despite the
downturn in the advertising market, video advertising held up well
and continues to be an area of growth. Revenues were up 67% and
total video views of 275 million represent a 49% year-on-year
improvement.
The group delivered adjusted EBITDA of £3.1m, a decline of 47%,
and adjusted operating profit of £2.9m. Contributing factors were
the downturn in advertising and investment in new brands. The group
accelerated plans to implement a new operating model, which will
deliver £1.1m of savings in the second half, with c.£2.5m of
annualised cost savings and restructuring costs of £0.9 million.
However, the new model primarily focuses on sustaining National
World’s news brands in local markets by increasing reach and
customer engagement. Investment in technology and platforms is well
advanced and the first relaunches of fully automated and integrated
print, online, and video brands is expected this quarter. The group
completed five acquisitions in the period, paying a total
consideration of £3.0m, (£1.9m consideration net of cash acquired)
funded from its existing cash resources. Revenue of £2.0m and
EBITDA contribution of £0.3 million were reported in the first
half, with the bulk of this flowing from 1 May. For the full year,
revenues of approximately £7.0m are expected with an EBITDA
contribution of c.£1.0m.
Norman Broadbent PLC (Norman Broadbent) (equity, loan
notes and interest, 1.55% of net assets)
Cost: £0.57m Value (including loan note interest):
£0.53m
BackgroundNorman Broadbent is less than 2% of
DSM but Downing client funds now hold an influential stake of
almost 20% of the equity. Norman Broadbent offers a bespoke mix of
high-quality Search, Interim Management, Research & Insight,
Assessment & Development solutions. A recognised but
historically uninspiring brand, Norman Broadbent 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 Norman Broadbent to the next level of organic
and inorganic growth.
Update to the investment
case► Strong revenue growth and Net Fee Income
► Highly experienced management team with proven track
record ► Repaid £0.2m convertible loan notes
► Net Fee Income up 58%► Recent trading
update reiterated ability to generate up to £1.5m of EBITDA by
2025, despite the macro headwinds of the recruitment sector
Progress against investment caseNorman
Broadbent issued strong interim results, reporting revenue growth
up 54% and underlying EBITDA of £0.27m up almost 400%. The group
delivered its first profitable H1 since 2019, generating profit
before tax of £8,000 compared with a loss of £72,000 for the same
period the year prior. The group also paid down £0.2m of
convertible loan notes during the reporting period, with the
balance of £0.2m expected to be repaid before the second
anniversary of issue. Operationally, Net Fee Income (NFI) increased
by 58% to £5.2m, Executive Search NFI grew by 58% and Interim
Management NFI was up 43%. The group has strengthened the business
in all areas, with economies of scale and efficiency improvements
beginning to benefit the bottom line. Having delivered a profit
after tax for the first time since H1 2019, the substantial carried
forward tax losses of over £14m begin to be of significant value as
management expects to deliver sustainable and accelerated growth in
the years ahead.
OnTheMarket PLC (OnTheMarket) (3.89% of net
assets)
Cost: £1.87m Value: £1.32m
BackgroundOnTheMarket is a majority agent owned
and back 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► Record group revenues and profits
► Continued strategic progress► Cash balance
of £11.3 million provides operating flexibility and potential for
capital returns ► OnTheMarket Software incurred a £1.5m
impairment charge► OnTheMarket was subject to a private
equity bid post the results date, which requires shareholder
approval but if voted for will provide shareholders with a 56%
premium to the closing price and a 94% premium to the average share
price of the previous 3 months
Progress against investment case The group
issued FY results for the year ended 31 January 2023 and reported
record group revenues and continued strategic progress. Management
reported a positive start to FY24 with current trading in the
year-to-date in line with the board's expectations.
Ramsdens Holdings PLC (Ramsdens) (5.75% of net
assets)
Cost: £1.33m Value: £1.95m
BackgroundRamsdens 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 158 stores within the UK (excluding 2
franchised stores) and has a growing online presence.
Update to the investment
case► Strong performance with positive trading
momentum ► 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
announced its interim results and reported a strong performance,
achieved by strong trading across all the group’s key income
streams. This momentum puts the business on course to deliver
record profits in the current financial year. Profit before tax was
up by 68% to £3.7m, gross revenue increased by 33% to £39.0m, and
jewellery retail revenue increased by 32% to £17.3m. The
pawnbroking loan book increased by 29% to £9.7m, and foreign
currency gross profit increased by 41% to £4.9m. The group opened
six new stores in the period, and it anticipates opening another
six in the second half of FY23.
Management is focused on driving organic growth by delivering
ongoing continuous improvements to its operations, expanding the
store estate, and investing in the online offering. In addition,
the board is continuing to seek and appraise attractive
consolidation opportunities in what remains a highly fragmented
market.
Real Good Food PLC (Real Good Food) (equity, loan notes
and interest, 12.7% of net assets)
Cost: £5.45m Value (including loan note interest):
£4.33m
BackgroundReal 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► Macro-headwinds continue to impact the
business ► Challenging conditions have shown some
improvement ► Radical reform programme and new
management team► Reform program realised £8m of
annualised cost savings for 2024 and beyond► Loan
extension provides a secure platform for rebuilding
Progress against investment caseReal Good
Food’s full-year results for the year ended 31 March 2023 reported
revenues fell by 19.8% to £32.5m as the macroeconomic headwinds
punished the business. An EBITDA loss of £4.8m reflected the
reduced gross margins and operating leverage, and the group posted
a loss before tax of £9.0m. The business secured a £2.5m revolving
credit facility and £0.55m in short-term shareholder loans which
will support the group's radical reform programme. At the period
end, total net debt had increased to £31.2m compared with £25.5m
the year prior.
Volumes were about 26% lower year-on-year, with sales into the
US and Europe significantly reduced – these were market-driven
rather than customer losses. Key input costs continued to rise, and
this was partially mitigated by increased prices to customers, but
the limited availability of key ingredients also impacted
performance. The impact of reduced volumes and the lag in passing
cost increases on to customers reduced gross margins, however,
these have begun to improve in the current trading period.
While market conditions remain challenging; there is evidence
that volumes in some segments are beginning to rebuild, and the
business is trading its way into a better place as the busier
autumn season kicks in. A radical reform programme that has been
implemented over the last year has been transformational and, with
a management team in place, Real Good Food is well-positioned to
make further gains, particularly in manufacturing efficiencies,
sales, and customer focus. A loan extension will provide a more
secure platform to continue the journey to sustainable and
satisfactory profitability.
Following the release of a trading update by Real Good food plc
on 31 October 2023, the board has reviewed the valuation of the
Company’s loan stock investment and revalued it to £2.6M (including
interest and redemption premium). This valuation has been adopted
by the Company in its daily NAV announcements with effect from 3
November 2023.
Synectics PLC (Synectics) (5.94% of net
assets)
Cost: £3.98m Value: £2.02m
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► Target markets are strong and
recovering
► Latest financial results demonstrate significant
turnaround in performance
► Strong order book
► FY results expected to be in line with market
expectations
Progress against investment caseSynectics
announced its interim results for the six months ended 31 May 2023
and highlighted that revenue was £21.9m, 14% ahead of the same
period the year prior. Underlying operating profit increased by 61%
to £0.8m and underlying profit before tax was up 62% to £0.7m.
Strength in the oil & gas market underpinned the strong
results, with growth in other markets more modest. The group has a
strong order book at £28.4m and the board expects significantly
improved trading in the second half of its financial year.
Synectics operates in markets that are strong and recovering, and
the company has solid long-term growth potential, from a sound
platform. The group possesses excellent technology in thriving
global markets, including oil & gas, gaming, and public safety,
which are experiencing renewed growth. With a robust financial
position and a clear strategic direction, future success will be
delivered by the execution of that strategy.
Tactus Holdings Limited (Tactus) (2.44% of net
assets)
Cost: £1.23m Value: £0.83m
BackgroundTactus 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 ► Strong cash
generation driven by inventory reductions
Progress against investment caseTactus 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) (2.39% of net
assets)
Cost: £1.41m Value: £0.81m
BackgroundTheWorks 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► Resilient performance in line with
revised expectations ► Total revenue increased
► Business rates cost increased as Covid reliefs
ended► Strong balance sheet ► Improved store
estate
Progress against investment caseTheWorks issued
results and a trading update on 30 August 2023 which showed the
group delivered a resilient performance in FY23, despite the
challenging backdrop. Revenue increased by 5.8% to £280.1m, driven
by its strong portfolio of stores and bolstered by the sector-wide
shift of customers returning to shop in-store post-Covid. Store
sales strengthened as the year progressed, delivering a LFL
increase of 7.5%, however, online sales declined resulting in
overall LFL sales growth of 4.2%. Product gross margin declined by
170bps due to strategic change in sales mix (increased weighting of
front-list books) and higher freight costs, and business rates
costs increased by £5.8m as Covid reliefs ended. Although
inflationary pressures increased business costs and dampened
consumer confidence, TheWorks ended the year in line with its
rebased expectations. The group remains in a strong financial
position at the end of FY23, with net bank balances of £10.2m
(FY22: £16.3m, including higher than usual creditor balances).
Volex PLC (Volex) (9.75% of net
assets)Cost: £1.67m Value: £3.31m
BackgroundVolex 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► Strong group revenue growth driven by
strong organic growth and acquisitions ► Effective
management of inflation and cost control► Significant
progress made towards five-year growth plan ► Investment
in increasing capacity across India, Mexico, Poland and
Indonesia
Progress against investment case – See additional detail
in the Investment Managers ReportWith a strong set of
full-year results, Volex made further strategic progress through
the proposed (now completed) acquisition of Murat Ticaret, the
largest acquisition to date at €178 million. This adds a fifth
market segment to the group in the off-highway space. Like previous
Turkish acquisition, DE-KA, Murat provides access to this market
via a low-cost, vertically integrated operator at scale. Unlike
DE-KA, Murat is primarily in high mix, low volume cable assemblies,
similar to the wider Volex businesses. This drives highly accretive
EBITDA margins of over 20% and should drive group operating margins
north of 10% with a full year of earnings in FY25. While this
acquisition adds scale and a new growth vertical, there remains
significant untapped potential in leveraging Murat’s capabilities
into the substantial US off-highway market where Volex has
previously been unable to compete on price. The acquisition at c.5x
2022 EBITDA was funded through debt and an equity raise of £60m, of
which management contributed £15m. FY25 will be the first full year
of Murat earnings, at which point the current share price will
value the business on less than 11x P/E, which continues to
significantly lag peers despite the structurally improving margin
profile.
Interim Financial
Statements
Condensed Statement of Profit or Loss and Other
Comprehensive Income
for the six months ended 31 August 2023
|
(Unaudited) |
(Unaudited) |
(Audited) |
|
Six months ended 31 August
2023 |
Six months ended 31 August 2022 |
Year ended 28 February 2023 |
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
|
|
|
|
|
|
|
|
|
|
(Losses)/gains on investments at fair value through profit or
loss |
- |
(3,225) |
(3,225) |
- |
(2,935) |
(2,935) |
- |
(2,774) |
(2,774) |
Investment income |
415 |
- |
415 |
484 |
- |
484 |
1,088 |
- |
1088 |
|
415 |
(3,225) |
(2,810) |
484 |
(2,935) |
(2,451) |
1,088 |
(2,774) |
(1,686) |
|
|
|
|
|
|
|
|
|
|
Investment management fee |
(31) |
(123) |
(154) |
(33) |
(132) |
(165) |
(62) |
(247) |
(309) |
Impairment expense |
- |
- |
- |
- |
- |
- |
(1,196) |
- |
(1,196) |
Other expenses |
(303) |
(29) |
(332) |
(215) |
- |
(215) |
(483) |
(61) |
(544) |
|
(334) |
(152) |
(486) |
(248) |
(132) |
(380) |
(1,741) |
(308) |
(2,049) |
|
|
|
|
|
|
|
|
|
|
Profit/(loss) before taxation |
81 |
(3,377) |
(3,296) |
236 |
(3,067) |
(2,831) |
(653) |
(3,082) |
(3,735) |
|
|
|
|
|
|
|
|
|
|
Taxation |
- |
- |
- |
- |
- |
- |
- |
- |
- |
|
|
|
|
|
|
|
|
|
|
Profit/(loss) for the period |
81 |
(3,377) |
(3,296) |
236 |
(3,067) |
(2,831) |
(653) |
(3,082) |
(3,735) |
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
(p) |
(p) |
(p) |
(p) |
(p) |
(p) |
(p) |
(p) |
(p) |
Earnings/(loss) per Ordinary Share |
0.17 |
(7.07) |
(6.90) |
0.47 |
(6.17) |
(5.70) |
(1.32) |
(6.22) |
(7.54) |
The total column of this statement represents
the Statement of Comprehensive Income of the company prepared in
accordance with 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 profit/(loss) for the period 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.
Condensed Statement of Changes in Equity
for the six months ended 31 August 2023
|
Share capital |
Capital redemption reserve |
Special reserve |
Capital reserve |
Revenue reserve |
Total |
|
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
Year ended 28 February 2023 (Audited) |
|
|
|
|
|
|
At 28 February 2022 |
56 |
- |
54,474 |
(12,126) |
655 |
43,059 |
Profit for the year |
– |
- |
– |
(3,082) |
(653) |
(3,735) |
Buyback of Ordinary Shares into treasury |
– |
- |
– |
(812) |
– |
(812) |
Transfers between reserves |
– |
- |
– |
– |
– |
– |
Cancellation of treasury |
(4) |
4 |
|
- |
– |
– |
Expenses for share buybacks |
– |
- |
– |
(8) |
– |
(8) |
Dividends paid (note 8) |
– |
- |
– |
– |
(149) |
(149) |
As at 28 February 2023 |
52 |
4 |
54,474 |
(16,028) |
(147) |
38,355 |
|
|
|
|
|
|
|
Six months ended 31 August 2023
(Unaudited) |
|
|
|
|
|
|
At 28 February 2023 |
52 |
4 |
54,474 |
(16,028) |
(147) |
38,355 |
Profit for the period |
– |
– |
– |
(3,377) |
81 |
(3,296) |
Buyback of Ordinary Shares into treasury |
– |
– |
– |
(1,107) |
– |
(1,107) |
Expenses for share buybacks |
– |
– |
– |
(13) |
– |
(13) |
Dividends paid |
– |
– |
– |
– |
– |
– |
As at 31 August 2022 |
52 |
4 |
54,474 |
(20,525) |
(66) |
33,939 |
Condensed Statement of Financial Position
as at 31 August 2023
|
(Unaudited) |
(Unaudited) |
(Audited) |
|
31 August2023 |
31 August2022 |
28 February2023 |
|
£’000 |
£’000 |
£’000 |
Non-current assets |
|
|
|
Investments held at fair value through profit or loss |
32,132 |
34,503 |
36,927 |
|
32,132 |
34,503 |
36,927 |
Current assets |
|
|
|
Trade and other receivables |
10 |
15 |
88 |
Cash and cash equivalents |
1,914 |
5,007 |
1,505 |
|
1,924 |
5,022 |
1,593 |
Total assets |
34,056 |
39,525 |
38,520 |
Current liabilities |
|
|
|
Trade and other payables |
(117) |
(65) |
(165) |
|
(117) |
(65) |
(165) |
Total assets less current liabilities |
33,939 |
39,460 |
38,355 |
Net Assets |
33,939 |
39,460 |
38,355 |
Represented by: |
|
|
|
Share capital |
52 |
56 |
52 |
Capital redemption reserve |
4 |
- |
4 |
Special reserve |
54,474 |
54,474 |
54,474 |
Capital reserve |
(20,525) |
(15,812) |
(16,028) |
Revenue reserve |
(66) |
742 |
(147) |
Equity shareholders’ funds |
33,939 |
39,460 |
38,355 |
Net asset value per Ordinary Share |
71.57p |
79.68p |
77.99p |
Condensed Statement of Cash Flows
for the six months ended 31 August 2023
|
(Unaudited) |
(Unaudited) |
(Audited) |
|
Six months ended 31 August
2023 |
Six months ended 31 August 2022 |
Year ended 28 February 2023 |
|
£’000 |
£’000 |
£’000 |
Operating activities |
|
|
|
(Loss)/return before taxation |
(3,296) |
(2,831) |
(3,735) |
Losses on investments at fair value through profit or loss |
3,225 |
2,935 |
2,774 |
UK fixed interest income |
(22) |
(340) |
(380) |
Receipt of UK fixed interest income |
11 |
- |
- |
Impairment expense |
- |
- |
1,196 |
Decrease/(increase) in other receivables |
78 |
45 |
(28) |
(Decrease) in other payables |
(47) |
(175) |
(75) |
Purchases of investments |
(2,759) |
(1,926) |
(6,321) |
Sales of investments |
4,340 |
4,269 |
5,244 |
Net cash inflow from operating activities |
1,530 |
1,977 |
(1,325) |
Financing activities |
|
|
|
Buyback of Ordinary shares into treasury |
(1,107) |
(615) |
(812) |
Expenses of for share buybacks |
(14) |
(4) |
(7) |
Dividends paid |
- |
(149) |
(149) |
Net cash outflow from financing activities |
(1,121) |
(768) |
(968) |
Change in cash and cash equivalents |
409 |
1,209 |
(2,293) |
Cash and cash equivalents at start of period |
1,505 |
3,798 |
3,798 |
Cash and cash equivalents at end of period |
1,914 |
5,007 |
1,505 |
Comprised of: |
|
|
|
Cash and cash equivalents |
1,914 |
5,007 |
1,505 |
Notes
1. General
informationDowning 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 within the
meaning of Chapter 4 of Part 24 of the Corporation Tax Act
2010.
2. Accounting
policiesBasis of accountingThe unaudited
financial statements for the six months ended 31 August 2023 have
been prepared in accordance with the accounting policies set out in
the statutory accounts for the year ended 28 February 2023, which
were prepared in accordance with 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
October 2019 is consistent with the requirements of international
accounting standards, the directors have sought to prepare the
Financial Statements on a consistent basis compliant with the
recommendations of the SORP.
The financial information presented in respect of the six months
ended 31 August 2023 and the comparative half-year period ended 31
August 2022 has not been audited. The financial information
presented in respect of the year ended 28 February 2023 has been
extracted from the financial statements for that year, which have
been delivered to the Registrar of Companies. The Auditor’s report
on those financial statements was unqualified and did not include a
statement under sections 498(2) or 498(3) of the Companies Act
2006.
3. Income
|
(Unaudited) |
(Unaudited) |
(Audited) |
|
Six months ended 31 August
2023 |
Six months ended31 August
2022 |
Year ended 28 February 2023 |
|
£’000 |
£’000 |
£’000 |
Income from investments |
|
|
|
UK dividend income |
373 |
142 |
688 |
UK fixed interest income |
22 |
340 |
380 |
Bank interest income |
20 |
2 |
20 |
Total |
415 |
484 |
1,088 |
UK fixed interest income represents loan note interest
receivable from Real Good Food plc and Norman Broadbent plc. UK
fixed interest income forms 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.
4. Investment
management fee
In respect of its services provided under the
Management Agreement, the Investment Manager is entitled to receive
a management fee payable monthly in arrears, calculated at the rate
of one twelfth of 1% of the market capitalisation as at the
relevant calculation date.
The Investment Manager has agreed that, for so long
as it remains the company’s Investment Manager, it will rebate such
part of any management fee payable to it so as to help the company
maintain an ongoing charges ratio of 2% or lower.
|
(Unaudited) |
(Unaudited) |
(Audited) |
|
Six months ended 31 August
2023 |
Six months ended 31 August
2022 |
Year ended 28 February 2023 |
|
£’000 |
£’000 |
£’000 |
Investment management fee |
|
|
|
Revenue |
31 |
33 |
62 |
Capital |
123 |
132 |
247 |
Total |
154 |
165 |
309 |
5. Basic and
diluted return per Ordinary ShareReturns per Ordinary
Share are based on the weighted average number of shares in issue
during the period. As there are no dilutive elements on share
capital, basic and diluted returns per share are the same.
|
(Unaudited) |
|
(Unaudited) |
|
(Audited) |
|
Six months ended 31 August
2023 |
|
Six months ended 31 August 2022 |
|
Year ended 28 February 2023 |
|
Net return |
Per share |
|
Net return |
Per share |
|
Net return |
Per share |
|
£’000 |
Pence |
|
£’000 |
Pence |
|
£’000 |
Pence |
Revenue return/(loss) |
81 |
0.17 |
|
236 |
0.47 |
|
(653) |
(1.32) |
Capital loss |
(3,337) |
(7.07) |
|
(3,067) |
(6.17) |
|
(3,082) |
(6.22) |
Total loss |
(3,256) |
(6.90) |
|
(2,831) |
(5.70) |
|
(3,735) |
(7.54) |
Weighted average number of Ordinary Shares1 |
47,770,423 |
|
49,684,468 |
|
49,519,100 |
1Excluding treasury shares
6. Net Asset
Value per Ordinary ShareNAV per Ordinary Share is based on
net assets at the period end and 47,421,927 (31 August 2022:
49,519,882, 28 February 2023: 49,176,599) Ordinary Shares, being
the number of Ordinary Shares in issue excluding treasury shares at
the period end.
|
(Unaudited) |
|
(Unaudited) |
|
(Audited) |
|
31 August 2023 |
|
31 August 2022 |
|
28 February 2023 |
|
NAV per share |
NAV attributable |
|
NAV per share |
NAV attributable |
|
NAV per share |
NAV attributable |
|
Pence |
£’000 |
|
Pence |
£’000 |
|
Pence |
£’000 |
Ordinary Shares: |
|
|
|
|
|
|
|
|
Basic and diluted |
71.57 |
33,939 |
|
79.68 |
39,460 |
|
77.99 |
38,355 |
7. Investments
|
(Unaudited) |
(Unaudited) |
(Audited) |
|
Six months ended |
Six months ended |
Year ended |
31 August 2023£’000 |
31 August 2022£’000 |
28 February 2023£’000 |
Opening book cost |
42,440 |
40,512 |
40,512 |
Opening UK fixed interest income at fair value through profit or
loss |
466 |
1,282 |
1,282 |
Opening investment holding losses |
(5,979) |
(2,353) |
(2,353) |
Opening valuation |
36,927 |
39,441 |
39,441 |
Movements in the year |
|
|
|
UK Fixed interest income at fair value through profit or loss |
22 |
340 |
380 |
Receipt of UK fixed interest income |
(11) |
- |
- |
Impairment of accrued loan note interest receivable |
- |
- |
(1,196) |
Investment purchases at cost |
2,759 |
1,926 |
6,321 |
Disposals: |
|
|
|
Proceeds |
(4,340) |
(4,269) |
(5,245) |
Net realised (losses)/gains on disposals |
(898) |
988 |
852 |
Movement in investment holding losses |
(2,327) |
(3,923) |
(3,626) |
Closing valuation |
32,132 |
34,503 |
36,927 |
|
|
|
|
Closing book cost |
39,961 |
39,157 |
42,440 |
Closing UK fixed interest income at fair value through profit or
loss |
477 |
1,622 |
466 |
Closing investment holding losses |
(8,306) |
(6,276) |
(5,979) |
|
32,132 |
34,503 |
36,927 |
|
|
|
|
Realised (losses)/gains on disposals |
(898) |
988 |
852 |
Movement in investment holding losses |
(2,327) |
(3,923) |
(3,626) |
Losses on investments held at fair value through profit or
loss |
(3,225) |
(2,935) |
(2,774) |
8. Fair Value
HierarchyFinancial assets and financial liabilities of the
company are carried in the statement of financial position at their
fair value. The fair value is the amount at which the asset could
be sold, or the liability transferred in a current transaction
between market participants, other than a forced or liquidation
sale. For investments actively traded in organised financial
markets, fair value is generally determined by reference to Stock
Exchange quoted market bid prices and Stock Exchange Electronic
Trading Services (‘SETS’) at last trade price at the Statement of
Financial Position date, without adjustment for transaction costs
necessary to realise the
asset. The company
measures fair values using the following hierarchy that reflects the
significance of the inputs used in making the measurements.
Categorisation within the hierarchy has been determined on the
basis of the lowest level input that is significant to the fair
value measurement of the relevant assets as follows:
Level 1 – Quoted prices (unadjusted) in active markets for
identical assets or liabilities.An active market is a market in
which transactions for the asset or liability occur with sufficient
frequency and volume on an ongoing basis such that quoted prices
reflect prices at which an orderly transaction would take place
between market participants at the measurement date. Quoted prices
provided by external pricing services, brokers and vendors are
included in Level 1 if they reflect actual and regularly occurring
market transactions on an arm’s length basis.
Level 2 – Inputs other than quoted prices included within Level
1 that are observable for the asset or liability, either directly
(that is, as prices) or indirectly (that is, derived from
prices).
Level 2 inputs include the following:
► Quoted prices for similar (i.e. not
identical) assets in active markets.
► Quoted prices for identical or similar assets
or liabilities in markets that are not active. Characteristics of
an inactive market include a significant decline in the volume and
level of trading activity, the available prices vary significantly
over time or among market participants or the prices are not
current.
► Inputs other than quoted prices that are
observable for the asset (for example, interest rates and yield
curves observable at commonly quoted intervals).
► Inputs that are derived principally from, or
corroborated by, observable market data by correlation or other
means (market-corroborated inputs).
Level 3 – Inputs for the asset or liability that are not based
on observable market data (unobservable inputs).
The level in the fair value hierarchy within which the fair
value measurement is categorised in its entirety is determined on
the basis of the lowest level input that is significant to the fair
value measurement in its entirety. If a fair value measurement uses
observable inputs that require significant adjustment based on
unobservable inputs, that measurement is a Level 3 measurement.
Assessing the significance of a particular input to the fair value
measurement in its entirety requires judgement, considering factors
specific to the asset or liability.
|
Level 1 |
Level 2 |
Level 3 |
Total |
£’000 |
£’000 |
£’000 |
£’000 |
31 August 2023 (Unaudited) |
|
|
|
|
Quoted on the Main Market |
5,082 |
- |
- |
5,082 |
Traded on AIM |
21,872 |
- |
- |
21,872 |
Unquoted Equity |
- |
- |
829 |
829 |
Unquoted Loan Notes |
- |
- |
4,349 |
4,349 |
|
26,954 |
- |
5,178 |
32,132 |
28 February 2023 (Audited) |
|
|
|
|
Quoted on the Main Market |
6,392 |
- |
- |
6,392 |
Traded on AIM |
25,612 |
- |
- |
25,612 |
Unquoted Equity |
- |
- |
760 |
760 |
Unquoted Loan Notes |
- |
- |
4,163 |
4,163 |
|
32,004 |
- |
4,923 |
36,927 |
31 August 2022 (Unaudited) |
|
|
|
|
Quoted on the Main Market |
4,998 |
- |
- |
4,998 |
Traded on AIM |
22,554 |
- |
- |
22,554 |
Unquoted Equity |
- |
- |
1,632 |
1,632 |
Unquoted Loan Notes |
- |
- |
5,319 |
5,319 |
|
27,552 |
- |
6,951 |
34,503 |
There were no transfers between Level 1 and
Level 2 during the period.A reconciliation of fair value
measurements in Level 3 is set out in the table below.
|
(Unaudited) |
(Unaudited) |
(Audited) |
|
Six months ended 31 August
2023 |
Six months ended 31 August
2022 |
Year ended 28 February 2023 |
|
£’000 |
£’000 |
£’000 |
Opening balance |
4,923 |
6,056 |
6,056 |
Purchases |
500 |
342 |
343 |
Sales proceeds |
(103) |
- |
- |
UK Fixed interest income at fair value through profit or loss |
22 |
340 |
380 |
Receipt of UK fixed interest income |
(11) |
- |
- |
Impairment of accrued loan note interest receivable |
- |
- |
(1,196) |
Total gains/(losses) included in losses on investments in the
Statement of Comprehensive Income: |
|
|
|
- on assets sold |
3 |
- |
- |
- on assets held at the period end |
(156) |
213 |
(660) |
Closing balance |
5,178 |
6,951 |
4,923 |
9. Significant
Interests
As at 31 August 2023, the Company held interests
amounting to 3% or more of the equity in issue by the following
investee companies.
|
% of
investeecompany |
Digitalbox plc |
19.50% |
Norman Broadbent plc |
13.35% |
FireAngel Safety Technology Group PLC |
11.94% |
Synectics plc |
10.80% |
Real Good Food Company plc |
7.52% |
Journeo plc |
6.63% |
Centaur Media plc |
4.56% |
Flowtech Fluidpower plc |
4.51% |
National World plc |
4.03% |
OnTheMarket plc |
3.10% |
TheWorks.co.uk plc |
4.48% |
10. Dividends
paid in the period
|
Six months ended31 August
2023 |
Year ended28 February 2023 |
|
£’000 |
£’000 |
Dividends paid during the period |
- |
149 |
The Directors did not recommend the payment of a
final dividend for the year ended 28 February 2023.
Interim Management ReportThe directors are
required to provide an interim management report in accordance with
the UK Listing Authority’s Disclosure and Transparency Rules
(‘DTR’). They consider that the Chairman’s Statement and the
Investment Manager’s Report of this Half-Yearly Financial Report,
the following statements on principal risks and uncertainties;
related party transactions; and going concern, together with the
directors’ Responsibilities Statement below together constitute the
interim management report for the company for the period ended 31
August 2023.
The company is required to make the following disclosures in its
Half-Yearly Financial Report.
Principal Risks and UncertaintiesThe principal
risks faced by the company fell into the following broad
categories: investment performance; operational; financial; and
legal and compliance. The board reported on the principal risks and
uncertainties faced by the company in the Annual Report for the
year ended 28 February 2023. Information on each of these areas can
be found in the strategic report on pages 39 to 48 and in note 14
on pages 87 to 90 of the Annual Report available on the company’s
website at www.downingstrategic.co.uk/.
Related Party TransactionsDuring the first six
months of the current financial year, no transactions with related
parties have taken place which have materially affected the
financial position or performance of the company during the
period.
Going ConcernThe directors, having considered
the company’s investment objective, risk management policies, the
nature of the portfolio and the company’s income and expenditure
projections, are satisfied that the company has adequate resources
to continue in operational existence for the foreseeable future.
For these reasons, they continue to adopt the going concern basis
in preparing the accounts.
Directors’ Responsibility StatementThe
directors confirm that, to the best of their knowledge, the
condensed set of financial statements contained within the
Half-Yearly Financial Report has been prepared in accordance with
International Accounting Standard 34 “Interim Financial Reporting”
and the Half-Yearly Financial Report includes a fair review of the
information required by:
► DTR 4.2.7R of the Disclosure and Transparency
Rules, being an indication of important events that have occurred
during the first six months of the financial year and their impact
on the condensed set of financial statements, and a description of
the principal risks and uncertainties for the remaining six months
of the year; and
► DTR 4.2.8R of the Disclosure and Transparency
Rules, being related party transactions that have taken place
during the first six months of the current financial year and that
have materially affected the financial position or performance of
the entity during that period, and any changes in the related party
transactions described in the last annual report that could do
so.
Hugh AldousChairman9 November 2023
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