TIDMDSM
Embargoed until 7:00am 9 November 2023
Downing Strategic Micro-Cap Investment Trust plc
LEI Code: 213800QMYPUW4POFFX69
9 November 2023
Half-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 (GBP'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 Statement
Overview
For 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.
Performance
A 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 capital
Last 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 shareholders
I 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.
Governance
I 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 administration
Our 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 issues
We are resolutely intolerant of misstatements or misleading
statements by investee boards, management, and their companies.
Forward view
Political 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 view
Small 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!
Thanks
Thanks 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 Aldous
Chairman
9 November 2023
Investment Manager's Report
The 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.GBP1.1m 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 Portfolio
Our 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 contributors
Volex 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 EUR178m. 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
GBP60m, of which management contributed GBP15m. 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 GBP10.8m of purchase orders or contract wins,
which help contribute to the GBP27m order book and GBP55m 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 GBP15m 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 GBP1.2bn), Zebra (GBP220m) 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
GBP9.8m and 3.27p, respectively, on revenues up 43% to GBP45m --
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 GBP16.6m. 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 GBP2.4m, in line with
amortisation costs of GBP2.5m, 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 period
FireAngel 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 GBP6.1m 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 GBP500k 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
GBP19.3m due to a fall in non-strategic advertising, adjusted
EBITDA increased modestly to GBP3.5m from GBP3.4m thanks to careful
cost management and a focus on profitable revenues.
Cash was strong, with 115% cash conversion delivering a balance
sheet of GBP8.8m of net cash (the previous year was GBP14.2m), but
this was after distributions to shareholders of GBP8m 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 GBP10m on margins of 23% and beyond this
full year.
Looking forward, unlevered FCF of GBP5.4m 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 GBP13m
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 Company
As 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 MacKenzie
Head of Downing Fund Managers and Partner of Downing LLP
9 November 2023
Investments
As at 31 August 2023
As at As at
31 August 2023 28 Feb 2023
Market Value % of Total % of Total
(GBP'000) Assets 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 Notes(1) 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 Notes(1) 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 Limited(2) 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 Notes(1) 288 0.85 -
Norman Broadbent 10% Loan Notes(1) 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 GBP1,807,000 (28
February 2023: GBP1,428,000) 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: GBP3.58m Value: GBP2.55m
Background
Centaur Media is an international provider of business
information, training and consultancy, creating value through
premium content, analytics, and market insight within the Marketing
and Legal segments. Centaur operates under several flagship brands,
namely The Lawyer, MW Mini MBA, Influencer Intelligence, and
Econsultancy, with the latter three brands forming part of their
marketing arm, XEIM.
Update to the investment case
Strong 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 GBP8.8m following GBP8m 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 Report
There 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 GBP45m by the end of
2023.
Digitalbox PLC (Digitalbox) (3.73% of net assets)
Cost: GBP1.13m Value: GBP1.26m
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
Profit warning after significant downturn in audience
numbers
Strategic pivot required to return business to sustainable
earnings
Progress against investment case
The 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: GBP1.19m Value: GBP1.75m
Background
Equals 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 Report
Equals 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 GBP45.0m. The gross profit margin
increased to 52.4%, adjusted EBITDA more than doubled to GBP9.8m,
and it held GBP19.9m in cash despite GBP2.9m 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 GBP370k from GBP265, 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: GBP6.54m Value: GBP1.2m
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 Report
FireAngel issued interim results for the period to 30 June 2023
and reported revenue down 16% to GBP21.4m, with UK revenue growth
of 11% offset by a 63% decline in international revenue. Gross
profit in the period was down 32% to GBP3.8m, and there was a loss
of GBP4.0m 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: GBP2.60m Value: GBP2.55m
Background
Flowtech is a value-added distributor of hydraulic and pneumatic
consumables into a wide array of sectors predominantly in the UK
and Ireland. The group is a leading UK player in this space, with
pre--Covid revenues of over GBP110 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 Report
The 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: GBP1.82m Value: GBP2.37m
Background
Hargreaves is a diversified group delivering key projects and
services to the industrial and property sectors. The Distribution
and Services division aims to generate sustainable profitability
through operations across the energy and infrastructure sectors in
the UK, Europe and Asia. The Property and Land division aims to
generate value through the development and/ or disposal of the
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 case
The 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
GBP6.6m and the realisation case set out is between GBP21.6m and
GBP28.9m 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: GBP1.54m Value: GBP1.70m
Background
Inspecs is a vertically integrated designer, manufacturer, and
distributor of eyewear and lenses. It owns its own brands, some of
which are market-leading, and it also licenses brands and provides
white-label options for others.
Update to the investment case
Improved trading and cash generation performance
Norville losses reduced substantially
Net debt (excluding leases) reduced by GBP5m
New Vietnam facility will significantly increase manufacturing
capacity
Progress against investment case
When 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 GBP27.6m to GBP22.7m. 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: GBP1.13m Value: GBP1.96m
Background
Journeo 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 Report
The business is set to benefit from long term government
spending trends in the transport sector to help reduce emissions by
improving the quality and quantity of public transport journeys.
There are a number of multi-billion-pound government projects which
Journeo is able to tap into to expedite the growth of the
business.
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 GBP21.8m, which represented 41% organic growth
in core business revenue and GBP9.3m revenue from Infotec. The
sales order intake increased to GBP18m, including GBP4.2m from
Infotec, which provides increased visibility into H2 2023 and
beyond. The order book carried forward into H2 2023 was GBP27m and
the sales opportunity pipeline was over GBP55m.
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: GBP2.92m Value: GBP1.72m
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 GBP22.1m
Five acquisitions completed, boosting revenue expectations
Progress against investment case
The 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 GBP8.9m, 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 GBP3.1m, a decline of
47%, and adjusted operating profit of GBP2.9m. 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 GBP1.1m of savings in the second half, with c.GBP2.5m
of annualised cost savings and restructuring costs of GBP0.9
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 GBP3.0m, (GBP1.9m consideration net
of cash acquired) funded from its existing cash resources. Revenue
of GBP2.0m and EBITDA contribution of GBP0.3 million were reported
in the first half, with the bulk of this flowing from 1 May. For
the full year, revenues of approximately GBP7.0m are expected with
an EBITDA contribution of c.GBP1.0m.
Norman Broadbent PLC (Norman Broadbent) (equity, loan notes and
interest, 1.55% of net assets)
Cost: GBP0.57m Value (including loan note interest):
GBP0.53m
Background
Norman 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 GBP0.2m convertible loan notes
Net Fee Income up 58%
Recent trading update reiterated ability to generate up to
GBP1.5m of EBITDA by 2025, despite the macro headwinds of the
recruitment sector
Progress against investment case
Norman Broadbent issued strong interim results, reporting
revenue growth up 54% and underlying EBITDA of GBP0.27m up almost
400%. The group delivered its first profitable H1 since 2019,
generating profit before tax of GBP8,000 compared with a loss of
GBP72,000 for the same period the year prior. The group also paid
down GBP0.2m of convertible loan notes during the reporting period,
with the balance of GBP0.2m expected to be repaid before the second
anniversary of issue. Operationally, Net Fee Income (NFI) increased
by 58% to GBP5.2m, 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 GBP14m 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: GBP1.87m Value: GBP1.32m
Background
OnTheMarket 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 GBP11.3 million provides operating flexibility
and potential for capital returns
OnTheMarket Software incurred a GBP1.5m 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: GBP1.33m Value: GBP1.95m
Background
Ramsdens is a growing, diversified, financial services provider
and retailer, operating in the four core business segments of
foreign currency exchange, pawnbroking loans, precious metals
buying and selling and retailing of second-hand and new jewellery.
Ramsdens does not offer unsecured high-cost short-term credit.
Headquartered in Middlesbrough, the group operates from over 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 GBP3.7m, gross revenue increased by 33% to
GBP39.0m, and jewellery retail revenue increased by 32% to
GBP17.3m. The pawnbroking loan book increased by 29% to GBP9.7m,
and foreign currency gross profit increased by 41% to GBP4.9m. 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: GBP5.45m Value (including loan note interest):
GBP4.33m
Background
Real Good Food is a food manufacturing business specialising in
cake decoration (Renshaw and Rainbow Dust Colours) in the UK, USA
and Europe.
Update to the investment case
Macro-headwinds continue to impact the business
Challenging conditions have shown some improvement
Radical reform programme and new management team
Reform program realised GBP8m of annualised cost savings for
2024 and beyond
Loan extension provides a secure platform for rebuilding
Progress against investment case
Real Good Food's full-year results for the year ended 31 March
2023 reported revenues fell by 19.8% to GBP32.5m as the
macroeconomic headwinds punished the business. An EBITDA loss of
GBP4.8m reflected the reduced gross margins and operating leverage,
and the group posted a loss before tax of GBP9.0m. The business
secured a GBP2.5m revolving credit facility and GBP0.55m in
short-term shareholder loans which will support the group's radical
reform programme. At the period end, total net debt had increased
to GBP31.2m compared with GBP25.5m 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 GBP2.6M
(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: GBP3.98m Value: GBP2.02m
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 case
Synectics announced its interim results for the six months ended
31 May 2023 and highlighted that revenue was GBP21.9m, 14% ahead of
the same period the year prior. Underlying operating profit
increased by 61% to GBP0.8m and underlying profit before tax was up
62% to GBP0.7m. 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 GBP28.4m 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: GBP1.23m Value: GBP0.83m
Background
Tactus is an unquoted UK business which supplies own- and
third-party computer hardware, including laptops and notebooks and
customised gaming PCs.
Update to the investment case
Revenue behind budget due to consumer slow down
Margins and earnings affected by destocking and sell through
initiatives in H2
Strong cash generation driven by inventory reductions
Progress against investment case
Tactus is strategically well-positioned to take share in the PC
gaming market which is one of the fastest growing forms of
entertainment globally. While the year saw consumer spending and
margin headwinds which have impacted earnings, we expect that the
normalisation of supply chains, reduced de-stocking activity and
internal restructuring efforts should provide upside to earnings
over the next 12 months. There is also untapped opportunity in the
B2B market which has been underserved by the current model and
which presents a good growth opportunity going forward.
TheWorks.co.uk PLC (TheWorks) (2.39% of net assets)
Cost: GBP1.41m Value: GBP0.81m
Background
TheWorks is one of the UK's leading multi-channel value
retailers of arts and crafts, stationery, toys, and books, offering
customers a differentiated proposition as a value alternative to
full-price specialist retailers. The group operates a network of
over 500 stores in the UK & Ireland and an online store.
Update to the investment case
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 case
TheWorks 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
GBP280.1m, 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 GBP5.8m 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 GBP10.2m
(FY22: GBP16.3m, including higher than usual creditor
balances).
Volex PLC (Volex) (9.75% of net assets)
Cost: GBP1.67m Value: GBP3.31m
Background
Volex manufactures complex cable assemblies and power cords
through a global manufacturing base for a wide variety of
industries. Following a turnaround and portfolio repositioning, the
business has shifted away from lower margin, commodity products and
has been growing sales in high structural growth sectors such as
electric vehicles and data centres.
Update to the investment case
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 Report
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 EUR178
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 GBP60m, of which management
contributed GBP15m. 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 Six months ended Year ended
31 August 2023 31 August 2022 28 February 2023
Revenue Capital Total Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'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
Capital
Share redemption Special Capital Revenue
capital reserve reserve reserve reserve Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'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 August 31 August 28 February
2023 2022 2023
GBP'000 GBP'000 GBP'000
Non-current assets
Investments held at fair value
through pro t 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 Six months
ended ended Year ended
31 August 31 August 28 February
2023 2022 2023
GBP'000 GBP'000 GBP'000
Operating activities
(Loss)/return before taxation (3,296) (2,831) (3,735)
------------------------------------ ----------- ----------- ------------
Losses on investments at fair
value through pro t 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 in ow 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 out ow from nancing
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 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 within the
meaning of Chapter 4 of Part 24 of the Corporation Tax Act
2010.
2. Accounting policies
Basis of accounting
The 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 (GBP)
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 Six months
ended ended Year ended
31 August 31 August 28 February
2023 2022 2023
GBP'000 GBP'000 GBP'000
Income from investments
UK dividend income 373 142 688
------------------------ ----------- ----------- ------------
UK xed 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 Six months Year ended
ended ended 28 February
31 August 2023 31 August 2022 2023
GBP'000 GBP'000 GBP'000
Investment management
fee
Revenue 31 33 62
---------------------- --------------- --------------- ------------
Capital 123 132 247
---------------------- --------------- --------------- ------------
Total 154 165 309
---------------------- --------------- --------------- ------------
5. Basic and diluted return per Ordinary Share
Returns 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 Six months ended Year ended
31 August 2023 31 August 2022 28 February 2023
Net Net Net
return Per share return Per share return Per share
GBP'000 Pence GBP'000 Pence GBP'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 Shares(1) 47,770,423 49,684,468 49,519,100
------------------------ ------------------ ------------------ -------------------
(1) Excluding treasury shares
6. Net Asset Value per Ordinary Share
NAV 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 NAV NAV NAV NAV NAV
per share attributable per share attributable per share attributable
Pence GBP'000 Pence GBP'000 Pence GBP'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 Six months
ended ended Year ended
31 August 31 August 28 February
2023 2022 2023
GBP'000 GBP'000 GBP'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 pro t or loss (3,225) (2,935) (2,774)
----------------------------------------- ----------- ----------- -----------
8. Fair Value Hierarchy
Financial assets and nancial liabilities of the company are
carried in the statement of nancial 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 nancial 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 re ects the signi cance 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 signi
cant 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 suf cient frequency and volume on an
ongoing basis such that quoted prices re ect 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 re
ect 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 signi cant decline in the volume and level of trading
activity, the available prices vary signi cantly 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
Level 1 Level 2 3 Total
GBP'000 GBP'000 GBP'000 GBP'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 Six months
ended ended Year ended
31 August 31 August 28 February
2023 2022 2023
GBP'000 GBP'000 GBP'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 investee
company
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
Year ended
Six months ended 28 February
31 August 2023 2023
GBP'000 GBP'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 Report
The 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 Uncertainties
The 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 Transactions
During 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 Concern
The 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 Statement
The 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 Aldous
Chairman
9 November 2023
(END) Dow Jones Newswires
November 09, 2023 02:00 ET (07:00 GMT)
Copyright (c) 2023 Dow Jones & Company, Inc.
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