Yahoo Finance DSM: Half-Yearly Financial Report
Downing Strategic Micro-Cap Investment Trust plc
LEI Code: 213800QMYPUW4POFFX69
1 November 2021
Half-Yearly Financial Report for the six months ended 31 August 2021
The investment objective of the company is to generate capital growth for shareholders over the long term, from a focused portfolio of UK micro-cap companies (those whose market capitalisations are under £150 million at the time of investment) targeting a compound return of 15% per annum over the long term.
The Directors of Downing Strategic Micro-Cap Investment Trust plc announce the company's results for the half year ended 31 August 2021.
Highlights
NAV per share increase of 15.5% for the half-year period
Partial loan note redemption from Real Good Food plc, generating proceeds of £5.3 million
Partial exit from and valuation uplift to Tactus Holdings Limited, resulting in a NAV increase of 2.07p (0.85p realised and 1.22p unrealised)
Continued reinvestment of portfolio gains, with several new toehold positions added during and after the half-year period
Increase in cash over the half-year period, from 8.03% to 12.47% of NAV
Aggregate unrealised gains of £3.4 million as at 31 August 2021
Outperformance against the FTSE AIM All-Share Index over the half-year period (see chart in Half-Yearly Financial Report)
Judith MacKenzie, the lead Manager, said “It has been another volatile six months in markets, as we emerged from another lockdown. However we have been proud of the way our investments have performed, typically having made themselves leaner and more efficient. Some have taken the opportunity to make timely and what look like well priced acquisitions. As we look ahead we note that we have some ‘Covid’ laggards, where share prices have not yet caught up with the improved earnings and operational efficiencies of the underlying businesses. We expect this will ultimately be reflected in valuations – perhaps as we go through the next set of earnings results. We are not complacent – our attention is firmly on the headwinds that face our investments – inflation, interest rates, and supply chains do vex our minds. A defensive place for investment, we believe, continues to be in small, inexpensive cash generative businesses of which this portfolio has plenty. We believe that there remains significant pent-up recovery in a number of our holdings, and these are complemented by core positions in well priced and strongly growing enterprises. Meanwhile, having 12% of the NAV in cash (at the time of writing) provides an opportunity to capitalise on market turbulence and any mispricing that tends to accompany market volatility.”
Financial Highlights
(Unaudited) | (Audited) | ||
31 August | 28 February | Change | |
Assets | 2021 | 2021 | % |
Net assets (£’000) | 48,152 | 42,524 | 13.23 |
Net asset value (‘NAV’) per Ordinary Share | 93.74p | 81.16p | 15.50 |
Mid-market price per Ordinary Share | 76.00p | 72.00p | 5.56 |
Discount | 18.92% | 11.28% | |
(Unaudited) | (Audited) | ||
31 August | 28 February | ||
Revenue | 2021 | 2021 | |
Revenue return per Ordinary Share | 0.17p | 1.02p | |
Capital return per Ordinary Share | 12.96p | 9.56p | |
Total return per Ordinary Share | 13.13p | 10.58p | |
Chairman’s Statement
Overview
Over the last year or so, DSM has shown itself to be not only a beneficiary of a shift towards value investing, a theme in troubled times, but it has presented a robust, successful portfolio, oriented to growth as well as value, comprised of well-managed, well-financed companies. Meanwhile the market has had a slow summer, economically and politically, becoming edgier. There have been a few signs of ‘better’, but those have been amid troublesome issues inducing market rotation in their turn. The market has taken a recent 5% correction and currently remains cautious. Nevertheless, for the half-year the DSM NAV was up 15.5% and up 39.2% on the NAV of 31 August 2020.
The DSM portfolio has proved its value as part of the UK’s economic future. Shareholders have not only enjoyed good returns, but they have invested in determined small companies building that future.
Performance
Your company’s NAV per share on 31 August 2021 was 93.74p, an increase of 15.5% on the NAV per share on 28 February 2021 (81.16p) and an increase of 39.2% on the prior interim NAV per share of 31 August 2020 (67.36p). All companies in the portfolio have made good progress and, as you will see from the manager’s report and my comments below, their prospects improve.
As to share price, discounts for investment companies tended to widen in late summer. That happened to DSM and, in addition, your board was briefly constrained from acting because we were ‘inside’ on a successful deal by the manager. Consequently, we ended the period for this report at a wider discount than normal with a mid-market share price of 76p, only 5.56% up on the company’s year-end, but even so that was 49% up on the prior interim report. At the time of writing the discount has returned to some 12%, typical for the sector.
As to any view on dividends, they are not part of our objective, but the year-end results in February are likely to see a modest distribution proposed.
Looking forward
Although we can’t call markets, we can say that there looks to be more uncertainty than there has been for a while, notwithstanding Covid. Inflation may be, but probably isn’t, ‘transitory’, energy costs are current headlines, shortage of skills is too evident. Interest rates have been exceptionally low for a long time but how to raise them significantly if necessary? If there is an equilibrium, it may not be stable. Expect turbulent weather sooner or later.
Fortunately, soundly based, soundly financed, forward looking companies make up most of the DSM portfolio. The manager’s investor letter for 31 August 2021 (and if you don’t get those letters, you really must go on the website and register for them – they are clear and good) said of the portfolio, ‘boards have been re-shaped, strategies re-focused and tough positions exited’. The management team probes for companies that address the future needs of our economy and yet have been overlooked, in value terms, by the market. With what we think will be significant change in the UK, the challenge of revitalising earnings and productivity, and contributing to everyone’s wealth (poorly expressed as ‘levelling up’) is critical; best achievable if somehow the central establishment can be further shaken (rather than stirred) into life. Opportunity waits for national change – not for White Papers. Governments have, sadly, tended to drain effort and local energy into its central mire of glumness; let’s hope this time it will be different and UK entrepreneurism, generating regional economic and social wealth, will flourish.
Meanwhile, DSM is a small but proud player, injecting determination and support in backing companies focused on the future.
Strategy
Investing in small companies, that are materially undervalued and in need of some strategic involvement, is our core purpose. A paragraph on strategy is traditionally expected, but your company’s strategy is summarised on the inside cover of the report and accounts and remains unchanged. It is time-consuming but rewarding, as recent results have shown.
The portfolio
You have the manager’s report, on pages 6 to 8 of the Half-Yearly Report, taking you through a portfolio of companies in good health, many quite leading edge, and which includes some private equity that has already caught valuable attention. Performance by all the investee companies has been sound – hence the considerable uplift in NAV. Despite that, the portfolio at NAV still stands at a considerable discount to intrinsic value: it comprises small companies unreasonably overlooked – even though each has a likely exit. Their worth should be realised nicely in time and they currently offer excellent value. To quote the 31 August investor letter to shareholders again, ‘the DSM portfolio offers great value, great growth and lots of catalysts over the short and medium term’. The injection of £40m by a large technology investment trust into Tactus, a DSM private equity IT investment, is an example of the last point. Meanwhile your board takes an active interest in the very considerable work in progress list on which the managers are focused.
Looking after shareholders - Discount management
I talk to the larger shareholders at least twice a year. As a board we look to buy-back if the discount drifts out beyond par for a company like DSM. The average for the period from 28 February 2021 to date is 14.8%. We take a view. We hope we shall be able to get the discount to single figures in a healthy market. As to redemptions, I have talked to shareholders and have expressed my view for some years now that it is damaging to start selling part of what is a small fund invested in undervalued and still developing companies in order to run a redemption programme when we can manage buy-backs more constructively. This autumn’s discussions with larger shareholders will follow the release of these interims, but meantime, working with our brokers, we have enabled exits for those who had to manage changes in their mandates and we have looked after the retail investor.
Board and managers
Your board has a rapport with the managers that is open, direct, cheerfully respectful and healthy. We assess each other annually. I have sat on many boards; I think the culture here is exceptional. A credit to all. Judith MacKenzie and Nick Hawthorn are the right managers for this company’s strategy, my fellow board members make a complementary team.
Doctors’ Support Network
The non-executive directors agreed last year to allocate a proportion of their fees to launch a coaching scheme by Doctors’ Support Network (DSN), a charity which provides support for medics with mental health problems. DSN has used this money to provide specialised coaches for doctors at all levels of seniority who need help to manage personal career concerns, including the stresses of treating Covid patients and the consequent burdens on the health service as a whole. Thus far, DSN has accepted nearly half of the 40 doctors for which it has capacity. The feedback has been extremely positive and the hope is that further such initiatives will build on DSN’s experience.
Hugh Aldous
Chairman
1 November 2021
Investment Manager’s Report
We have been unusually bullish on the prospects of DSM since the start of 2021 (see investor letters from August and February). These letters reiterate our progressive confidence in the portfolio of DSM. We don’t use phrases like ‘coiled spring’ and ‘best ever prospects for the portfolio’ without conviction. As Managers, as soon as we were released from market constraints, we have been personal buyers of stock in DSM, as have other Downing related parties. These are material positions for us as individuals. More importantly, 9 of our 14 investments have evidenced management teams buying stock in their own companies.
This is because the prospects for the DSM investments are healthy. We are not blind to what are aggressive headwinds for UK PLC. At the current time it is pleasing to note that, of our 14 investment companies, all bar one are meeting or are ahead of our expectations, and capable of delivering earnings and cash-flows which should ultimately be better than pre-Covid times. They are now typically more efficient, better managed, and able (or will be very soon) to achieve better returns on invested capital than when we first invested. The one positive irony of companies coming through change, as many in the DSM portfolio have, is that they tend to be leaner when they emerge from these changes. Hence, we believe that the portfolio is as well positioned as it can be for rougher times, which now seem inevitable. The strength of the balance sheets of our portfolio companies is additionally reassuring. We are generally pessimistic on the equity markets, and the potential for headwinds given some lofty valuations, however we are cautiously optimistic for the prospects of our portfolio positions.
In many cases the prospects in this confusing time are still not understood by the market, and hence our job continues to be to ensure that these unique UK-based, but internationally operational companies, are recognised by the market - otherwise they will most likely be targets for international corporate activity. The positions in DSM are good value in terms of relative valuations in other UK markets, but extraordinarily cheap when compared to their international peers.
These Interim Results highlight our activity in greater detail than previously, hopefully allowing investors to draw their own conclusions as to the quantifiable upside in the portfolio. We won’t pontificate on the macro-outlook, however, investors can be reassured that we discuss the challenges regularly with our investee companies, who are the best barometer for what is really happening in the world. We don’t tend to trust economists to forecast the outlook for our portfolio.
Our investee companies typically have strong balance sheets, and the niche nature of their activities often allow them to prove a competitive edge, which in turn enables them to pass on inflationary costs to customers. Typically, our investments have demonstrated operational flexibility, especially through Covid. The strength of balance sheets has allowed many of our investments to finance demand through selectively investing in their inventories. Inevitably, we suspect that although some of the supply chain issues may find an equilibrium, inflation and interest rates will continue to be a feature of everyday life for some time. The honeymoon period is over, and we welcome a fairer equilibrium in our economy.
The safest place for investment we believe, continues to be in small, inexpensive cash generative businesses of which this portfolio has plenty. We believe that there remains significant pent-up recovery in a number of our holdings, and these are complemented by core positions in well priced and strongly growing enterprises. Meanwhile, having 12% of the NAV in cash (at the time of writing) provides an opportunity to capitalise on market turbulence and mispricing, as it allows us to invest in companies we know well and have undertaken diligence on.
Discount to Intrinsic Value
Although we often talk of the discount to the intrinsic value that sits within the portfolio, we understand that that is our own judgement, resulting from thorough reassessments of the values of our underlying businesses.
It is worth noting that, if our Covid ‘laggard’ investments (defined, in our view, as those where share prices have not responded to positive newsflow) get back to just our entry value, then there would be mid double digit upside on the current NAV. Whilst we accept that there are headwinds, including supply chain issues and wage inflation, we believe these investments are operationally more effective than when we first invested, and their share prices are not reflective of this. It is clearly subjective as to whether their share prices can return to their previous levels, however we feel that the fundamentals could justify this upside.
Still, this does not reflect our view on the true intrinsic values of these positions - which we believe to be at a significant premium to where they are now. These investments have matured after 3-4 years of strategic changes in their businesses. We are already evidencing these improvements, which we think will be valued by the market, or ultimately by trade or private buyers.
Portfolio Activity for the six months to August 2021
Total portfolio gains of £6.87 million, made up of:
Total realised gains on disposal of £2.15 million; and
Total unrealised valuation gains of £4.72 million.
The main drivers of these portfolio gains were:
Hargreaves Services Plc provided an unrealised gain of £2.3m during the period, resulting in a substantial holding (11.7% of NAV at the half-year date). There were no additions or disposals in the period. We remain confident in this position and are supportive of management in their strategic direction of the company, understanding that, due to commodity prices, 2021 may have provided some windfall profits.
In Volex Plc we made a net investment of £0.5 million during the period. This reflected our trading of this well-known holding, where we decided to increase our position when we believed that the market was not valuing it accurately. In aggregate, Volex generated realised gains of £0.94 million and unrealised gains of £1.31 million for the period (total gains of £2.25 million for the six months). We have unrealised gains of £6.16 million in total over our book cost, having already realised £7.23 million on the position, against a cost of £3.18 million.
Synectics recorded an unrealised loss of £0.77 million for the half-year period. This holding sits at an unrealised loss position of £1.96 million and we view it as one of the Covid laggards, where the market has not yet caught up with the positive initiatives taken through Covid. We expect the share price to reflect these initiatives and contract wins. If not, the M&A activity in the sector, where earnings multiples paid are way in excess of the 4x EBITDA that this company trades on, will surely be reflected in the valuation soon. Some of the highlights are below:
Over £2.4 million p.a. of cost savings;
3 multi-million pound project wins in the interim period; and
Significant improvement in prospects and cash generation.
Venture Life recorded an unrealised loss of £0.52 million for the period, with the carrying value being largely equal to cost at 28 February 2021. During the period we invested a further £0.67 million. Since the period end the shares have suffered as a result of a weak trading update, which highlighted the dependency on the second half earnings. As a result, Venture Life is currently trading behind our expectations and we are engaged with management regarding their remedial actions. We believe the company is capable of utilising its capacity through the effective distribution of the owned brands, but we need to see that management are able to execute on operational challenges, not just acquisitions.
Duke Royalty achieved an overall gain of £0.57 million during the period, however we continued to reduce this position from 3.3% of NAV to 2.9%. To the period end we had modest gains in this position which have continued since the period end. Our reduction in the position here is not based on the fundamentals of the company, but reflective of how we now believe it is being perceived by the market – which is inconsistent with our original investment case. In short, it is being valued as a venture capital firm on a NAV basis whilst we believed it should and could be valued on the basis of its future (annuity-like) cash flows.
Tactus, our only unquoted equity position, was a new investment in the period, where we invested £1.92 million, and subsequently undertook a partial exit as part of a significant new third investment, disposing of £0.92 million of cost for £1.34 million, generating a realised gain of £0.42 million. DSM also received full interest repayment, of £0.04 million. Our continuing position was valued at £1.63 million on the remaining cost of £1.0 million, generating an unrealised gain of £0.63 million. This, as highlighted above, is still held at a discount to the third party investor in Tactus, who became involved in the business after we had invested.
Real Good Food made a substantial return of capital during the period, repaying £3.8 million of the 10% Loan Note principal, which, when it included interest and redemption premium, meant a repayment to DSM of £5.3 million and reflecting an IRR of 11.4% on this Loan Note. This reduced the Real Good Food exposure from 21.60% to 9.09% over the half-year period.
Toeholds and Work in Progress
We make what we define as ‘toehold’ investments when we are most of the way through our investment and diligence process and believe a company has good potential. These toeholds allow us to take advantage of liquidity as it arises.
In the period we invested £0.70 million in three toeholds (two new and one existing). In one of the two new toeholds, we quickly exited at a gain of £0.15 million as a bid was made for the company. These positions generated total portfolio gains (total of realised and unrealised) of £0.53 million. Post-period end we have made another toehold investment, and have a strong pipeline of opportunities within our ‘WIP’ list.
ESG
Since the inception of DSM, we have championed good corporate governance as one of the most accurate indicators for future success. We have always taken the social aspect of being a proper custodian of shareholders money as ‘common sense’ or a ‘given’ for our investments. In simple terms for us as Managers, that means our investments look after employees, pay suppliers fairly, and invest for the long term. In our view, if you cannot do that then you don’t have a sustainable business. We didn’t have a name for that before – it was just part of our due diligence process. That is now the ‘S’ in the Environmental, Social and Governance (ESG) agenda.
Now climate, or the ‘E’ of ESG, is also part of the exam question. Here we are learning the questions to ask our investments, looking for appropriate disclosures to ensure that the investor community knows our investments are doing things responsibly. It’s a refreshed part of our investment process - to document these aspects of responsible investing; however, we feel we have embraced these principles since the inception of the company. Now we just need to make sure these are recorded for others to take the score! We don’t want to pretend we are 100% there on these matters. However, it is important to highlight our commitment to telling investors what we do and where there are weaknesses (in this regard) in our portfolio. Rest assured we are addressing any areas for improvement.
Judith MacKenzie
Head of Downing Fund Managers and Partner of Downing LLP
1 November 2021
Investments
As at | As at | ||
Market Value | % of Total | % of Total | |
Volex | 8,253 | 17.13 | 15.17 |
Hargreaves Services | 5,636 | 11.70 | 7.64 |
Flowtech Fluidpower | 3,495 | 7.26 | 4.50 |
Ramsdens Holdings | 3,454 | 7.17 | 7.04 |
Fireangel Safety Technology | 3,407 | 7.08 | 6.07 |
AdEPT Technology Group | 3,258 | 6.77 | 7.43 |
Real Good Food 10% Loan Note (19/05/2023)1 | 2,573 | 5.34 | 17.38 |
Venture Life Group | 2,107 | 4.38 | 4.59 |
Synectics | 2,017 | 4.19 | 6.55 |
Real Good Food 12% ‘C’ Secured Guaranteed Loan Note (19/05/2023)1 | 1,682 | 3.49 | 3.78 |
Tactus Holdings2 | 1,632 | 3.39 | - |
Duke Royalty | 1,425 | 2.96 | 3.30 |
Digitalbox | 1,298 | 2.70 | 3.46 |
Real Good Food | 127 | 0.26 | 0.44 |
Other | 2,021 | 4.20 | 4.88 |
Total investments | 42,385 | 88.02 | 92.23 |
Cash | 6,003 | 12.47 | 8.06 |
Other net current assets | (236) | (0.49) | (0.29) |
Total assets | 48,152 | 100.00 | 100.00 |
1Unquoted. Stated inclusive of the fair value of unpaid interest income. | |||
All investments are in Ordinary Shares and traded on AIM unless indicated. As at 31 August 2021, DSM held investments in 14 companies (28 February 2021: 14). Details of the equity interests comprising more than 3% of any company's share capital are set out in note 9.
As at 31 August 2021, loan note principal represented 6.52% (28 February 2021: 16.24%) of total assets and the total of loan note principal and interest represented 8.83% (28 February 2021: 21.16%).
The table above includes net current assets of £5,767,000 (28 February 2021: £3,306,000) that are also disclosed in the statement of financial position.
Background to the investments
(unless otherwise stated all information provided as at 31 August 2021)
AdEPT Technology Group PLC (AdEPT) (6.77% of net assets) |
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Interim Financial Statements
Condensed Statement of Profit or Loss and Other Comprehensive Income
for the six months ended 31 August 2021
(Unaudited) | (Unaudited) | (Audited) | |||||||
Six months ended | Six months ended | Year ended | |||||||
Revenue | Capital | Total | Revenue | Capital | Total | Revenue | Capital | Total | |
£’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |
Gains/(losses) on investments at FVTPL (note 7) | - | 6,873 | 6,873 | - | (1,563) | (1,563) | - | 5,390 | 5,390 |
Investment income (note 3) | 326 | - | 326 | 554 | - | 554 | 996 | - | 996 |
326 | 6,873 | 7,199 | 554 | (1,563) | (1,009) | 996 | 5,390 | 6,386 | |
Investment managementfee (note 4) | (39) | (155) | (194) | (34) | (136) | (170) | (59) | (234) | (293) |
Other expenses | (198) | - | (198) | (173) | - | (173) | (390) | - | (390) |
(237) | (155) | (392) | (207) | (136) | (343) | (449) | (234) | (683) | |
Profit/(loss) before taxation | 89 | 6,718 | 6,807 | 347 | (1,699) | (1,352) | 547 | 5,156 | 5,703 |
Taxation | - | - | - | - | - | - | - | - | - |
Profit/(loss) for the period | 89 | 6,718 | 6,807 | 347 | (1,699) | (1,352) | 547 | 5,156 | 5,703 |
Revenue | Capital | Total | Revenue | Capital | Total | Revenue | Capital | Total | |
(p) | (p) | (p) | (p) | (p) | (p) | (p) | (p) | (p) | |
Earnings/(loss) per Ordinary Share (note 5) | 0.17 | 12.96 | 13.13 | 0.64 | (3.11) | (2.47) | 1.02 | 9.56 | 10.58 |
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 return/(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 2021
Share capital | Special reserve | Capital reserve | Revenue reserve | Total | ||
Note | £’000 | £’000 | £’000 | £’000 | £’000 | |
Year ended 28 February 2021 (Audited) | ||||||
At 29 February 2020 | 56 | 54,473 | (16,617) | 1,184 | 39,096 | |
Profit for the year | – | – | 5,156 | 547 | 5,703 | |
Buyback of Ordinary Shares into treasury | – | – | (1,390) | – | (1,390) | |
Transfers between reserves | – | 1 | (1) | – | - | |
Expenses for share buybacks | – | – | (11) | – | (11) | |
Dividends paid (note 8) | – | – | – | (874) | (874) | |
As at 28 February 2021 | 56 | 54,474 | (12,863) | 857 | 42,524 | |
Six months ended 31 August 2021 (Unaudited) | ||||||
At 28 February 2021 | 56 | 54,474 | (12,863) | 857 | 42,524 | |
Profit for the period | – | – | 6,718 | 89 | 6,807 | |
Buyback of Ordinary Shares into treasury | – | – | (760) | – | (760) | |
Expenses for share buybacks | – | – | (4) | – | (4) | |
Dividends paid | 10 | – | – | – | (415) | (415) |
As at 31 August 2021 | 56 | 54,474 | (6,909) | 531 | 48,152 | |
Condensed Statement of Financial Position
as at 31 August 2021
(Unaudited) | (Unaudited) | (Audited) | ||
31 August | 31 August | 28 February | ||
Note | £’000 | £’000 | £’000 | |
Non-current assets | ||||
Investments held at fair value through profit or loss | 7,8 | 42,385 | 29,356 | 39,218 |
42,385 | 29,356 | 39,218 | ||
Current assets | ||||
Trade and other receivables | 11 | 724 | 39 | |
Cash and cash equivalents | 6,003 | 6,860 | 3,428 | |
6,014 | 7,584 | 3,467 | ||
Total assets | 48,399 | 36,940 | 42,685 | |
Current liabilities | ||||
Trade and other payables | (247) | (250) | (161) | |
(247) | (250) | (161) | ||
Total assets less current liabilities | 48,152 | 36,690 | 42,524 | |
Net Assets | 48,152 | 36,690 | 42,524 | |
Represented by: | ||||
Share capital | 56 | 56 | 56 | |
Special reserve | 54,474 | 54,473 | 54,474 | |
Capital reserve | (6,909) | (18,496) | (12,863) | |
Revenue reserve | 531 | 657 | 857 | |
Equity shareholders’ funds | 48,152 | 36,690 | 42,524 | |
Net asset value per Ordinary Share | 6 | 93.74p | 67.36p | 81.16p |
Condensed Statement of Cash Flows
for the six months ended 31 August 2021
(Unaudited) | (Unaudited) | (Audited) | |||
Six months ended | Six months ended | Year ended | |||
Notes | £’000 | £’000 | £’000 | ||
Operating activities | |||||
Return/(loss) before taxation | 6,807 | (1,352) | 5,703 | ||
(Gains)/losses on investments at FVTPL | 7 | (6,873) | 1,563 | (5,390) | |
UK fixed interest income | (183) | (360) | (738) | ||
Receipt of UK fixed interest income | 1,162 | - | - | ||
Decrease/(increase) in other receivables | 28 | (681) | 4 | ||
Increase in other payables | 86 | 153 | 64 | ||
Purchases of investments | (7,733) | (2,294) | (8,877) | ||
Sales of investments | 10,460 | 4,834 | 8,886 | ||
Net cash inflow/(outflow) from operating activities | 3,754 | 1,863 | (348) | ||
Financing activities | |||||
Buyback of Ordinary shares into treasury | (760) | (177) | (1,390) | ||
Expenses of for share buybacks | (4) | (3) | (11) | ||
Dividends paid | (415) | (874) | (874) | ||
Net cash outflow from financing activities | (1,179) | (1,054) | (2,275) | ||
Change in cash and cash equivalents | 2,575 | 809 | (2,623) | ||
Cash and cash equivalents at start of period | 3,428 | 6,051 | 6,051 | ||
Cash and cash equivalents at end of period | 6,003 | 6,860 | 3,428 | ||
Comprised of: | |||||
Cash and cash equivalents | 6,003 | 6,860 | 3,428 | ||
Notes to the Interim Financial Statements
for the six months ended 31 August 2021
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 2021 have been prepared in accordance with the accounting policies set out in the statutory accounts for the year ended 28 February 2021, which were prepared in accordance with international accounting standards and in conformity with the requirements of the Companies Act 2006.
These Financial Statements are presented in Sterling (£) rounded to the nearest thousand. Where presentational guidance set out in the statement of recommended practice ‘Financial Statements of Investment Trust Companies and Venture Capital Trusts’ (‘SORP’), issued by the Association of Investment Companies (‘AIC’) issued in October 2019 is consistent with the requirements of international accounting standards, the directors have sought to prepare the Financial Statements on a consistent basis compliant with the recommendations of the SORP.
The financial information presented in respect of the six months ended 31 August 2021 and the comparative half-year period ended 31 August 2020 has not been audited. The financial information presented in respect of the year ended 28 February 2021 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.
Prior period restatement
Within the Annual Report for the year ended 28 February 2021, the company changed its accounting treatment in respect of unpaid UK fixed interest income (‘fixed interest income or interest income’), which is due to the company in connection with its loan note investments. Such amounts were previously recorded within the balance of trade and other receivables on the Statement of Financial Position and are now recorded as part of the balance of investments held at fair value through profit or loss (‘FVTPL’). The comparatives for the year ended 28 February 2021 and the six months ended 31 August 2021 have been restated accordingly, with no impact on net assets.
3. Income
(Unaudited) | (Unaudited) | (Audited) | |
Six months ended | Six months ended | Year ended | |
£’000 | £’000 | £’000 | |
Income from investments | |||
UK dividend income | 82 | 194 | 258 |
UK fixed interest income | 183 | 360 | 738 |
Fee income | 61 | - | - |
Total | 326 | 554 | 996 |
UK fixed interest income represents loan note interest receivable from Real Good Food plc and Tactus Holdings Limited. During the period all contractual loan interest was received from Tactus Holdings Limited, as part of the partial exit. UK fixed interest income forms part of the overall fair value of the loan note instruments and are therefore included within investments held at fair value through profit or loss on the Statement of Financial Position.
4. Investment management fee
In respect of its services provided under the Management Agreement, the Investment Manager is entitled to receive a management fee payable monthly in arrears calculated at the rate of one twelfth of 1% of the market capitalisation as at the relevant calculation date.
The Investment Manager has agreed that, for so long as it remains the company’s Investment Manager, it will rebate such part of any management fee payable to it so as to help the company maintain an ongoing charges ratio of 2% or lower.
(Unaudited) | (Unaudited) | (Audited) | |
Six months ended | Six months ended | Year ended | |
£’000 | £’000 | £’000 | |
Investment management fee | |||
Revenue | 39 | 34 | 59 |
Capital | 155 | 136 | 234 |
Total | 194 | 170 | 293 |
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 | ||||||
Net return | Per share | Net return | Per share | Net return | Per share | |||
£’000 | Pence | £’000 | Pence | £’000 | Pence | |||
Revenue return | 89 | 0.17 | 347 | 0.64 | 547 | 1.02 | ||
Capital return | 6,718 | 12.96 | (1,699) | (3.11) | 5,156 | 9.56 | ||
Total return | 6,807 | 13.13 | (1,352) | (2.47) | 5,703 | 10.58 | ||
Weighted average number of Shares1 | 51,830,420 | 54,626,242 | 53,908,480 | |||||
1Excluding treasury shares
6. Net Asset Value per Ordinary Share
NAV per Ordinary Share is based on net assets at the period end and 51,369,341 (31 August 2020: 54,467,002, 28 February 2021: 52,398,491) Ordinary Shares, being the number of Ordinary Shares in issue excluding treasury shares at the period end.
(Unaudited) | (Unaudited) | (Audited) | ||||||
31 August 2021 | 31 August 2020 | 28 February 2021 | ||||||
NAV | NAV | NAV | NAV | NAV | NAV | |||
Pence | £’000 | Pence | £’000 | Pence | £’000 | |||
Ordinary Shares: | ||||||||
Basic and diluted | 93.74 | 48,152 | 67.36 | 36,690 | 81.16 | 42,524 | ||
7. Investments
(Unaudited) | (Unaudited) | (Audited) | |
Six months ended | Six months ended | Year ended | |
31 August 2021 | 31 August 2020 | 28 February 2021 | |
Opening book cost | 38,425 | 42,138 | 42,138 |
Opening UK fixed interest income at fair value through profit or loss | 2,093 | 1,355 | 1,355 |
Opening investment holding losses | (1,300) | (10,394) | (10,394) |
Opening valuation | 39,218 | 33,099 | 33,099 |
Movements in the year | |||
UK Fixed interest income at fair value through profit or loss (notes 3,8) | 183 | 360 | 738 |
Receipt of UK fixed interest income | (1,162) | - | - |
Investment purchases at cost | 7,733 | 2,294 | 8,877 |
Disposals: | |||
Proceeds | (10,460) | (4,834) | (8,886) |
Net realised gains/(losses) on disposals | 2,153 | (4,223) | (3,705) |
Movement in investment holding gains/(losses) | 4,720 | 2,660 | 9,095 |
Closing valuation | 42,385 | 29,356 | 39,218 |
Closing book cost | 37,851 | 35,375 | 38,425 |
Closing UK fixed interest income at fair value through profit or loss | 1,114 | 1,715 | 2,093 |
Closing investment holding gains/(losses) | 3,420 | (7,734) | (1,300) |
42,385 | 29,356 | 39,218 | |
Realised gains/(losses) on disposals | 2,153 | (4,223) | (3,705) |
Movement in investment holding gains/(losses) | 4,720 | 2,660 | 9,095 |
Gains/(losses) on investments held at fair value through profit or loss | 6,873 | (1,563) | 5,390 |
8. Fair Value Hierarchy
Financial assets and financial liabilities of the company are carried in the statement of financial position at their fair value. The fair value is the amount at which the asset could be sold or the liability transferred in a current transaction between market participants, other than a forced or liquidation sale. For investments actively traded in organised financial markets, fair value is generally determined by reference to Stock Exchange quoted market bid prices and Stock Exchange Electronic Trading Services (‘SETS’) at last trade price at the Statement of Financial Position date, without adjustment for transaction costs necessary to realise the asset.
The company measures fair values using the following hierarchy that reflects the significance of the inputs used in making the measurements. Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant assets as follows:
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities.
An active market is a market in which transactions for the asset or liability occur with sufficient frequency and volume on an ongoing basis such that quoted prices reflect prices at which an orderly transaction would take place between market participants at the measurement date. Quoted prices provided by external pricing services, brokers and vendors are included in Level 1, if they reflect actual and regularly occurring market transactions on an arm’s length basis.
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices).
Level 2 inputs include the following:
Quoted prices for similar (i.e. not identical) assets in active markets.
Quoted prices for identical or similar assets or liabilities in markets that are not active. Characteristics of an inactive market include a significant decline in the volume and level of trading activity, the available prices vary significantly over time or among market participants or the prices are not current.
Inputs other than quoted prices that are observable for the asset (for example, interest rates and yield curves observable at commonly quoted intervals).
Inputs that are derived principally from, or corroborated by, observable market data by correlation or other means (market-corroborated inputs).
Level 3 – Inputs for the asset or liability that are not based on observable market data (unobservable inputs).
The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a Level 3 measurement. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgement, considering factors specific to the asset or liability.
Level 1 | Level 2 | Level 3 | Total | |
£’000 | £’000 | £’000 | £’000 | |
31 August 2021 (Unaudited) | ||||
Quoted on the Main Market | 1,122 | - | - | 1,122 |
Traded on AIM | 35,376 | - | - | 35,376 |
Unquoted Equity | - | - | 1,632 | 1,632 |
Unquoted Loan Notes | - | - | 4,255 | 4,255 |
36,498 | - | 5,887 | 42,385 | |
28 February 2021 (Audited) | ||||
Quoted on the Main Market | 1,018 | - | - | 1,018 |
Traded on AIM | 29,201 | - | - | 29,201 |
Unquoted Loan Notes | - | - | 8,999 | 8,999 |
30,219 | - | 8,999 | 39,218 | |
31 August 2020 (Unaudited) (restated) | ||||
Quoted on the Main Market | - | - | - | - |
Traded on AIM | 20,735 | - | - | 20,735 |
Unquoted Loan Notes | - | - | 8,621 | 8,621 |
20,735 | - | 8,621 | 29,356 |
There were no transfers between Level 1 and Level 2 during the period. A reconciliation of fair value measurements in Level 3 is set out in the table below.
(Unaudited) | (Unaudited) | (Audited) | |
Six months ended | Six months ended | Year ended | |
£’000 | £’000 | £’000 | |
Opening balance | 8,999 | 8,261 | 8,261 |
Purchases | 1,920 | - | - |
Sales proceeds | (5,594) | - | - |
UK Fixed interest income at FVTPL (notes 3, 7) | 183 | 360 | 738 |
Receipt of UK fixed interest income | (1,162) | - | - |
Total gains/(losses) included in losses on investments in the Statement of Comprehensive Income: | |||
- on assets sold | 910 | - | - |
- on assets held at the period end | 631 | - | - |
Closing balance | 5,887 | 8,621 | 8,999 |
9. Significant Interests
As at 31 August 2021, the Company held interests amounting to 3% or more of the equity in issue by the following investee companies.
% of investee | |
Digitalbox plc | 21.05% |
FireAngel Safety Technology plc | 11.07% |
Synectics plc | 10.80% |
Ramsdens Holdings plc | 6.11% |
Real Good Food Company plc | 5.33% |
AdEPT Technology Group plc | 4.93% |
Flowtech Fluidpower plc | 4.51% |
Hargreaves Services plc | 3.24% |
10. Dividends paid in the period
Six months ended | Year ended | ||
£’000 | £’000 | ||
Dividends paid during the period | 415 | 874 |
A final dividend of 0.8p per share, in respect of the year ended 28 February 2021, was paid on 9 July 2021.
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 on pages 4 to 8 of the 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 2021.
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 2021. Information on each of these areas can be found in the strategic report on pages 33 to 34 and in note 14 on pages 76 to 79 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
1 November 2021
