TIDMDSM
Downing Strategic Micro-Cap IT PLC
16 November 2023
Downing Strategic MicroCap (DSM)
16/11/2023
Results analysis from Kepler Trust Intelligence
Downing Strategic MicroCap (DSM) has released its half-year
financial report for the period ending 31/08/2023. Over the
six-month period, the trust saw its NAV decrease by 8.2% on a total
return basis, which compares to a 12.8% decrease in the FTSE AIM
All-Share Index in the same period.
M&A has continued to feature in the period, with two
portfolio companies being taken out in the past six months which
has contributed to returns. There is now over 20% of net portfolio
assets with agreed bids or under strategic review which should
contribute to capital returns.
After a number of years of unrealised potential, and low
investor appetite for micro cap stocks, the board has announced a
planned wind down. The board have decided a journey towards a full
redemption will be the best way of unlocking value in the trust.
The first return to shareholders of at least 20% of the portfolio
is expected to come in early 2024.
Chairman Hugh Aldous said, "Most of DSM's portfolio is
performing well and more is ripe for M&A or rerating", but
despite this ongoing uncertainty means he "has concluded that it
would advantage all shareholders equally and fairly to commence a
managed wind down of the company's investment portfolio in an
orderly manner".
Kepler View
Managers Judith Mackenzie and Nick Hawthorn have released, in
our opinion, a bittersweet half-yearly annual report for Downing
Strategic MicroCap (DSM). On the one hand, they have delivered
another period of outperformance from their concentrated portfolio
of companies at the smallest end of the market cap spectrum.
However, they also acknowledge the ongoing headwinds towards the
sector mean that the prospects for their holdings are unlikely to
be fulfilled in the foreseeable future. As such, they believe
shareholders will be best served by a winding up of the trust and a
returning of capital to shareholders.
Judith and Nick highlight that two holdings received bids in the
period and another has announced a strategic review. We understand
these will likely make up the first capital repayment of c. 20%.
Before the announcement, the shares traded at a 17.8% discount to
NAV. We believe this approach of selling the 'low-hanging fruit'
should offer investors a near-term boost of a well-defined capital
return in the interim, at a price that is likely to be much closer
to NAV than the shares currently trade at, with the potential for
future returns as the wind down process continues.
The managers also highlight positive performance from a number
of holdings including one the managers had recently added to and
another DSM helped appoint a new director. We believe this
demonstrates the potential in the portfolio which could contribute
to further returns going forward, though this will be primarily led
by exit values achieved.
Going forward, we believe this means the discount could be seen
as attractive. While it will take some time to wind up the
portfolio, and markets could move in the interim, there is the
scope for periodic distributions at or near NAV. Furthermore, there
is still potential for the managers to deliver value through their
active approach. It may take some time to fully realise the value,
as the UK remains out of favour, but this wind down approach could
deliver strong returns if the managers achieve exits close to the
current value in the NAV.
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