Final Results and Notice of Investor Presentation

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10.05.2021, 08:00  |  140   |   |   

Downing Strategic Micro-Cap Investment Trust plc
LEI Code: 213800QMYPUW4POFFX69
10 May 2020
Final Results and Notice of Investor Presentation

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 year ended 28 February 2021.

Key points

  • Focused portfolio of actively managed investments with clear catalysts in place
  • Investments are now all in either late stage turnaround or growth phase
  • 26% increase in NAV and 22% increase in share price since the pre-Covid 29 Feb 2020 year end
  • Portfolio still at 43% discount to the manager’s base case intrinsic value
  • Any return of positive sentiment to UK small company value could further enhance intrinsic value of the portfolio
  • Investee companies all well financed and should benefit from the end of lockdown
  • Post period end a significant return of capital, interest and redemption premium, reducing the exposure to the turnaround of Real Good Food Plc (subject to shareholder approval by Real Good Food plc)
  • Strong work in progress list of potential new investments which will be executed in the short term

Judith MacKenzie, the lead manager, saidWe are focused, alongside strong management teams, on the catalysts in the portfolio which has now matured into a collection of well-run and relevant businesses. Meanwhile the sentiment towards value is improving, and there is now more of a focus on UK small cap which has been an underdog for many years. We believe it is a good time to be an investor in this asset class.

Investor Presentation
Downing Strategic Micro-Cap Investment Trust plc is pleased to announce that Judith MacKenzie and Nick Hawthorn will provide a live investor presentation via the Investor Meet Company platform on 18th May 2021 at 10.30am BST.

The presentation is open to all existing and potential shareholders. Questions can be submitted pre-event via your Investor Meet Company dashboard up until 9am the day before the meeting or at any time during the live presentation.

Investors can sign up to Investor Meet Company for free and access the meeting with Downing Strategic Micro-Cap Investment Trust plc via:

Investors who already follow Downing Strategic Micro-Cap Investment Trust plc on the Investor Meet Company platform will automatically be invited.

Financial highlights

  28 February 29 February Change
Assets 2021 2020 %
Net assets (£’000) 42,524 39,096 8.77
Net asset value (‘NAV’) per Ordinary Share 81.16p 71.30p 13.82
Mid-market price per Ordinary Share 72.00p 63.00p 14.29
Discount 11.28% 11.64%  
  Year ended Year ended  
  28 February 29 February  
Revenue 2021 2020  
Revenue return per Ordinary Share 1.02p 1.91p  
Capital return per Ordinary Share 9.56p (4.01p)  
Total return per Ordinary Share 10.58p (2.10p)  

Chairman’s Statement
The recent pandemic, coupled with Brexit, caused a jolt sufficient to challenge some established ways of doing things and encouraged a rethink of the creation of social, economic and corporate worth. The best companies are now more focused, more innovative; society is more demanding, governments more responsive (well maybe….). Revised views on value generation could well leave many people better off and will leave good businesses stronger. To quote the FT on 22 April 2021 “build back better could be what helps us achieve growth above what we were resigned to accept before the world changed” (Martin Sandbu).

Through this difficult time, the companies in DSM’s portfolio have taken up that challenge and become all the better. None of the companies in our portfolio have crashed, and, by and large, all have emerged better managed, thinking clearly and fixed on stronger and more profitable futures. That reflects well on DSM’s style and stock selection.

The portfolio has performed robustly since March last year and should continue to do so. Shareholders can also see that by investing in DSM they have invested into the heart of the UK’s productive economy and into companies that have yet to be fairly recognised.

At the time of this statement the NAV per share is 89.79p and the shares are 77.0p mid (74.0p bid/80.0p offer). The discount is 14.24%. 2020/21 was a volatile year, so how to look at performance? At last year end the NAV was 71.30p per share and mid-market price 63.0p, by this financial year end the NAV stood at 81.16p per share and the shares were 72.0p. In the midst we had the March 2020 market collapse. Following that collapse, confidence re-emerged; your portfolio continued to show its strength and value stocks came more into their own. The NAV grew from a nadir of 57.0p per share to today’s 89.79p (an increase of 57.5%) and the share price grew from 36.0p (with other days around 40 to 42p) to 77.0p – over 100%. The strength of your company’s portfolio has come through. I will highlight some examples in a moment. That has meant that the NAV more than recovered its 29 February 2020 level and now stands 25.9% higher than at that bullish moment; the share price, 22.2% higher. During settled markets your board has actively managed the discount and brought it back in again, despite the current closed period. Yet there continues to be a lot of intrinsic value in the portfolio still to be recognised by the market - the manager’s view is 43%. Those views on the look through discount are expressed periodically in the manager’s investor newsletters (which you can request from the DSM website).

DSM does not have a benchmark, but it has beaten the Numis Smaller Companies + AIM Index for the last two quarters.

DSM is not an income investment company, but, because of some high yielding loan notes, we are proposing a dividend of 0.8p per share. Subject to shareholder approval at the AGM, the dividend will be paid on 9 July 2021 to shareholders on the register at 11 June 2021.

Attention to ESG
The manager’s reports cover specific aspects. Shareholders should have noticed over the years that DSM is outspoken on its expectations of investee companies which reflects its activism and that Downing sponsors and contributes to the QCA’s Corporate Governance and ESG Guides.

Some of the events of the past year
Shareholders will recall that Real Good Food (‘RGD’) turned out to be a bigger problem than we thought, once our manager joined the board and had unearthed corporate failings that needed immediate attention. Value was still there despite having to put in an interim CEO and new finance director. The pandemic curtailed realisation of value until this April, but you will see from the manager’s report that a satisfactory price of £43m has been achieved for Brighter Foods (subject to shareholder approval) and that the remaining business, Renshaw, and the properties are also being prepared for sale. The Brighter transaction alone will repay £4.8m of loan notes and interest to DSM and release £0.5m of redemption premium. Our manager’s assertion that the sum of the parts would repay invested time and capital looks to be correct.

As to the rest of the portfolio, nearly all companies have managed the last year well. That is set out in the manager’s report, but I would highlight some of the breakthroughs. Synectics reorganised internally and cut costs whilst securing some remarkable contracts. Its software and integrated analytics will provide a new, real time incident management and surveillance system for the City of London to make the City the safest city area in the world; a command and control platform for Deutsche Bahn is now operating for the Berlin S-Bahn. These are key inflection points for Synectics, never mind its surveillance system for casinos opening-up after lockdown. FireAngel now has contracts for its unique fire management platform and has secured a fully funded research and development programme with a German partner for the next generation of smoke alarms working off the FireAngel platform. Ramsdens has come through the pandemic keeping most of their shops open with cash-positive trading and ready for the ‘holidays’ roadmap with their FX service. AdEPT has positioned itself in network delivery. Volex powers on. Hargreaves Services, as their broker puts it, ‘has genuine momentum’. Hargreaves trading, property and German j.v. are performing nicely. The portfolio as a whole makes strides.

Portfolio construction
I leave the manager to tell you how the portfolio matches the changing future of the UK. Your board is content with its development and that the manager has disposed of some investments that really didn’t fit that future. In one case we lost faith in the integrity of the management and in another we began to doubt whether shareholder interest was really on their agenda. You can’t always assess management perfectly until you ‘get in there’.

Looking forward
Personally, I welcome the increasing responsibility that the recent Government White Paper will place on directors. Competent, responsible, diligent, effective boards matter.

As to outlook, personally I have never been able to call markets (Who said, ‘There are two types of investor: those who can’t call markets and those who know they can’t’?) but developed markets outside the USA, such as ours, seem to have struggled for 20 years in a bearish world compared to the ever-vigorous America. Now more vigour, interest in corporate substance and value is growing in the UK and your portfolio has that energy amongst its well-driven companies. DSM has a portfolio for future national recovery.

Looking after our shareholders
This has not been an easy year for the smaller shareholder. In March 2020 markets fell dramatically. I said this time last year that there was no point in trying to stand against the tide and buy-back shares in that market; just sit tight. There was no value for the overall mix of shareholders in making a redemption offer and we did not exercise the facility. Once disorder had calmed, we stepped into the market and, from the end of September onwards, we worked with our brokers to generate some effective discount control which, with increasing interest in DSM, brought the discount in to less than 12% by its year end. That way we saw no market overhang and those who have wished to sell found that there were buyers – sometimes through buy-backs.

What we now need to do is to build this company, whilst looking after shareholders through marketing and maintaining liquidity – and doing that through discount management when necessary and as markets permit. That is what we will continue to do and, if it works well, that alone should be enough to look after shareholders without further shrinking the company through redemptions – whilst, of course, listening to shareholders as to their views.

Talking to shareholders, informing shareholders, quarterly investor letters
As chairman, I make a point of talking to the larger shareholders after each report and accounts, and sometimes more frequently if they wish. I am happy to talk to any shareholder. But how do you penetrate the nominee platforms to reach the smaller shareholders? The best we can do is invite you all to register on our website ( to get our investor letters, Kepler research reports, useful articles about micro-caps generally and be invited to join webinars and shareholder engagement events.

Board and managers
We do our own assessments of the board and the managers, encouraging frankness. That builds teamwork and focuses the board’s purpose and the work we do with the managers with whom we have an open, communicative, constructive relationship. That level of openness is quite unusual, and it makes for a good working relationship.

The managers are the right activist team for this micro-cap market.

Doctors’ Support Network
During the year, your board waived 25% of its fees - £28,750 – in order for the company to make a donation to the Doctors’ Support Network, a leading charity which provides peer support to doctors and medical students who have concerns about their mental health. The aim of our donation is to assist those who have found that the challenge of working in the frontline of the Covid-19 pandemic began to question their career choice or even their future in medicine. Participants will receive free short-term one to one coaching. The service was launched in the week of 26 April to coincide with the International Conference on Physician Health.

This year’s AGM will take place on 7 July 2021 at 2:15pm at Downing’s office at St Magnus House, 3 Lower Thames Street, London EC3M 6HD. With indications that all social distancing restrictions will now end before that date, we are planning to hold an AGM in the traditional manner this year.

Last year’s AGM worked well enough in the circumstances. Shareholders could ‘attend’ through Zoom and type in their questions which we then answered. We got some compliments and no complaints.

We are mindful that government guidance can change and so request that any shareholders intending to attend the meeting register by sending an email to stating that you wish to register for the AGM. Further details regarding arrangements for the AGM will then be provided to you.

Please also register on DSM’s website ( for AGM news, manager presentations, webinars, the quarterly Investor Letter, broker and Kepler research and portfolio news.

As always, my thanks to colleagues both on the board, those supporting the company and to Judith MacKenzie, Nick Hawthorn and the manager’s team.

Hugh Aldous
7 May 2021

Investment Manager’s Report
I said back at the time of the Interim Report in 2020 (issued in November) that I didn’t know what I would be writing at the time of the full year report in May 2021. The complexities on the world stage at that point were multiple; a Brexit deadline was looming, the threat of a 2nd or even 3rd lock-down looked inevitable, vaccines were being validated but not rolled out, and of course we were on the eve of a tumultuous US General Election. At that point my fortune cookie had to forecast the outcome of these issues, whilst at the same time we had to evaluate their impact on our portfolio. Clearly this was challenging, but we had formed a view in early 2020 that we could only focus on what we know – which is our underlying investments.

Six months seems to have been a long time this year, but in other ways it seems surprisingly short. I am more relaxed about the US - or am I? Biden is creating fiscal stimulus through infrastructure commitment. But who is paying for it? We have a vaccine roll out program – so I should be less concerned about covid, surely. But who is paying for the fiscal support? Brexit – done and dusted aside from a couple of supply chain issues and a disgruntled Northern Ireland. But who is paying for the regulatory and operational change it has brought? Apparently, I need not worry, as markets are at all-time highs. But I am still left thinking, ‘who is paying for it’?

I am clearly in a minority when it comes to questioning the fundamentals. US margin debt has risen to a record peak of $822bn in March, the popularity of SPACs and the fact that the cryptocurrency market is worth more than all listed US banks combined, would in normal times give reason for concern. However, as the year progresses, I suspect we will still be living the 1920s-like euphoria for some time, even if I am still asking who is paying for it.

If we therefore assume that there might be a stock market bubble looming, then we have to look at the impact it might have on our portfolio. Firstly, booms or bubbles are typified by 5 main stages:

1. The theory of displacement, or that the world will follow a new paradigm. We have seen the popularity of healthcare and technology stocks in the last 12 months, for example.

2. Boom – yes, we can tick that box. The US market is at all-time highs. The Leisure Sector in the UK is at the same rating as it was pre-covid; despite lockdowns.

3. Euphoria – yes, we can say there is evidence of this. The number of IPOs and fundraises in the EMEA market is at its highest level since 2000 (Q1 2021)

4. Profit taking – not seeing that yet.

5. Panic – still to come?

As managers, we have a belief that it is difficult for the central banks to step away from pushing money into the economy, and that the public could spend their way out of a recession. But at the same time, we have a conviction that the symptoms of a bubble, described above, are there. So, what do you do? Becoming too defensive means you miss out but electing to ride the momentum seems foolhardy.

Being a stock-picker in this environment is the most comfortable place to be. You are not buoyed by sector movements; you have the luxury of looking at fundamentals and taking a view as to how future cash flows and assets can be valued. Being able to hunt for the strategic catalysts that can drive value is a more comfortable place to be than trying to value the next IPO.

We have always tried to quantify the inherent value within the portfolio – based on our own judgement of current and future earnings. Thereby trying to cut through the ‘market noise’ against or for our type of investing. If we purport to understand our underlying investments better than anyone else, then we should theoretically understand how to value them better.

As we stand today, we believe that the portfolio sits at a 43% discount to its intrinsic value. Coupled with that there is a 14.2% discount to the net asset value reflected in the current share price.

So, we are focused, alongside strong management teams, on the catalysts in the portfolio. Meanwhile the sentiment towards value is improving, whilst there is a focus on UK small cap which has been an underdog for many years. We believe it is a good time to be an investor in this asset class.

Turning to the portfolio, the detail of our progress against the investment case is illustrated in the individual company reports, however here we seek to update readers on the tangible progress that this portfolio has made since the start of 2021. Over 60% of the underlying positions have seen management teams buy stock in their own business over the last 12 months. All positions have reported positive trading updates, many having announced significant new contract wins.

Company Insider Buying 2021 progress on catalysts
Real Good Food No Divestment and return of capital.
Volex Yes Achieved better than expected earnings.
AdEPT Technology Yes Earnings accretive acquisition.
Hargreaves Services Yes German joint venture trading well.
Ramsdens Yes Strong recovery play post lockdown.
FireAngel Yes Good news flow on Connected Home. Placing to secure growth initiatives are achieved.
Synectics Yes Significant margin improvement. Material Systems contract win.
Venture Life No Earnings ahead of expectations. Deal flow strong.
Flowtech Fluidpower Yes Cost savings executed. Strong recovery anticipated.
DigitalBox No New Chair, Board changes. Scope to improve monetisation rates and acquire.
Duke Royalty No Good underlying performance, fundraise.

Real Good Food (‘RGD’)

One of the main events in the portfolio since the period end is Real Good Food plc who disposed of their majority stake in Brighter Foods, to The Hut Group (‘THG’) plc for a gross consideration of £43m. The offer from THG broadly equates to 8.6 times annualized FY20 EBITDA and 11.7 times (unaudited) EBITDA for the last 12 months ended 31 March 2021.

This in turn has led to a neutralising of the pension fund liabilities, and a repayment of debt of £23.1m to loan note holders, of which DSM is one.

The impact for DSM is a significant return of capital, interest and redemption premium, totalling over £5.3m. This payment greatly reduces exposure to RGD to c.9% (down from c.21% as at 28 February 2021) and importantly provides a return on the investment – repayment incorporates accrued interest accrued (to early May 2021) and a redemption premium payment representing 15% of the principal being redeemed (equivalent to 7.5% of DSM’s full 10% loan note holding). A summary of the proceeds to be received by DSM is shown below. Please note that this repayment to loan note holders is subject to RGD shareholder approval.




premium (£m)

Split of proposed proceeds from RGD 3.7 1.1 0.5 5.3

This repayment highlights the ability to drive strategic value from this position, where Downing holds the right to a board position and has been highly engaged with the turnaround of the business. Going forward the board of RGD have stated the intention to continue to drive value from the remaining assets – predominantly Renshaw and Rainbow Dust.

Remaining net debt of RGD is £21.5m. These businesses pre-Covid and during their turnaround year generated turnover of c.£45m and EBITDA of £3.0m. This has historically been higher.

We continue to assess what the residual value of the remaining assets might be. The Board has concluded that it remains appropriate to carry the remaining loan notes at par and with accrued interest.

A new holding – Tactus Holdings Limited (‘Tactus’)
DSM made an investment of £1.5m into Warrington-based Tactus at the end of April. Tactus is a technology expert providing multi-branded IT hardware to global retailers and the public sector. The investment from DSM was part of a £11.25m investment round which allowed Tactus to complete a recent landmark acquisition of PC gaming specialist, CCL computers, which sees the group become a GBP125 million turnover business.

This is a fantastic strategic acquisition for Tactus which further strengthens its position as a disruptive consumer tech expert. CCL is ideally placed to bolster Tactus’ credentials in the gaming space, which has emerged as one of the world’s fastest growing sectors in recent months.

Our investment will support Tactus in its organic and future acquisitions, and help it deliver its ambitious growth plan. The investment is structured by way of loan notes and equity, providing some downside protection in this private company investment. Given the strong growth profile of the company we would expect that realisation of our holding would come either through an IPO or trade exit.

DSM and responsible investing

In order to provide investors with further information on the work DSM has undertaken in the interests of sustainability and ESG, we have included a Sustainability Report in the Annual Report.

Shareholder presentation
Nick Hawthorn and I will be hosting a live investor presentation via the Investor Meet Company platform on 18th May 2021 at 10.30am BST.

The presentation is open to all existing and potential shareholders. Questions can be submitted pre-event via your Investor Meet Company dashboard up until 9am the day before the meeting or at any time during the live presentation.

Investors can sign up to Investor Meet Company for free and register for the event using the Investor Meet Company website at:


The NAV of DSM is up 8.6p (10.6%) since the year end. Our portfolio has now gone through the challenges of change (and signs would say for the better). We have had a partial realisation through a corporate event partly driven by Downing, and our portfolio has survived the rigors of covid well. We believe investments are leaner, fitter and more capable than they were pre-covid. As I write, we have a strong pipeline of new opportunities, some of which we expect to execute within the coming weeks.

We have a clear focus, and we know what is expected of us.

Judith MacKenzie
Head of Downing Fund Managers and partner of Downing LLP
7 May 2021

As at 28 February 2021

  As at

28 February

As at

29 February




% of Total

% of Total

Real Good Food 10% Loan Note (19/05/2022)* 7,392 17.38 17.40
Volex 6,451 15.17 15.29
Hargreaves Services 3,247 7.64 7.07
AdEPT Technology Group 3,159 7.43 8.94
Ramsdens Holdings 2,994 7.04 7.57
Synectics 2,786 6.55 7.13
Fireangel Safety Technology 2,580 6.07 2.35
Venture Life Group 1,950 4.59 -
Flowtech Fluidpower 1,913 4.50 -
Real Good Food 12% ‘C’ Secured Guaranteed Loan Note (19/05/2022)* 1,607 3.78 3.74
Digitalbox 1,469 3.46 -
Duke Royalty 1,405 3.30 4.86
Real Good Food 186 0.44 0.57
Science in Sport - - 2.52
Pennant International Group - - 1.61
Other 2,079 4.88 5.62
Total investments 39,218 92.23 84.67
Cash 3,428 8.06 15.47
Other net current assets (122) (0.29) (0.14)
Total assets 42,524 100.00 100.00
*Unquoted. Stated inclusive of the fair value of unpaid interest income.      

All investments are in Ordinary Shares and traded on AIM unless indicated. The total number of holdings as at 28 February 2021 was 14 (29 February 2020: 13).

As at 28 February 2021, loan note principal represented 16.24% (29 February 2020: 17.68%) of total assets and the total of loan note principal and interest represented 21.16% (29 February 2020: 21.14%).

Background to the investments
(unless otherwise stated all information provided as at 28 February 2021)

AdEPT Technology Group PLC (AdEPT) (7.43% of net assets)
Cost: £3.83m. Value as at 28 February 2021, £3.16m

AdEPT functions as an aggregator of telecoms services providing a smoother, integrated service to corporates and government organisations. We were attracted by the high operational gearing and recurring revenue streams at appealing margins. Communications and technology have converged over recent years and that trend is only set to accelerate into the future, and AdEPT is well placed to benefit from this trend.
Update to the investment case

  • Positive interim results - trading remained resilient despite Covid-19
  • Continued cash generation
  • Net senior debt reduced by £6.7m
  • New contract wins in DoE and NHS
  • Total revenue down but recurring and managed services revenue increased        

Progress against investment case
AdEPT has continued to trade robustly through the ongoing pandemic given that 78% of revenue is generated by recurring managed services. Reassuringly, the group continued to generate cash throughout the period, with underlying EBITDA conversion to free cash flow (including leases) of 97%. We believe that this demonstrates the cash generative nature of the underlying and core managed service business, along with essential nature of these services to customers, despite the global pandemic.

Given the high proportion of revenue visibility, low capital‐intensity, and the cash generative nature of business, we believe that AdEPT is undervalued on both a relative and absolute basis. We continue to engage with management to pursue the exercise of deleveraging the balance sheet based on the cash generation within the business model. We think that given the robust trading through the pandemic this low valuation won’t go unnoticed.

Digitalbox PLC (Digitalbox) (3.46% of net assets)
Cost: £1.20m. Value as at 28 February 2021, £1.47m

Digitalbox, a new investment in the portfolio, 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

  • Improving revenues and profits
  • Positive integration of The Tab
  • Audience growth across the portfolio
  • Board strengthened by appointment of new Chair & NED

Progress against investment case
We view Digitalbox’s value creation opportunity across two buckets. Organically, we can see scope to continuously increase title monetisation. Combining improving monetisation with a largely fixed cost base leads to rapidly improved earnings. Inorganically, the opportunity is to continue to consolidate under-monetised titles and improve their earnings. There is a plethora of opportunities which have lacked investment to move online in the transition from print media, and Digitalbox is well capitalised to take advantage of these. Ultimately, we expect to crystalise value from our £1.2 million investment in the group through a trade sale. We view the recent board shuffle as positive in this regard with Marcus Rich having been appointed chairman in early February. Marcus was previously chief executive of TI Media where he led the sale of to Bandlab Technologies, and ultimately oversaw the company’s sale to Future PLC.

Duke Royalty PLC (Duke) (3.30% of net assets)
Cost: £2.02m. Value as at 28 February 2021, £1.41m

Duke Royalty provides alternative capital solutions to a diversified range of profitable and long-established businesses in Europe and North America. Duke Royalty's royalty investments are intended to provide robust, stable, long term returns to its shareholders and has the benefit of having first mover advantage in the European Royalty Finance market.

Update to the investment case

  • Positive trading update
  • Follow-on investments into existing Royalty Partners
  • Successful exit from Royalty Partner
  • Appointment of new CIO
  • Reinstated cash dividend        

Progress against investment case
The challenges of the last 12 months have been well navigated by Duke, with the period acting as a good test of the resilience of the business model. The royalty partner that gave the most cause for concern during the pandemic for us as investors was the River Boat Cruise operator Temarca. On 31 March 2021 Duke announced that this position had been exited for negative IRR of only -2%. This has been very reassuring for us and demonstrates management’s ability to step in and rescue value under extreme circumstances.
Duke raised a further £32 million to continue deploying its strategy on 1 April 2021. This was well supported and has acted as a positive catalyst for the share price.

The volatile macro environment presented by the pandemic has created opportunity for Duke. Banks have tightened SME lending criteria whilst business cashflows have been put under more pressure, and demand for more flexible, alternative sources of capital remains very strong. As a first mover and leader in the UK and European corporate royalty space, the group has a significant opportunity to build and further diversify its portfolio. Importantly, it has significant liquidity available for new deployments, which adds to management’s high level of confidence for 2021.

FireAngel Safety Technology Group PLC (FireAngel) (6.07% of net assets)
Cost: £4.85m. Value as at 28 February 2021, £2.58m

FireAngel designs, sells and markets smoke detectors, carbon monoxide detectors and home safety products. We were attracted to the business 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 the group will benefit from. The move away from simple alarms to connected products is expected to drive improved economics for FireAngel, and we see scope to generate meaningful recurring revenue by gaining traction in the social housing space.

Update to the investment case

  • Reduced sales due to Covid and a subsequent delay in making progress on strategic initiatives
  • Recovery in markets and improved trading
  • Significant reduction in stock levels
  • Social housing contract win
  • Increasing traction of Connected Home product
  • Post period end a significant Connected Home contract with a German client
  • Post period end a successful £9m fundraising to support growth

Progress against investment case
The Covid-19 pandemic had a detrimental effect on short term earnings, however these have now improved. The key to fulfilling the investment case in this position is the deliverability of cash earnings from the core historic business, whilst growing the new Connected Home opportunity – which is now being evidenced, and will likely to influenced by the growing attention on potential legislation post Grenfell.
The most recent announcement from the group of a major partnership with a client in Germany highlights the capability of the underlying IP, while also providing a meaningful economic benefit to the group. Post the period end FireAngel announced a £9m funding round to enable them to secure the growth opportunities in the Connected Home market.

Flowtech Fluidpower PLC (Flowtech) (4.50% of net assets)
Cost: £1.58m. Value as at 28 February 2021, £1.91m

Flowtech Fluidpower is a value‐added distributor of hydraulic and pneumatic consumables into a wide array of sectors predominantly in the UK and Ireland. The group is a leading UK player in this space, with pre‐Covid revenues of over £110 million. 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

  • Covid challenges led to 15% reduction in revenues
  • Modest increase in market share
  • Reduction in net debt
  • Delivering on operational cost savings
  • Cautious optimism – dividend policy and reinstatement of earnings guidance under review

Progress against investment case        
DSM invested in mid-2020 which seemed a reasonably de‐risked entry point given the temporary effect that Covid-19 would have on the company’s revenues, falling from a peak of £110 million to a little over £95 million, with a more significant fall in earnings due to operating leverage. We think that there is a strong natural recovery case, buoyed by macro spending tailwinds which should provide future growth. Coupled with the cost savings and better working capital which management has enacted, we think that the business has strong prospects to significantly exceed historic levels of earnings and generate healthy free cash flow.

Hargreaves Services PLC (Hargreaves) (7.64% of net assets)
Cost: £3.65m. Value as at 28 February 2021, £3.25m

Hargreaves Services 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 currently includes planning permission for 4,700 residential plots, and 4 million square feet of logistics and industrial space.

Update to the investment case

  • Lacklustre performance due to Covid-19 delays
  • Further developments at Blindwells site
  • FY results expected to be in line with board expectations
  • New board appointment
  • Sale of Speciality Coal to HRMS        

Progress against investment case
Hargreaves was heavily impacted by the pandemic - delays around land disposals affected the Land business, and delays in HS2 deployment affected the Services business. However, this has set up 2021 for a bumper year and the news flow from the company has been promising. There have been two further land sales announced at Blindwells. The German joint venture is trading ahead of expectations and the Unity joint venture within the Land business also completed a major sale of a 79 acre plot which will generate revenue for the JV of £25 million.

Ramsdens Holdings PLC (Ramsdens) (7.04% of net assets)
Cost: £3.08m. Value as at 28 February 2021, £2.99m
Ramsdens is a growing, diversified, financial services provider and retailer, operating in the four core business segments of foreign currency exchange, pawnbroking loans, precious metals buying and selling and retailing of second hand and new jewellery. Ramsdens does not offer unsecured high cost short term credit. Headquartered in Middlesbrough, the group operates from 157 owned stores within the UK and has a growing online presence.

Update to the investment case

  • Resilient and profitable performance through Covid-19
  • 90%+ stores remained open through latest lockdown
  • Strong revenue growth
  • Robust cash position
  • Final dividend not recommended by the board, reflects appropriate caution due to Covid-19

Progress against investment case        
Despite the challenges of the last year, Ramsdens has been able to continue developing its business. Whilst only one net store opening was completed, there was good progress in online sales, with 9% of all jewellery being through this channel.

Ramsdens is now on a very strong footing for the next phase of the economic cycle given its net cash balance sheet and desirable covenant for high street landlords that will allow for attractive terms to be negotiated. The online business is gathering pace and as soon as international travel is an option Ramsdens will benefit not only from a surge in demand, but a less competitive market.

Real Good Food PLC (RGD) (equity, loan notes and interest, 21.60% of net assets)
Cost: £8.76m. Value as at 28 February 2021 (including loan note interest), £9.19m
Real Good Food (‘RGD’) is a food manufacturing business serving several market sectors including retail (own label and private label), manufacturing and export. The company has two businesses, cake decoration (Renshaw and Rainbow Dust Colours) and food ingredients (Brighter Foods), with leading brands in their chosen markets.

Update to the investment case

  • Experienced mixed trading through COVID-19
  • Lower revenues partially mitigated by cost savings
  • Credit facility increased to provide headroom
  • 75 new product launches
  • Post period end the sale of Brighter Foods, a division of RGD, was sold for £43m meaning that a repayment of loan notes, interest and redemption premium will be made to DSM        

Progress against investment case
RGD has reached an inflection point in our thesis, with the disposal of Brighter Foods returning over £5.3 million to DSM by way of its portion of loan note investments. The group retains the Renshaw business which we think is a desirable asset and has good potential to grow through new sales initiatives coupled with some cost base rationalisation.

Synectics PLC (Synectics) (6.55% of net assets)
Cost: £3.98m. Value as at 28 February 2021, £2.79m

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

  • Disruption to gaming activity as casinos were shut across regions, impacted sales
  • Restructuring programmes reduced operational costs
  • Strong balance sheet
  • Berlin S-Bahn goes live
  • Significant contract wins in UK and Ireland
  • Directors buying shares        

Progress against investment case
Synectics issued its final results for the year ended 30 November 2020 and reported that these have been significantly affected by the pandemic, particularly in its global gaming markets. However, the board believe that the business is well placed to capitalise on recent landmark project wins, which utilise its latest technology developments.

Trading in the first quarter of the current financial year generally continued at the low levels experienced across 2020, with lockdowns and travel restrictions still affecting both the volume and sales cycle timing of new business. However, recent contract wins, most notably in the UK and Europe, have increased the group's firm order book by nearly 30% since the year end. We have been impressed with the reduction in costs and rationalisation of the group structure, which we think should have a payback period of c.12 months. This, combined with the larger contract wins already announced, puts the business in a good position to demonstrate profitable and sustainable earnings in a growth sector.

Venture Life Group PLC (Venture Life) (4.59% of net assets)
Cost: £1.96m. Value as at 28 February 2021, £1.95m

Venture Life is a leader in developing, manufacturing and commercialising products for the self‐care market, which we have followed for some time through our ownership in other funds. We think the business has reached an interesting juncture with significant growth prospects.

Update to the investment case

  • Significant growth in revenues across the business
  • Step-change in profitability due to operational gearing
  • Exclusive long-term distribution agreement in China
  • Equity raise to fund acquisitions
  • Capital allocation optionality

Progress against investment case
Our investment case centred on increasing own-brand product diversification, utilising latent capacity within the manufacturing base which in turn should unlock significant operational gearing. Progression against this was most noticeable in the full year results, in which a 49% increase in revenue resulted in a 162% increase in profit after tax. Despite these impressive results, we believe that this is the beginning of the group’s journey.
The company raised £36 million of equity in December 2020 to accelerate the progression to infilling underutilised manufacturing capacity. There haven’t been any updates on potential acquisitions since then, which has halted momentum that was building in the investment story. However, it is believed the raise resulted in incremental inbound interest which could be creating a delay in outlining the optimal capital allocation.

We believe that once the proceeds are deployed, this will manifest into impressive returns on capital invested as the business scales to utilise excess capacity and can recycle capital into further growth on a self-funded basis.

Volex PLC (Volex) (15.17% of net assets)
Cost: £1.61m. Value as at 28 February 2021, £6.45m

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

  • Robust performance and resilient business model
  • Significant opportunity for share price appreciation
  • Shares trading at a discount to sector peers
  • Acquisition of DEKA creates European platform

Progress against investment case
2020 was an inflection year for Volex and it enjoyed significant multiple expansion, aided by strong trading. We still believe that Volex is a great business and it warrants a high weighting in DSM, despite the markedly higher multiple than that which we paid at our initial investment. The business is now generating significant cash flows and has a hopper of potential acquisitions on which to deploy that capital. Alongside the significant growth in the consumer electronics space which we expect to continue for some time, and the structural tailwinds in the data, electric vehicle and healthcare markets, we think that the business has ample potential to continue compounding at a reasonable rate.

Statement of Directors’ responsibilities in respect of the Annual Report and Financial Statements
The directors are responsible for preparing the Annual Report and Financial Statements in accordance with applicable law and regulation.

Company law requires the directors to prepare Financial Statements for each financial year. Under that law the directors have prepared the Company’s Financial Statements in accordance with international accounting standards and in conformity with the requirements of the Companies Act 2006. Under company law the directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs of the company and of the profit or loss for that period.

In preparing these Financial Statements the directors are required to:

  • select suitable accounting policies and then apply them consistently;
  • make judgements and estimates that are reasonable and prudent;
  • state whether international accounting standards have been followed, subject to any material departures disclosed and explained in the Financial Statements; and
  • prepare the Financial Statements on a going concern basis unless it is inappropriate to presume that the company will continue in business.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company’s transactions and disclose with reasonable accuracy at any time the financial position of the company, and to enable them to ensure that the Financial Statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The directors are also responsible for preparing the Strategic Report, Directors’ Report, Directors’ Remuneration Report, the Corporate Governance Statement and the Report of the Audit Committee in accordance with the Companies Act 2006 and applicable regulations, including the requirements of the Listing Rules and the Disclosure and Transparency Rules.

The directors consider that the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the company’s position and performance, business model and strategy.

Each of the directors confirms that, to the best of his or her knowledge:

  • the Financial Statements, which have been prepared in accordance with international accounting standards and on a going concern basis, give a true and fair view of the assets, liabilities, financial position and profits of the company; and
  • the Strategic Report includes a fair review of the development and performance of the business and the position of the company, together with a description of the principal risks and uncertainties that it faces.

For and on behalf of the board
Hugh Aldous
7 May 2021

Statement of Profit or Loss and Other Comprehensive Income

  Year ended
28 February 2021
Year ended
28 February 2020
  Revenue Capital Total Revenue Capital Total  
  £’000 £’000 £’000 £’000 £’000 £’000  
Gains/(losses) on investments at fair value through profit or loss - 5,390 5,390 - (1,904) (1,904)  
Investment income 996 - 996 1,505 - 1,505  
  996 5,390 6,386 1,505 (1,904) (399)  
Investment management fee (59) (234) (293) (76) (303) (379)  
Other expenses (390) - (390) (378) - (378)
  (449) (234) (683) (454) (303) (757)  
Return/(loss) before taxation 547 5,156 5,703 1,051 (2,207) (1,156)  
Taxation - - - - - -  
Return/(loss) for the year after taxation 547 5,156 5,703 1,051 (2,207) (1,156)  
  Revenue Capital Total Revenue Capital Total  
  (p) (p) (p) (p) (p) (p)  
Basic and diluted return per Ordinary Share 1.02 9.56 10.58 1.91 (4.01) (2.10)  

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 year disclosed above represents the company’s total comprehensive income. The company does not have any other comprehensive income.

All items in the above statement are those of a single entity and derive from continuing operations. No operations were acquired or discontinued during the period.

Condensed Statement of Changes in Equity
for the year ended 28 February 2021

Special reserve Capital reserve Revenue reserve

  £’000 £’000 £’000 £’000 £’000
Year ended 29 February 2020          
At 28 February 2019 56 54,506 (13,911) 824 41,475
(Loss)/return for the year (2,207) 1,051 (1,156)
Buyback of Ordinary Shares into treasury (496) (496)
Cancellation of Ordinary Shares (33) (33)
Expenses for share buybacks (3) (3)
Dividends paid (691) (691)
As at 29 February 2020 56 54,473 (16,617) 1,184 39,096
At 29 February 2020 56 54,473 (16,617) 1,184 39,096
Return/(loss) 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 (874) (874)
As at 28 February 2021 56 54,474 (12,863) 857 42,524

Statement of Financial Position
as at 28 February 2021

  28 February

29 February
1 March
  £’000 £’000 £’000
Non-current assets      
Investments held at fair value through profit or loss 39,218 33,099 36,021
  39,218 33,099 36,021
Current assets      
Trade and other receivables 39 43 45
Cash and cash equivalents 3,428 6,051 5,504
  3,467 6,094 5,549
Total assets 42,685 39,193 41,570
Current liabilities      
Trade and other payables (161) (97) (95)
  (161) (97) (95)
Total assets less current liabilities 42,524 39,096 41,475
Net Assets 42,524 39,096 41,475
Represented by:      
Share capital 56 56 56
Special reserve 54,474 54,473 54,506
Capital reserve (12,863) (16,617) (13,911)
Revenue reserve 857 1,184 824
Equity shareholders’ funds 42,524 39,096 41,475
Net asset value per Ordinary Share 81.16p 71.30p 74.59p

Statement of Cash Flows
for the year ended 28 February 2021

  Year ended
28 February 2021
Year ended
29 February 2020

  £’000 £’000
Operating activities    
Return/(loss) before taxation 5,703 (1,156)
(Gains)/losses on investments at fair value through profit or loss (5,390) 1,904
UK fixed interest income (738) (756)
Receipt of UK fixed interest income - 96
Increase in other receivables 4 2
Increase in other payables 64 2
Purchases of investments (8,877) (969)
Sales of investments 8,886 2,647
Net cash inflow/(outflow) from operating activities (348) 1,770
Financing activities    
Buyback of Ordinary shares into treasury (1,390) (496)
Cancellation of Ordinary Shares - (33)
Expenses of for share buybacks (11) (3)
Dividends paid (874) (691)
Net cash outflow from financing activities (2,275) (1,223)
Change in cash and cash equivalents (2,623) 547
Cash and cash equivalents at start of period 6,051 5,504
Cash and cash equivalents at end of period 3,428 6,051
Comprised of:    
Cash and cash equivalents 3,428 6,051

1. General information

Downing Strategic Micro-Cap Investment Trust PLC (‘the company’) was incorporated in England and Wales on 17 February 2017 with registered number 10626295, as a closed-end investment company limited by shares.

The company commenced its operations on 9 May 2017. The company intends to carry on business as an investment trust company within the meaning of Chapter 4 of Part 24 of the Corporation Tax Act 2010.

2. Accounting policies

Basis of accounting

The annual Financial Statements of the company have been 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.

Going concern

The Financial Statements have been prepared on a going concern basis and on the basis that approval as an investment trust company will continue to be met.

The directors have made an assessment of the company’s ability to continue as a going concern and are satisfied that the company has the resources to continue in business for the foreseeable future, being a period of 12 months from the date these Financial Statements were approved. Furthermore, the directors are not aware of any material uncertainties that may cast significant doubt upon the company’s ability to continue as a going concern, having taken into account the liquidity of the company’s investment portfolio and the company’s financial position in respect of its cash flows and investment commitments. Therefore, the Financial Statements have been prepared on the going concern basis.

Presentation of statement of comprehensive income

In order to better reflect the activities of an investment trust and in accordance with guidance issued by the AIC, supplementary information which analyses the income statement between items of revenue and capital nature has been presented alongside the income statement. The revenue profit for the year is the measure the directors believe is appropriate in assessing the company’s compliance with certain requirements set out in the Investment Trust (Approved Company) (Tax) Regulations 2011.

Segmental reporting
The directors are of the opinion that the company is engaged in a single segment of business, being investment business. The company only invests in companies quoted in the UK.

Accounting developments: new standards, interpretations and amendments adopted from 1 January 2020

The following amendments to standards came into effect this accounting period, although they have no impact on the Financial Statements:

  • IFRS 4 (Insurance Contracts)
  • Interest Rate Benchmark Reform – IBOR ‘phase 1’ (Amendments to IFRS 9, IAS 39, and IFRS 7)
  • IFRS 16 (Leases)
  • IFRS 3 (Business Combinations)

Accounting developments: new standards, interpretations and amendments not yet effective

  • Interest Rate Benchmark Reform – IBOR ‘phase 2’ (Amendments to IFRS 9, IAS 39, IFRS 4, IFRS 7 and IFRS 16) (effective 1 January 2021)
  • Onerous Contracts – Cost of Fulfilling a Contract (Amendments to IAS 37) (effective 1 January 2022)
  • Annual Improvements to IFRS Standards 2018-2020 (Amendments to IFRS 1, IFRS 9, IFRS 16 & IAS 41 (effective 1 January 2022)
  • References to Conceptual Framework (Amendments to IFRS 3) – effective 1 January 2022
  • Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16) – effective 1 January 2022

Critical accounting estimates and judgements

The preparation of financial statements in conformity with international accounting standards requires management to make judgements, estimates and assumptions that affect the application of policies and the amounts reported in the balance sheet and the income statement. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis.

The Directors have made the following judgements and estimates that have had the most significant impact on the carrying values of assets and liabilities stated in these financial statements:

  • Valuation of unquoted loan notes and the carrying values of accrued interest: unquoted loan notes are held at fair value through profit or loss and are valued using a discounted cash flow methodology. The carrying values of accrued interest are assessed for any Expected Credit Loss (‘ECLs’) in accordance with IFRS 9, also using a discounted cash flow methodology. Key contractual inputs, as well as assumptions regarding the nature, timing and amount of future cash flows are assessed as part of the discounted cash flow approach. The directors use judgement in selecting and applying the assumptions used, although such assumptions are based upon all available information which the directors deem to be reliable and are stress tested under a range of scenarios. The directors consider all loan note investments to be non-current assets, as such investments are entered into in conjunction with a strategic equity holding in the same portfolio company.

There were no other significant accounting estimates or significant judgements applied in the current period.

Correction of prior period error
During the year ended 28 February 2021, the company identified that unpaid UK fixed interest income (‘fixed interest income’ or interest income’) in respect of loan note investments had been incorrectly recorded within the balance of trade and other receivables on the Statement of Financial Position, rather than as part of the balance of investments held at fair value through profit or loss (‘FVTPL’). Fixed interest income had historically been recognised at the fair value of the consideration receivable at the time of recognition, and subsequently held at amortised cost and assessed for any Expected Credit Losses (‘ECLs’) in accordance with IFRS 9. However, the company now considers that unpaid fixed interest income should be held at fair value through profit or loss for the following reasons:

  • The company’s loan note investments comprise elements of loan principal, interest and redemption premium. Therefore, the fair values of the instruments are assessed using a discounted cash flow methodology which considers all possible future cash flows which either have or may become due to the company;
  • UK fixed interest income cannot be easily separated from the instrument to which it relates and is only due to be repaid when a corresponding redemption of loan note principal takes place.

The correction of the prior period error principally impacts two financial statement line items on the Statement of Financial Position, being investments held at fair value of profit or loss and trade and other receivables.

The error has been corrected by restating each of the affected financial statement line items for prior periods. The table below summarises the impacts on the company’s financial statements.

Statement of Comprehensive Income
No adjustments have been made to the Statement of Comprehensive Income.

Statement of Financial Position

  As at 29 February 2020   As at 1 March 2019
  Previously reported Adjustment Restated   Previously reported Adjustment Restated
  £’000 £’000 £’000   £’000 £’000 £’000
Investments held at fair value through profit or loss 31,744 1,355 33,099   35,326 695 36,021
Trade and other receivables 1,398 (1,355) 43   740 (695) 45
Others 6,051 - 6,051   5,504 - 5,504
Total assets 39,193 - 39,193   41,570 - 41,570
Total liabilities (97) - (97)   (95) - (95)
Net assets 39,096 - 39,096   41,475 - 41,475

Statement of Cash Flows

  Year ended 29 February 2020
  Previously reported Adjustment Restated
  £’000 £’000 £’000
UK fixed interest income - (756) (756)
Receipt of UK fixed interest income - 96 96
Increase in trade and other receivables (658) 660 2
Others 2,428 - 2,428
Net cash inflow/(outflow) from operating activities 1,770 - 1,770
Net cash outflow from financing activities         (1,223) - (1,223)
Change in cash and cash equivalents         547 - 547

Investments held at fair value

All investments held by the company (quoted equity investments and unquoted loan notes) are classified at ‘fair value through profit or loss’ as the investments are managed and their performance evaluated on a fair value basis in accordance with the investment strategy and this is also the basis on which information about the investments is reported to the board. Investments are initially recognised at book cost, being the fair value of the consideration given, including any transaction fees. After initial recognition, investments are measured at fair value, with unrealised gains and losses on investments recognised in the statement of comprehensive income and allocated to capital. Realised gains and losses on investments sold are calculated as the difference between sales proceeds and the book cost.

For investments actively traded in organised financial markets, fair value is generally determined on a daily basis, with reference to quoted market bid prices at the close of business on the balance sheet date, without adjustment for transaction costs necessary to realise the asset.

When a purchase or sale is made under a contract, the terms of which are required to be delivered within the time frame of the relevant market, the investments concerned are recognised or derecognised on the trade date.

Unquoted investments are valued by the directors at the balance sheet date based on recognised valuation methodologies, in accordance with International Private Equity and Venture Capital Valuation (‘IPEV’) Guidelines, such as dealing prices or third-party valuations where available, net asset values and other information as appropriate.

All investments for which fair value is measured or disclosed in the Financial Statements will be categorised within the fair value hierarchy in the notes of the Financial Statements, described as follows, based on the lowest significant applicable input:

  • Level 1 reflects financial instruments quoted in an active market;
  • Level 2 reflects financial instruments whose fair value is evidenced by comparison with other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable markets; and
  • Level 3 reflects financial instruments whose fair value is determined in whole or in part using a valuation technique based on assumptions that are not supported by prices from observable market transactions in the same instrument and not based on available observable market data. For investments that are recognised in the Financial Statements on a recurring basis, the company determines whether transfers have occurred between levels in the hierarchy by re-assessing the categorisation (based on the lowest significant applicable input) at the date of the event that caused the transfer.


Dividends receivable on quoted equity shares are taken into account on the ex-dividend date. Where no ex- dividend date is quoted, they are brought into account when the company’s right to receive payment is established. Special dividends will be taken to revenue or capital account depending on their nature. In deciding whether a dividend should be regarded as a capital or revenue receipt, the company will review all relevant information as to the reasons for and sources of the dividend on a case-by-case basis.

UK fixed interest income is recorded on a daily basis and in the revenue column of the Statement of Comprehensive Income. Where the terms of loan note investments require interest or a redemption premium to be paid on redemption, the fair values of any previously unpaid amounts are assessed as part of the total fair values of the loan note instruments, under the company’s discounted cash flow methodology.

Dividend receivable are initially recognised at the fair value of the consideration receivable by the company. This is subsequently measured at amortised cost using the effective interest method less any provision for impairment. The company recognises an annual loss allowance for expected credit losses (‘ECL allowances’), in accordance with IFRS 9. ECL allowances are calculated on a specific basis and are deducted from the gross carrying values of the dividend receivables carried at amortised cost. ECL allowances are recognised in the Statement of Comprehensive Income, designated as revenue or capital in accordance with the categorisation of the income to which the allowance relates.


All expenses are accounted for on an accruals basis and gross of Value Added Tax (‘VAT’) where charged to the company. All expenses are charged to revenue within the statement of comprehensive income, with the exception of the following:

  • expenses which are incidental to the acquisition or disposal of an investment as an element of the purchase of sales consideration respectively, and therefore charged to capital.
  • All other expenses are allocated to revenue, with the exception of 80% of the investment manager’s fee which is allocated to capital. This is in line with the board’s expected long-term split of returns from the investment portfolio in the form of income and capital gains respectively.

The charge for taxation is based on revenue profit for the year. Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date. Investment Trusts which have approval under Section 1158 of the Corporation Tax Act 2010 are not liable for taxation on capital gains. Any tax relief obtained in respect of investment management fees and other capital expenses charged or allocated to the capital column of the Statement of Comprehensive Income is reflected in the capital reserve and a corresponding amount is charged against the revenue column of the Statement of Comprehensive Income. The tax relief is the amount by which corporation tax payable is reduced as a result of these capital expenses.

Cash and cash equivalents
Cash and cash equivalents are defined as cash in hand, demand deposits and short-term, highly liquid investments readily convertible to known amounts of cash and subject to insignificant risk of changes in value.

Operating cash flows
As the principal activity of the company is to invest in accordance with the Investment Policy, the directors consider all cash flows relating to the portfolio, including purchases and sales of investments, to be operating cash flows. Operating cash flows also includes cash movements relating to investment income and the settling of investment management fees and other expenses.

Share issue costs
Share issue costs relating to Ordinary Shares issued by the company are charged to the share premium account.

Repurchase of Ordinary Shares for cancellation or to be held in Treasury
The cost of repurchasing shares including the related stamp duty and transaction costs is charged to capital reserves and dealt with in the Statement of Changes in Equity. Share repurchase transactions are accounted for on a trade date basis. Where shares are cancelled or held in Treasury and subsequently cancelled, the nominal value of those shares is transferred out of called up share capital and into special reserve. Should shares held in Treasury be reissued, the sales proceeds up to the purchase price of the shares will be transferred to capital reserves. The excess of the sales proceeds over the purchase price will be transferred to share premium.

Capital reserve
Capital reserve is a distributable reserve which includes:

  • gains and losses on the disposal of investments;
  • exchange difference of a capital nature;
  • expenses, together with the related taxation effect, allocated to this reserve in accordance with the above policies; and
  • increase and decrease in the valuation of investments held at period end.

Revenue reserve

This reserve includes profit for the year recognised in the revenue column of the Statement of Comprehensive Income. This reserve is distributable.

Special reserve
The company cancelled its share premium account following a court order issued on 12 July 2017. As a result, a distributable special reserve was created. This reserve is distributable.

Capital redemption reserve
This reserve represents the repurchase and subsequent cancellation of the Ordinary Shares of the company. This reserve is not distributable.

Dividends payable to shareholders
Dividends to shareholders are recognised as a liability in the period in which they are paid. Dividends declared and approved by the company after the balance sheet date have not been recognised as a liability of the company at the balance sheet date.

3. Basic and diluted return per Ordinary Share
Returns per Ordinary Share are based on the weighted average number of shares in issue during the year. As there are no dilutive elements on share capital, basic and diluted returns per share are the same.

  Year ended
28 February 2021
Year ended
29 February 2020
  Net return Per share Net return Per share
  £’000 Pence £’000 Pence
Revenue return 547 1.02 1,051 1.91
Capital return 5,156 9.56 (2,207) (4.01)
Total return 5,703 10.58 (1,156) (2.10)
Weighted average number of Ordinary Shares* 53,908,480 55,049,771

* Excluding treasury shares

4. Net Asset Value per Ordinary Share
NAV per Ordinary Share is based on net assets at the period end and 52,398,491 (28 February 2020: 54,830,002) Ordinary Shares, being the number of Ordinary Shares in issue excluding treasury shares at the period end.

  28 February 2021 29 February 2020

per share


per share

  Pence £’000 Pence £’000
Ordinary Shares:        
Basic and diluted 81.16 42,524 71.30 39,096

5. Principal risks

The company is exposed to a variety of risks and uncertainties. The Directors have carried out a robust assessment of the principal risks facing the company, as well as a review of emerging risks which may have arisen during the year, including those which could threaten its business model, future performance, solvency or liquidity.

Listed below is a summary of the principal and emerging risks identified by the board and the action taken to mitigate those risks.

Risk Mitigation
Investment performance
The investment objective of the company may not be achieved as returns are reliant on the performance of the portfolio. The company is reliant on the investment manager’s investment process. The board has set investment restrictions and guidelines which the investment manager monitors and regularly reports on.

The board monitors the implementation and results of the investment process with the investment manager. The investment manager attends all board meetings and provides the board with information including performance data, an explanation of stock selection decisions, portfolio exposure and the rationale for the portfolio composition.
The company will invest primarily in the smallest UK quoted or traded companies, by market capitalisation. Smaller companies can be expected, in comparison to larger companies, to have less mature businesses, a more restricted depth of management and a higher risk profile. The investment manager has significant experience in small-cap investing and deploys an approach that is designed to maximise the potential for the investment objective to be achieved over the longer-term.
Investment performance
The lasting economic consequences of the coronavirus pandemic remain unclear, however lagging performance of the UK economy has the potential to impact market conditions and depress market prices. The company has a small, focused portfolio which allows the investment manager to work closely with each portfolio company and provide active support where it can.
The Company relies on external service providers. In the event that these parties are unable, or unwilling to perform in accordance with the terms of their appointment, this could have a detrimental impact on the Company’s performance.

Disruption to the accounting, payment systems or custody records could lead to inaccurate reporting and monitoring of the Company’s financial position.

The security of the company’s assets, dealing procedures, accounting records and adherence to regulatory and legal requirements are reliant on the effective operation of the control systems of the service providers.
Due diligence is undertaken before contracts are executed with potential service providers. The board monitors the performance of service providers together with the associated costs. The board also reviews reports on the effective operation of the internal controls of service providers.

The company’s assets are subject to a strict liability regime and in the event of a loss of financial assets held in custody, assets of an identical type or the corresponding amount must be returned unless the loss was beyond the reasonable control of the custodian.

The board also considers the business continuity arrangements of the company’s key service providers.

The board may terminate all key contracts on normal market terms.
The company’s investment activities expose it to a variety of financial risks that include market risk, liquidity risk, and credit and counterparty risk. Further details of these risks are disclosed in the Financial Statements, together with a summary of the policies for managing these risks.
Legal and compliance
The company has been accepted by HM Revenue & Customs as an investment trust, subject to continuing to meet the relevant conditions. The investment manager monitors investment movements and the amount of proposed dividends, if any, to ensure that the relevant provisions of the Corporation Tax Act 2010 are not breached. A report is provided to the Board at each meeting.
The company is subject to the Companies Act 2006, the Alternative Investment Fund Manager’s Directive (‘AIFMD’), the UK Listing Rules and Disclosure & Transparency Rules and the Market Abuse Regulations, international accounting standards and the AIC SORP. The company secretary and administrator, along and the company’s professional advisers, provide reports to the board in respect of compliance with all applicable rules and regulations and ensure that the board is made aware of any changes to such rules and regulations.

Compliance with applicable accounting standards and best practice reporting for investment trusts are also reviewed on an ongoing basis, with recommendations made to the board by the administrator.

Coronavirus pandemic

A key feature of the investment manager’s approach is in seeking to have a strategic involvement with all investee companies. This has allowed the manager to be closely involved with the developments in the investee companies in relation to the coronavirus pandemic and its consequences. The board and manager will continue to monitor such developments and the potential impact of the pandemic on the individual companies and the portfolio as a whole.


The rules governing the new relationship between the EU and the UK took effect on 1 January 2021. The investment manager continues to monitor the impact of this new relationship on the company’s portfolio, however expects that there will be no significant implications for the investee companies. Similarly, the board considers that the new relationship will have no significant impact on the company’s business as an investment trust.

6. Related parties and Investment Manager

Investment Manager

Downing LLP is the investment manager to the company. The relationship is governed by an agreement dated 23 March 2017.

The total investment management fee charged by Downing LLP for the period ended 28 February 2021 was
£292,800 (2020: £378,799). The amount outstanding as at 28 February 2021 was £30,868 (2020: £28,786).

During the year under review, Judith MacKenzie was a Non-Executive director of Real Good Food plc, in which the company has an investment. An annual fee of £25,000 is paid to Downing LLP for Judith’s services as a director of Real Good Food plc.

Administrator and Company Secretary

On 1 April 2020, Downing LLP was appointed as administrator to the company and Grant Whitehouse, a Downing LLP partner, was appointed as Company Secretary. During the period from 1 April 2020 to 28 February 2021, total fees of £75,720 (inclusive of VAT where applicable) were charged by Downing LLP in connection with the provision of the Administration, AIFM Support and company secretarial services set out in the Downing LLP Administration Agreement. As at 28 February 2021, the amount outstanding was £75,720.


Disclosure of the directors’ interests in the Ordinary Shares of the company and fees and expenses payable to the directors are set out in the directors’ Remuneration Report. At 28 February 2021, there were no outstanding directors’ fees (2020: none).

7. Non-adjusting events after reporting date

In the period between 28 February 2021 and the date of this report, the following non-adjusting events took place:

  • The company purchased 420,290 of its own Ordinary Shares, at an average price of 72.0 pence per share, all of which are now held in treasury;
  • On 22 April 2021 RGD announced the proposed sale of its majority stake in Brighter Foods to The Hut Group (‘THG’) plc for a gross consideration of £43m. Completion of the proposed transaction will result in the company receiving a payment of over £5.3m from RGD. The payment will constitute a partial redemption of the company’s 10% loan note holding in RGD, including elements of loan note principal and accrued interest, as well as redemption premium equal to 15% of the principal being redeemed.

Announcement based on audited accounts

The financial information set out in this announcement does not constitute the Company's statutory financial statements in accordance with section 434 Companies Act 2006 for the year ended 28 February 2021, but has been extracted from the statutory financial statements for the year ended 28 February 2021 which were approved by the Board of Directors on 7 May 2021 and will be delivered to the Registrar of Companies. The Independent Auditor's Report on those financial statements was unqualified and did not contain any emphasis of matter nor statements under s 498(2) and (3) of the Companies Act 2006.

The statutory accounts for the year ended 29 February 2020 have been delivered to the Registrar of Companies and received an Independent Auditors report which was unqualified and did not contain any emphasis of matter nor statements under s 498(2) and (3) of the Companies Act 2006.

A copy of the full annual report and financial statements for the year ended 28 February 2021 will be printed and posted to shareholders shortly. Copies will also be available to the public at the registered office of the Company at St. Magnus House, London, EC3R 6HD and will be available for download from


Judith McKenzie Downing Fund Managers 07771 980 687
Hugh Aldous Chairman 07785 294 789
Robert Finlay Shore Capital 07771 765 675

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