Half-year Report - replacement

Downing Strategic Micro-Cap Investment Trust plc

LEI Code: 213800QMYPUW4POFFX69

22 October 2024

Half-Yearly Financial Report for the six months ended 31 August 2024

The Directors of Downing Strategic Micro-Cap Investment Trust plc announce the company's results for the half year ended 31 August 2024.

Key points

►     Wind up of the Company is ongoing, with distributions paid to shareholders totalling 61.7p per share in the six months to 31 August 2024.

►     Declaration of further dividend of 2.2p per share making total dividends distributed and declared of 63.9p.

Chairman's Statement

Overview

Your company is well advanced in its programme of managed wind down.  At 29 February 2024 net assets were £30.6 million (65.7p per share) and the company's market value stood at £28.9 million (62p per share).  By the half-year, 31 August 2024, distributions paid had amounted to 61.7p per share still leaving on today's NAV, 7.4p per share for potential future distributions. Today, 22 October 2024, your board declared a further dividend of 2.2p per share making total dividends distributed and declared of 63.9p per share. The dividend is payable on 22 November 2024 to shareholders on the register at 1 November 2024. The ex-dividend date will be 31 October 2024. 

That leaves the company with remaining net assets today of approximately £2.4 million and suggests 68p or more per share in total distributions may be made if the wind down continues undisturbed, plus, as the manager puts it 'potential for further upside gains'. That would be a reasonable outcome in the circumstances.

Events following the announcement of a proposed wind down

We made it clear at the end of last year that both the board and all our larger shareholders were of the view that as your company was small, and its market unappreciated, we should begin the process of a managed wind down, returning capital to shareholders. We put that proposal to shareholders through a circular and a general meeting and received overwhelming approval.

Then in March of this year two of our larger shareholders, and supporters of wind down, sold their respective positions to Milkwood Capital Limited who used their consequent holding to oppose our intended process for implementing that shareholder vote and who then sought to replace the board with their nominees and thereby takeover the direction of your company, and its management contract, for themselves.  They failed on both counts.  The associated proceedings were nevertheless tiresome and expensive for shareholders. 

The actions of shareholders who had actively sought, and supported, wind-up but then sold out to a party intent on denying that for other shareholders raises an interesting stewardship point: shareholder respect needs to be mutual.

Performance

The realisation process by our manager has been run well.  Market value has been achieved; liquidity and worth demonstrated.  Despite suffering the expense of antagonistic proceedings, we are on course to return cash in excess of the company's NAV at 29 February 2024 and within the timelines set out in our circular of 2 February 2024.

Outlook

Once the remaining investments have been realised (and we are giving our manager scope to do that over the next few months for anticipated value) our objective, preceded by yet a further modest dividend, is to put the company into liquidation.  That will require a special resolution early in the new year.  If passed that will enable continuing shareholders not just to receive a final distribution from the liquidator, but, if relevant to them, to have a confirmed capital loss which may help in their tax affairs given that Milkwood's behaviour caused us to lose the shareholder resolution providing tax-efficient capital distributions and obliged us to distribute cash by way of dividends instead.

As a general, and sad, observation, one other micro-cap investing plc, with well-respected managers, seems to be facing potential wind-up. The vibrancy, energy and competence of management of micro and small caps call for attention as a source of lifeblood to the UK economy.

Thanks go to colleagues, the company's manager, lawyers and ISCA through, as I said, a tiresome few months.

Hugh Aldous
Chairman
22 October 2024

Investment Manager's Report

In the half year to 31 August 2024, the NAV or total return including dividends paid was up 5.8% to 69.5p against the FTSE AIM All Share up 4.9%.  Of this NAV/Total Return, 61.7p had been paid in Special Dividends, in accordance with the managed wind down of the Company approved on 28 February 2024.  The remaining NAV was 7.8p as at the period end and reflected holdings in five positions.

The remaining assets, the manager believes, have potential for further upside gains and these are likely to be realised through corporate actions.  DigitalBox has announced that they are undertaking a Strategic Review, and Centaur has announced the appointment of a new Chair.   Real Good Food is in the final stages of administration and there is growing certainty of a return of capital and interest on the Loan Note Instruments, leaving our carrying value of £275,000 looking prudent.  In short, we believe that there is value in allowing the remainder of the portfolio to achieve the catalysts for value realisation, and we concur with the Board's timetable for wind-down and eventual liquidation.

Judith MacKenzie

Head of Downing Fund Managers and Partner of Downing LLP

22 October 2024

Investments

As at 31 August 2024

All investments are in Ordinary Shares and traded on AIM or the Main Market unless indicated. As at 31 August 2024, DSM held investments in 5 companies (29 February 2024: 15). Details of the equity interests comprising more than 3% of any company's share capital are set out in note 9 below.

The table above includes net current assets of £1,132,000 (29 February 2024: £10,273,000) that are also disclosed in the Statement of Financial Position.

Interim Financial Statements

Condensed Statement of Profit or Loss and Other Comprehensive Income

for the six months ended 31 August 2024

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 (loss)/profit 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 2024

Condensed Statement of Financial Position

as at 31 August 2024

Condensed Statement of Cash Flows

for the six months ended 31 August 2024

Notes

1.    General information

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

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

2.    Accounting policies

Basis of accounting

The unaudited financial statements for the six months ended 31 August 2024 have been prepared in accordance with the accounting policies set out in the statutory accounts for the year ended 29 February 2024, 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 2024 and the comparative half-year period ended 31 August 2023 has not been audited. The financial information presented in respect of the year ended 29 February 2024 has been extracted from the financial statements for that year, which have been delivered to the Registrar of Companies. The Auditor's report on those financial statements was unqualified and did not include a statement under sections 498(2) or 498(3) of the Companies Act 2006.

3.    Income

UK fixed interest income in previous periods represents loan note interest receivable from Real Good Food plc and Norman Broadbent plc.

4.    Investment management fee

On 3 April 2024 the board and investment manager agreed that the investment manager's current fee arrangement be amended.

The new fee structure combines a reduction in the base fee with the introduction of further fees that incentivise the investment manager and will also align its interests with those of shareholders, to complete the wind down whilst seeking the best achievable values, at the point of realisation, in a timely fashion in order for the company to return cash to shareholders.

Effective from 1 January 2024 the terms of the investment manager's fee are:

► a basic management fee at the rate of 0.25 per cent. per annum of the company's market capitalisation payable monthly;

► a capital return fee of 0.50 per cent. of distributions made to shareholders;

► an equity appreciation fee payable only on completion of the investment manager's realisation process equal to 2.5 per cent. of all amounts (if any) by which total distributions to shareholders exceed the net asset value of the company as at the date shareholders approved the New Investment Policy to encourage achieving value appreciation,

►subject to an overall cap on total fees payable to the investment manager in any 12-month period equal to 4.9 per cent. of the market capitalisation (or NAV if lower) of the company as at the date shareholders approved the New Investment Policy.

The notice period required to be given by the company in the event the company wishes to terminate the Investment Management Agreement remains at 6 months. Protective notice was given to the manager in August 2024.  Shorter notice may be provided so long as the investment manager receives payment in lieu of such notice on the basis of the basic management fee. All the other key commercial terms of the Investment Management Agreement will remain unchanged.

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.

¹Excluding treasury shares

6.    Net Asset Value per Ordinary Share

NAV per Ordinary Share is based on net assets at the period end and 45,645,241 (31 August 2023: 47,421,927, 29 February 2024: 46,608,486) Ordinary Shares, being the number of Ordinary Shares in issue excluding treasury shares at the period end.

7.    Investments

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.

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.

9.    Significant Interests

As at 31 August 2024, the Company held interests amounting to 3% or more of the equity in issue by the following investee companies.

10.  Dividends paid in the period

The Directors did not recommend the payment of a final dividend for the year ended 28 February 2024.

11.  Post Balance Sheet Event

On 22 October 2024, your board declared a further dividend of 2.2p per share payable on 22 November 2024 to shareholders on the register at 1 November 2024. The ex-dividend date will be 31 October 2024.    

Interim Management Report

The directors are required to provide an interim management report in accordance with the UK Listing Authority's Disclosure and Transparency Rules ('DTR'). They consider that the Chairman's Statement and the Investment Manager's Report of this Half-Yearly Financial Report, the following statements on principal risks and uncertainties; related party transactions; and basis other than going concern, together with the directors' Responsibilities Statement below together constitute the interim management report for the company for the period ended 31 August 2024.

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 29 February 2024. Information on each of these areas can be found in the strategic report on pages 34 to 37 and in note 14 on pages 79 to 82 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.

Basis other than going concern

As stated on page 32 of the 2024 Annual Report, at a General Meeting of the company held on 28 February 2024 shareholders voted to adopt a new investment policy and the Company will be managed with the intention of realising all remaining assets in the Company's portfolio in a prudent manner consistent with the principles of good investment management and with a view to returning cash to shareholders in an orderly manner. Once this process has been completed the directors' intention would be to place the company into liquidation. Given this, the Financial Statements have been drawn up on a basis other than that of a going concern.

In preparing the Financial Statements on a basis other than that of a going concern the following amendments have been made:

1) As the investments are expected to be realised within 12 months from the reporting date, they have been reclassified from non-current to current assets. The board has concluded that no adjustments to the value of investments is required and that the bid price remains appropriate.

2) A provision for the costs of liquidation of £25,000 has been made.

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

22 October 2024