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(Alliance News) - Downing Strategic Micro-Cap Investment Trust PLC on Monday posted a drop in net asset value over the first half of its financial year, with Redhall Group PLC's demise proving especially tough.
The firm, which invests in companies with a market capitalisation below GBP150 million, reported a NAV per share of 72.47 pence as at August 31, a 2.8% drop from its 74.59p NAV per share on February 28 - the end of its 2019 financial year.
The company's investment manager, Judith MacKenzie, said that "it would be easy to blame markets for the company's lack of performance" given the approximately 17% 12 month decline in the AIM market and close to 21% drop among those companies with an under GBP150 million market cap.
However, she added that "performance since the company's inception has been disappointing". NAV on September 30 was down 28% since admission, widening the gap further from the 25% discount on February 28. Moreover, Downing Strategic Micro-Cap's share price is now 34% below what it was on admission, having already been at a 27% discount at the end of February.
"Right now it is still the case that few investors take enough interest in these businesses and hence the difference between our cautious valuations and how the stock market values these companies has grown wider. One of us will be wrong," said MacKenzie.
Of particular disappointment to MacKenzie and the company as a whole was Redhall, which sank into administration in June. Downing Strategic Micro-Cap has written its just over GBP5 million Redhall investment - consisting of both equity and loan notes - down to zero.
"The investment case in Redhall was simple, it was in an enviable position as a specialist UK manufacturer to win and deliver high value projects geared to UK infrastructure - at that time predominantly in nuclear and rail. The business had a very attractive forward order book which we believed would deliver cash generation and ultimately a trade exit. The irony has been that the very contracts that made the investment attractive in the first place led to its downfall. Delayed payments to this highly skilled small supplier in a large supply chain led to a working capital crisis that was impossible to unwind," MacKenzie said.
"Redhall was a mistake that we are adamant will not be repeated," she added.
Chair Hugh Aldous said: "I cannot apologise for markets, but, as chairman, I can assure you that the board, and the investment manager, do appreciate any shareholder frustration. I and my fellow board members share that. The word 'patient' has unfortunate current associations, but I do believe that this portfolio has burgeoning opportunities.
"Your company stands 85% invested and the investment manager and board consider the level of cash holdings to be about right, given current market and economic uncertainties. We have undertaken some modest buy-backs when the discount has widened but we have tried to do so, and will do, only when such intervention would be helpful. We do think the shares are good value."
Shares in Downing Strategic Micro-Cap were marginally lower at 64.24p in London on Monday morning.
By Anna Farley; annafarley@alliancenews.com
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