Downing Strategic Micro-... Share Discussion Threads

[red ninja] 17/11/2023 16:32

I think there is more chance of a sale, not possibly at the best price, but a sale price the shareholders could live with.

Mike Holt, Executive Chair, said:

"We have made substantial progress over the last year. The radical reform programme has delivered significant benefits and recent senior management changes have also made a real difference. The Group, however, is struggling to meet demand through supply issues and cash constraints. The Board together with JF Renshaw is exploring all possible options and is working closely with Interpath Advisory to determine the best way forward."

[cousinit] 17/11/2023 11:06

So Hilco has c10% of the debt, so mainly shareholder loans. RGD has balance sheet of negative £7m. Be interesting to see who potential buyers/investors are and whether they are looking to buy the entity or only the business once it is in administration.

[cousinit] 17/11/2023 08:36

But at what price? Where do Hilco rank in the debt pile? I presume nearer the top than the bottom

[weatherman] 17/11/2023 08:19

gradual wind up of company, also strategic review of Real Good Foods may result in sale of business.

Real Good Food plc, (AIM: RGD), the food manufacturing business specialising in cake decoration, announces that it has sold the business and certain assets of Rainbow Dust Colours ("RDC") to European Fermentation Products Limited for a total cash consideration of £800,000 (the "Disposal").

The Disposal provides JF Renshaw cash to leverage its recently completed, and successful, programme of radical reform. A condition of the sale is that £220,000 of the proceeds from the Disposal will be used to pay down a proportion of the Hilco Private Capital secured loan facility.

The assets being sold include plant and machinery, inventory, domain names and trademarks. The sale is expected to make a profit of circa £325,000 against book value for the Company. In the year to 31 March 2023, RDC reported a break-even result at EBITDA level.

In conjunction with the Disposal the Board has carefully reviewed its management accounts and working capital position as well as the expected sales in November and December. As noted in the trading update on 31 October 2023, performance has been constrained by supply issues and cash constraints. These are continuing and sales in November and December are now expected to be lower than previously forecast. This has led to the Board to conclude that it is in the best interests of all stakeholders to explore strategic options for its remaining business JF Renshaw.

The Board of JF Renshaw Limited has consequently resolved to appoint Interpath Advisory as its adviser to assist with the review of all strategic options, given a challenging environment for the Company and the cash flow constraints, which may include the sale of the shares or the business and assets of JF Renshaw as well as sourcing necessary external funding.

[riverman77] 10/11/2023 11:06

Regarding investments that are already involved in corporate actions - yes OTM and FA have recently received bids at a premium but the share prices have already adjusted - eg OTM up 77% in last month. This would therefore already be reflected in the NAV of DSM, so not sure there would be much further upside on top of this.
I don't disagree there is good upside potential here, but just not convinced there aren't better opportunities out there right now given you might have a long wait and the extremely cheap valuations in UK small caps (so a lot opportunity cost tying your money up here).

[888icb] 10/11/2023 10:33

A number of the larger investments are already involved in corporate actions that will realise investments at values higher than they sit in DSM’s current NAV. The managers are saying at least a 50% uplift on 59p per share and that excludes the current 18% discount to NAV which will obviously be removed by selling the assets and returning the cash to shareholders.

[riverman77] 10/11/2023 10:18

Perhaps not forced sellers, but certainly under pressure to sell over next year or so. For those reasona, I'm sceptical they'll be able to realise investments for what they're truly worth. Of course, if we see a new bull market in UK shares then that could change.

[888icb] 10/11/2023 10:08

DSM are not forced sellers and will conduct an orderly sale of assets to maximise shareholder value. There is currently no date set to conclude this process:
“ . It has concluded that it would advantage all shareholders equally and fairly to commence a managed wind down of the company's investment portfolio in an orderly manner. That will require shareholder approval which, along with further details, will be the subject of a circular shortly. It is expected that an initial return of capital equal to at least 20% of net assets can be delivered in early 2024 (subject to the two agreed bids noted above completing successfully) with further returns over a period of complete wind down. The board is consulting with its investment manager on the timescale for such a wind down, given current markets and the need to generate best value for shareholders who can see from the investment manager’s report that disposals by acquisition have been at values well above carrying value. The managers have been most helpful and set out more detail on this proposal in their report.”
And this is what the Manager’s say:
“ Inevitably, due to the nature of some of the investments, natural liquidity will be limited and hence there could be some time before a full and complete return of capital is made. Further details of this will be outlined in the coming weeks, however the manager has identified key catalysts within portfolio companies that point to an estimated intrinsic value of the portfolio, which if the divestments are carefully managed, would indicate an upside of at least 50% to current market cap. It is therefore the priority of the board and manager to realise this value and return capital to investors in the most efficient and effective way possible.

Further details on the proposed divestment plan, expected running costs, board composition, return of capital and revised management arrangements will be detailed by the end of the calendar year.”

[riverman77] 10/11/2023 09:43

Not sure about that last paragraph - if they're effectively forced sellers of these companies then they're unlikely to get anything like what they're worth. For instance, Ramsdens is probably worth closer to 300p but can't see that happening while DSM are known sellers. The best hope is that we see further bids for these companies.

[robow] 10/11/2023 09:24

Thanks 888ICB for sharing

[888icb] 10/11/2023 09:00

The final part of the very detailed article and Buy recommendation:
“ Although Ramsdens continues to outperform analysts’ earnings expectations, prompting another round of upgrades post results last summer, the shares are only priced on a forward PE ratio of nine and offer an attractive prospective dividend yield of 4.9 per cent. A price-to-book value of 1.3 times is modest for a cash-rich company generating a post-tax return on equity of 17 per cent and one that is performing well during a cost-of-living crisis. Liberum’s target of 290p is more than a third higher than Ramsden’s current share price.

It’s worth noting, too, that DSM’s largest holding is a liquid £2.9mn (8.5 per cent of NAV) stake in cable manufacturer Volex (VLX:285p), a £511mn market capitalisation company. In other words, the investment trust’s cash. Proceeds from the two agreed takeovers and investments in the above five holdings account for 54 per cent of DSM’s NAV.



Scope for narrowing of share price discount to NAV
The point is that there should be scope for a narrowing of DSM’s share price discount to NAV as cash distributions are made. There is also the real possibility that other portfolio companies will succumb to takeovers or corporate events at share price premiums during DSM’s wind-down process given that their listed market valuations are well below the intrinsic value of the holdings.

Indeed, investment manager Judith MacKenzie has identified key catalysts within investee companies that point to an estimated intrinsic value of the portfolio, which if divestments are carefully managed, indicates an upside of at least 50 per cent to DSM’s current market capitalisation of £28mn (59p). True, a complete wind-down could take time given the nature of some of DSM’s investments and liquidity. However, this could work in shareholders' favour as small-caps have historically outperformed strongly after downturns.

The bottom line is that there is potential for capital returns to shareholders well above DSM’s current NAV of £34mn (71.5p), a factor not reflected in the 18 per cent share price discount to NAV. Buy.

[888icb] 10/11/2023 08:57

More from the IC article where Simon Thompson has separately issued buy recommendations on a number of companies in DSM’s portfolio:
“ In recent weeks, portfolio companies OnTheMarket (OTM:110p), an online residential property portal, and FireAngel Safety Technology (FA.:6.73p), a home safety product supplier, have attracted recommended cash offers at bid premiums of 261 per cent and 56 per cent to their previous day’s closing prices. DSM will receive £2.7mn cash proceeds from each holding which, when combined with its cash holdings of £1.9mn, represents 21 per cent of DSM’s net asset value (NAV).

In addition, another investee company, Aim-traded fintech payments group Equals (EQLS:119.5p), has entered talks with potential bidders that could lead to a takeover of the fast-growing challenger brand in banking and international payments. DSM’s holding in Equals is worth £2.1mn, or 78 per cent higher than cost. It could have a 45 per cent further upside if analysts’ 175p fair valuations are hit (‘Equals offers opportunity for 50 per cent upside’, 8 November 2023).
Lowly rated portfolio offers material capital upside
DSM holds positions in three other companies I am particularly keen on: Hargreaves Services (HSP:418p), an industrial group and land developer; Journeo (JNEO:205p), a transport systems provider; and Middlesbrough-based financial services group Ramsdens (RFX: 212p). Combined the holdings are worth £6mn, or 17.6 per cent of NAV. I have target prices materially higher than the current share price for all these holdings, highlighting the value opportunity on offer.

For instance, Hargreaves is being valued on a 33 per cent discount to NAV of £201mn (618p) even though the group’s renewable energy assets (three wind farms, six access agreements and two solar farm leases) have been valued between £27.2mn and £28.9mn (83p to 89p). These assets are in the books for only £6.6mn (20p). The shares are rated on a forward price/earnings (PE) ratio of 6.7 and offer a five per cent dividend yield, too. Sum-of-the-parts valuations are 84 per cent higher than the current share price.

Following two recent earnings upgrades, house broker Cavendish expects Journeo’s full-year pre-tax profit to almost quadruple to £3.7mn to produce earnings per share (EPS) of 19.7p, rising to £4.2mn and 22.7p, respectively, in 2024. On this basis, the cash-rich company’s shares are rated on a 2024 price/earnings (PE) ratio of 9.1, an unwarranted 32 per cent discount to peers. My 300p target price represents a premium of almost 50 per cent to Journeo’s current share price (‘Journeo is en route to quadrupling its profit’, 18 September 2023).

[888icb] 10/11/2023 08:48

Buy recommendation from Simon Thompson of IC. This is the beginning of it:
“ Downing Strategic Micro-Cap Investment Trust (DSM: 59p) is planning an orderly wind-up of the company and to return capital to shareholders. The first distribution will be made early in 2024 and will be at least 20 per cent of DSM’s current net asset value of £34mn (71.5p).

DSM retains a portfolio of 17 well-run, niche businesses that continue to generally perform well even in a more challenging economic environment. The manager has been outperforming a falling stock market, too, reporting an 8.3 per cent decline in NAV since its last financial year-end (28 February 2023), or half the 17.1 per cent decline in the FTSE Aim All-Share Total Return (TR) index over the same period. Moreover, although the holding is 12.9 per cent below the entry-level in my 2021 Bargain Share Portfolio, the FTSE Aim All-Share TR index has shed 39 per cent of its value in the same 32-month holding period, highlighting DSM’s outperformance.
However, there is no avoiding the negative sentiment towards UK small and micro-cap companies that has led to some of the deepest investment trust’s discounts to NAV in the past 20 years, nor the fact that there is little interest in small specialist investment trusts like DSM. This explains the investment manager’s and the board’s decision to pursue an orderly wind-up of the company.



Initial distribution fully funded
Importantly, the board has the cash on hand to make the initial cash distribution. That’s because more than 20 per cent of the portfolio by value is under offer or in a strategic review process.

[cousinit] 09/11/2023 16:25

Interesting post Sphere. We may do.

I do think DSM have to some extent been architects of their own downfall though. The return of cash has been talked up in previous reports. This invites tourists/'bob each way' investors and to some degree DSM then becomes a hostage to fortune when the much vaunted delivery lags. Clearly the markets can remain irrational for long periods so making statements which are almost in defiance of this aren't particularly advisable.

See also ARIX. Loads of cash on balance sheet. Strategic review initiated. Fails to return said cash. Share price wilts in face of tourists feeling, somewhat understandably, aggrieved.

[sphere25] 09/11/2023 15:34

Very potent stuff in this report: "tiresome", "dispiriting", "depressingly low", "glum". All of it results in a managed wind down. So a further drag on the smaller caps with Downing looking to exit their holdings here.

Is this the time to sell though?

They might be caving in close to the bottom here. There are little pockets of bullish moves around. The market is comfortable with rates having topped out, rates being normalised higher (post the QE party), rates being higher for longer, inflation being more stubborn than expected and a low growth environment - for possibly many years to come.

Sat here wondering whether a fund like this giving up could be another sign of the bottom being close. The market might soon re-rate the solid and outperforming shares. You don't want to get too bullish here, the pockets of buying aren't across the board for proper trend changes.

Furthermore we are still not seeing the profit warning's getting bought up so the property, advertising, recruitment etc sector where we see regular downgrades will likely continue to lag with further cautionary statements.

However, just curious to see if the market does get its bullish hat on a tad, particularly with the more resilient beaten down companies. Surely each positive or solid update from here gives each company a greater chance of re-rating. Most of these doom and gloom factors are out there, all well known and alot of companies have been battered enough imo.

So barring some form of black swan, just intrigued to see if we look back at the news here today and go....hmmm, that was more interesting than we thought.

It is hard to go against the negativity out there, but surely...surely (shirley), the bullish turn is out there.

All imo
DYOR

[makinbuks] 09/11/2023 14:42

Actually its £4,236k and 12.82% with accrued interest. Not impressed by the announcement to wind up.

[makinbuks] 02/11/2023 17:33

That could be transformative here if they can exit RGD. a run rate EBITA of £3m - £4m bodes well to repay the c. £5m of loan notes which is about 13% of the portfolio

[red ninja] 02/11/2023 16:44

Turnaround on for Real Good Food (RGD) :-

"After a slow start to the year as we anticipated, the Group is trading well as it starts its busy seasonal third quarter in the lead up to Christmas. The benefit from the successful implementation of the Group's radical programme of reform is tangible and is expected to boost profitability in the coming months.

For the first six months to 30 September 2023, revenues were 2% up overall to £16.1m compared to the same period in the prior year (H1 23: £15.9m), reflecting the benefits of our pricing actions, albeit volumes were down circa 10% due to weak market conditions and exiting low margin sales. Revenues in August and September were £1.0m ahead of the same months last year at £5.9m. Going into the second half, revenues in October are expected to be circa £4.6m, 6% above October 2022.

More importantly, the unaudited EBITDA loss was much reduced at £0.7m for the period (H1 23: £2.3m loss). Gross margins, at 35.9% compared to 34.4% H1 last year, and 33.3% for FY23 full year, continue to improve due to price resets, more effective pass through of cost inflation (which continues) and self-help gains from improved cost efficiency. After distribution costs, margins were 26.6% for H1 compared to 22.3% H1 last year.

As previously stated, performance during H1 was constrained by supply issues and cash constraints, which the business is trying to resolve and we remain on track to deliver circa £8.0m of price resets, efficiency gains and cost savings for FY24. The Board therefore anticipates reporting a significant turnround for the full year with EBITDA in the region of £1.0m (FY 23: £5.8m loss) with an exit run rate of £3m to £4m EBITDA."

[red ninja] 27/10/2023 16:36

Adept. Tech sold at 201p per share
On The Market has agreed sale at 110p, now Fire Angel.

Its a Uk small cap. buyers market at cheap prices. Why not Synetics.

[chrisdgb] 27/10/2023 15:25

Lets hope Synetics is next.......

[red ninja] 27/10/2023 15:16

The current DSM discount to NAV is 19.31% and the bid should raise NAV by 4.9p per share.

From todays NAV statement :-

Premium/(Discount) to NAV (including current period revenue) (19.31%)

* Current period revenue covers the period 01/03/2023
to 26/10/2023 and includes undistributed revenue in
respect of that period.

Fireangel Safety Technology Group plc

At 7:00am this morning (27 October 2023) it was announced that Intelligent Safety Electronics Pte. Limited has reached agreement on the terms of a cash offer for portfolio company Fireangel Safety Technology Group plc at 7.40p per share.

The closing bid price of Fireangel Safety Technology Group plc shares as at 26 October 2023 was 2.0p per share. Valuing the Company's Fireangel Safety Technology Group plc holding at 7.40p per share, plus warrants, would increase the Company's NAV as at close on 26 October 2023 by c.4.9p per share. The bid price of Fireangel Safety Technology Group plc at 11:00am on 27 October 2023 was 6.25p.

[weatherman] 27/10/2023 13:46

DSM may have paid over 20p for their £5.7m stake, now to be sold at 7.4p - estimate maybe they'll get £1.7m back. Does anyone have more detailed figures.

[red ninja] 27/10/2023 11:47

Fireangel up 210% (which DSM holds) on an agreed bid :-

[red ninja] 08/9/2023 17:56

Downing strategic Micro Cap I.T August Factsheet comment :-

[weatherman] 21/7/2023 11:10

Kepler research note issued.