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Downing Strategic Micro says underlying discount growing

Downing Strategic Micro says underlying discount growing

Downing Strategic Micro says underlying discount growing – the NAV per share dropped by almost 20% over the year to the end of February 2019. The shares moved from trading at a small premium to a small discount. There will be a dividend of 1.25p, payable from earnings of 1.5p.

There are 13 companies in the portfolio:

  • AdEPT Technology Group
  • Braemar Shipping Services
  • Duke Royalty
  • FireAngel Safety Technology
  • Gama Aviation
  • Hargreaves Services
  • Pennant International Group
  • Ramsdens Holdings
  • Real Good Food
  • Redhall Group
  • Science in Sport
  • Synectics
  • Volex

Failings of management and governance

The chairman says “Short term damage to your company’s share price has come from three or four investments and has been due almost entirely to failings in corporate management and governance.

Where there has been a problem, it has not been because there was anything fundamentally wrong with the business or its market; the investment manager’s in-depth analyses have generally proved sound. What has emerged on active investing, and with, in one case, a seat on the board, has been the need for a change in the management and an overhaul of the governance of those companies. Our expectation of boards of public companies is that they should do the job required of them by law and regulation and that their audited accounts should be reliable. Unfortunately, … for otherwise good businesses, our investment manager has had to ‘encourage’ quite a lot of management and board change; more so than we anticipated. Your board’s support for the determination of the investment management team remains unwavering.”

The manager says that “17 board changes, alongside 12 management changes have been made in our 13 active investments, and it is likely that there will be more in the future. Largely, these changes are at chair level and are therefore the most effective for managing further change. 12 management moves have been made in our investments, 41% have gone through some kind of restructuring, and of the 13 companies , 15 acquisitions have been made and six companies divested.”

Intrinsic value of the portfolio

The intrinsic value of the portfolio is significantly above the current NAV. The intrinsic value is the investment manager’s calculation of the net worth of the businesses. This is a calculation based predominantly on the value of future free cash flows, but also includes the investment manager’s judgement of quality of earnings, and the ability of management to drive to a strategic goal. We believe that the weighted average upside in the portfolio is over 75%, based on the underlying portfolios prospects as of today.”

DSM : Downing Strategic Micro says underlying discount growing

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