DSM: Final Results

Downing Strategic Micro-Cap Investment Trust plc
LEI Code: 213800QMYPUW4POFFX69
9 May 2022
Final Results

The Directors of Downing Strategic Micro-Cap Investment Trust plc announce the company's results for the year ended 28 February 2022.

Key points

5.3% increase in NAV and 1% increase in share price over 12 months to 28 Feb 2022, despite the volatility in markets due to post pandemic macro backdrop and the Ukraine conflict.
Focused portfolio of actively managed investments with exciting catalysts now in play which should prove reliable in volatile markets.
Investments have progressed through the ‘J curve’ and are now in either late-stage turnaround or growth phase.
Investee companies are all well financed, and all are benefitting from a post covid environment.
Significant return of capital in the year as well as interest and redemption premium, reducing the exposure to Real Good Food plc, following the sale of its division Brighter Foods Limited and continued turnaround of the remaining business.
c.£3.8m of cash to deploy and a strong list of potential new investments which will be executed during the right conditions and at attractive valuations.

Judith MacKenzie, the lead manager, said
Overall, despite macro uncertainties, we are positive on the prospects for our holdings which are generally cheaper than the wider market, with stronger balance sheets and good growth prospects from the compelling products or services they provide. Typically, these investments have gone through significant catalytic changes over the last few years, and are therefore stronger than they were pre this period of economic instability. Strategically, we will continue to be active, ensuring that our businesses are well positioned to grow over the long term with the right operating structure and management in place. If conditions and prices are right, we may exit positions. Cash remains around 10% and the uncertain environment is generating ample opportunities for new investments.

Financial highlights

	28 February	28 February	Change
Assets	2022	2021	%
Net assets (£’000)	43,059	42,524	1.26%
Net asset value (‘NAV’) per Ordinary Share	85.43p	81.16p	5.26%
Mid-market price per Ordinary Share	72.75p	72.00p	1.04%
Discount	14.84%	11.28%

	Year ended	Year ended
	28 February	28 February
Revenue	2022	2021
Revenue return per Ordinary Share	0.42p	1.02p
Capital return per Ordinary Share	4.29p	9.56p
Total return per Ordinary Share	4.71p	10.58p

Chairman’s Statement
Overview
As I write, disruptions in supply chains, rebounds from Covid, labour market imbalance, cheap money and fiscal endeavours have triggered threateningly high inflation. Geopolitical shortcomings and short-sightedness have led to another war, with critical consequences. Globalisation is splintering, both politically and economically. Central banks have left matters late and if inflation proves stubborn that may leave them little alternative other than to constrain economies with slower growth, even to recession. The outcome looks like continuing inflation and more volatility, with maybe low and middle-income consumers under pressure. Will we still see Jamie Dimon’s “The consumer is unstoppable” or will the consequence be stagflation? Consensus is that the UK ‘will get by’, hopefully. Meanwhile most portfolios have taken at least a breather, if not a battering. This is a time for resilient business models.

DSM overview
Your company’s portfolio has progressed well.
Whilst over the last 12 months the FTSE AIM All-Share has declined by 21%, the MSCI UK Small Cap by 14% and the FTSE Small Cap by 5%, DSM, which does not measure itself against a benchmark but holds investments for their intrinsic value (which, in total, is considered to be well above the company’s NAV) has maintained its NAV with a current value per share of 87.37p, against 81.16p at the 2021 financial year end and 89.79p a year ago. Through this particularly stressful period, since the year end, the portfolio and its NAV have performed well. However, even though the latest NAV per share is 87.37p, the shares stand at 69.5p mid and the discount is 20.5% which is wider than this time last year.

Outlook
The DSM portfolio consists of value stocks, dynamically managed with strong balance sheets, appropriate to the foreseeable economy and held at modest valuations. Their quoted prices are significantly below the value at which DSM’s managers, using conservative estimates and noting evident catalysts, place their achievable market value. Time is then the spur to results. That leads us, your board, to consider how best to deliver that prospect to shareholders.

Looking after shareholders ’ interests
We are active in managing the discount of shares to NAV. Occasionally the market goes awry in its reactions and there is little that can be done for a while, but generally we have taken up loose stock and the discount has averaged around 15% through the year which, of course, is in addition to the inexpensive market value of the individual stocks.

Reducing the discount, enabling shareholders to realise further value, building a larger company
Your board is working on those three objectives.

We have tackled the first of these with buyback programmes when appropriate. We will continue to do that; but DSM has now achieved two years of distinctive performance. It deserves more market attention followed by realisable corporate growth.

In recent years, and during volatile markets, a portfolio of long term, ‘private equity’ style investments with considerable potential value, was not suited to fixed realisation points. It would have been damaging to continuing shareholders to sell part of a small fund, invested in undervalued and still developing companies, with some (as yet) of limited liquidity, to fund a periodic redemption programme. Instead, we have managed buybacks constructively and it does seem that thereby we have looked after the small investor.

However, the portfolio now looks to be in good order, right for the foreseeable economic and market climate, and the board does recognise the need to offer all shareholders the benefit of what in settled markets should be both an improving NAV and a reducing discount. Accordingly, we plan to provide a significant redemption point on 31 May 2024, assuming no serious market disorder from even darker days than now. That redemption will enable shareholders to redeem or have a matched sale for up to 50% of their holding. To affect the redemption and calculate the relevant redemption price, the directors expect to use the Redemption Pool basis as provided for in the company’s Articles of Association. The costs of that will be borne by the Redemption Pool and be deducted in arriving at the redemption price. In my view that should encourage the market to improve its rating of the company’s shares as we move towards that redemption point.

Improving the rating of the company’s shares should in turn enable us to tackle our third objective which is to build a larger company. The current net asset value of the company, at under £50m, is too small for the long term. By getting the discount in, coupled with continuing performance, I hope that we will get to a position to be able to raise capital and build the company. If size and performance also mean that shareholders do well and not all seek to redeem, we will have started to reposition DSM. Success in that objective will enable us then to repeat similar plans to maintain that stronger rating for shareholders.

Dividend
We will be proposing another small dividend of 0.3p per share. Subject to shareholder approval at the AGM, the dividend will be paid on 15 July 2022 to shareholders on the register at 17 June 2022.

Board and managers
The board undertakes an extensive appraisal of itself and the managers (and they of us, as a matter of interest) annually which develops into a process of continuous improvement, and that works well for now.

AGM
This year’s AGM will take place on 11 July 2022 at 2:15pm at Downing’s office at St Magnus House, 3 Lower Thames Street, London EC3M 6HD and will be held in the traditional manner. We request that any shareholders intending to attend the meeting register by sending an email to dsmagm@downing.co.uk saying you wish to register for the AGM. Details regarding arrangements for the AGM will then be provided to you.

The notice of the AGM is set out in the Annual Report. We encourage shareholders to submit their proxy votes in advance of the deadline of 7 July 2022.

Investor letters, presentations and regular information for shareholders
As shareholders know, I make a point of talking to the larger shareholders after each report and accounts, and more frequently if they wish. I am happy to talk to any shareholder. One problem we face is penetrating the nominee platforms to reach the smaller shareholders. We invite all shareholders to register on our website (www.downingstrategic.co.uk) and thereby get the manager’s extensive investor letters, have access to Kepler research reports, useful articles about micro‐caps generally, presentations, videos and be invited to join webinars.

Doctors’ Support Network
With the continuing pressure of Covid and backlogs on the NHS, we are pleased to say that our NEDs’ personal contribution to the Doctors’ Support Network continues to help Foundation doctors, GPs, doctors in speciality training and consultants. Issues raised include burn out, managing ongoing health issues as well as how to maintain interest and fulfilment later in careers during times of stress. The support was timely. I do not propose to report further but would encourage others to take an interest.

What matters looking forward?
Issues ahead look likely to be the consequences of inflation, slowing growth and trade disruption. Regrettably another may be the outcome of events in Ukraine, still watched from the side-lines by too many countries unsure of what they see as their own interests, but which seems to be turning into a tussle of momentous economic and historic significance, quite apart from immediate disruptions to energy and wheat. In these uncertain times, it will certainly matter to have a portfolio of well rooted, strongly managed, value investments.

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
Chairman
6 May 2022

Investment Manager’s Report
The year-end of the Company over the last two reporting periods has coincided with some historic world (and life) changing events. When it seemed like markets might normalise, we continued to be affected by unforeseen events. Brexit consequences, followed by Covid, followed by war. All of these have driven some of the most uncertain investing market backdrops that I have ever experienced. This has been characterised by extreme demand side shocks, extreme supply side shocks (often at the same time), labour shortages, energy price crises, freight and logistical challenges, and more. It is in these particularly uncertain times that we fall back on a tried and tested investment style which we believe can generate returns regardless of uncertainty and sentiment.

The Company invests in small, unloved, and overlooked UK companies under £150m market capitalisations (at the time of investment). These are typically good businesses with a core asset or earnings quality which is unrecognised by the market. We use strategic catalysts to unlock value over a three-to-seven-year investment horizon. We are now nearly five years into the seven-year investment lifecycle of some of our investments and the portfolio has begun to evidence that the strategic catalysts put in place are making a difference.

We try to de-risk investments by looking for self-help mechanisms and catalysts which can be executed by competent management teams. Self-help should create opportunities to grow earnings even through slower trading periods. By investing in overlooked businesses, we avoid the crowds and can often buy company profits at a lower multiple than if we invested in larger businesses. By combining an improved operating structure with improving demand and growing profits, we hope that the equity markets will gradually capitalise profits at a higher multiple, and failing that, a private buyer will.

Strategic activity
We have been very active executing on strategic catalysts within the portfolio over the period. This has included funding acquisitions, facilitating disposals, improving boards, refinancing, and improving investor perceptions. This activity has driven more recent performance and we believe that the portfolio has begun to demonstrate the ability to deliver on our expectations.

The most significant event was the partial repayment of Real Good Food loan notes which returned £6.0m across the holding period, generating an IRR on the returned investment of 11.3%. This is noteworthy because it significantly de-risked the investment of Real Good Food Plc, which was previously one of our largest exposures. It also leaves Real Good Food with a simplified corporate structure from which to drive continuing value.

The Company participated in the fundraising of FireAngel, which has helped it to restructure – now demonstrating significantly improved gross margins to 23% from the mid-teens. Management expects this trend to continue towards 30%. With the return to pre-Covid earnings we believe that this will create a £4m EBITDA business which has a current market capitalisation of £25m.

We also helped to facilitate the refresh of the board at Digitalbox which we think positions the business strongly for the future. Across the portfolio we have enabled board improvements during the year (which amount to the introduction of two new NEDs, two new Chairpersons and one new CEO). We have overseen strategy changes alongside these Boards and engaged as ‘insiders’ at moments of key importance. We have helped put in LTIP incentives for management teams in several positions.

Alongside high strategic activity, we also engaged regularly with many company stakeholders including management, advisors, and other investors. Further detail of our engagement, governance and social and climate engagements are described in the Annual Report.

P erformance and Portfolio activity
In the year to 28 February 2022 the NAV of the Company was up 5.3% versus the wider FTSE AIM All-Share which was down 12%.

In the period, we have invested in six new companies deploying £11.1m in cash. We made follow on investments in five existing holdings, deploying £3.4m of cash. New investments that continue to be in the portfolio include National World (investment of £2.5m), Centaur Media (investment of £3.6m), Norman Broadbent (investment of £0.4m), Tactus Limited (£1.9m), and one toehold where we are building a position (£1.2m). The investment cases for these are detailed below.

We increased our position in Flowtech, Fireangel and Venture Life when share prices were volatile and provided an opportunity to buy stock at a significant discount to our calculation of intrinsic value.

We exited in full from five positions, raising £6.8m in cash. These included toehold positions that had met our intrinsic value, one that was bid for shortly after we invested, and also one of our older positions in Duke Royalty, where we felt that the investment case had been changed. We made partial sales in five investments, where we were taking profits as the share price neared intrinsic value, which raised £9.1m in cash.

Overall net realised and unrealised gains of £2.5m were derived from the portfolio, which was predominantly made up of equity gains, however also included a net gain of £0.5m on disposal of loan notes (including redemption premium). The portfolio benefitted from receiving £0.3m from equity dividends. Meanwhile, the company returned £1.9m to shareholders in the period, £0.4m through dividends and £1.5m through buybacks. The NAV of the company improved from £42.5m to £43.1m and the NAV per share from 81.16p to 84.43p. At the period end the company had net cash of £3.8m, around 8.8% of net assets.

The main contributors to performance included;

Volex contributed strongly to performance in the period as the shares re-rated significantly through to Q3 on the back of further organic and inorganic growth. The shares then de-rated through the last few months of 2021 and into 2022 on the back of wider macro concerns. We took profits throughout the year to manage our position size. In our view, they are now well below intrinsic value given the quality and growth on offer and we continue to believe that there is ample re-rating opportunity as the company demonstrates the quality of its operating model and delivers on growth expectations.

Flowtech’s share price has performed well and has proven particularly robust through the current macro headwinds. There remains significant opportunity to grow earnings as the business recovers from Covid and grows revenues on a leaner cost base. Investment into an e-commerce platform should allow the business to begin taking market share more rapidly while working capital efficiencies, still to come through, will materially improve cash conversion and the quality of earnings. This ought to support a re-rating, in our view.

Hargreaves Services saw its share price up by 56% as its diversified and asset backed operating model begins to shine through. There remains significant upside through earnings growth across all divisions and a potential re-rating. The likelihood of a near-term disposal of the German JV has dissipated whilst that business earns outsized profits. We have taken modest profits from this share price rise.

The main detractors to performance included;

Centaur saw its share price modestly decline in the period; however, it has recovered since the period end. We believe that the market has not yet reflected the value of the initiatives put in place to achieve a margin of 23% by 2023. When that is achieved the company should be highly cash generative, producing a double-digit free cash flow yield. We have been impressed by the calibre of management in this new position in the portfolio.

Synectics’ share price experienced some weakness during the period, reflecting the shut-down of its key casino market in the US due to Covid. The share price performance ignored the benefit of the reorganisation and cost cutting in the business, which saw costs of £2m per annum removed from the business. This will allow Synectics to benefit from significant margin improvement as revenues return to pre-Covid levels. We are also encouraged that Synectics has won significant new contracts in the infrastructure and transport sectors. We believe this company is under-rated compared to its peers, and management have committed to improving shareholder communications.

Venture Life saw its share price down by 51% in the year. Venture Life has had a challenging 2021/2022. It was more of a Covid-beneficiary than we likely anticipated as core earnings faltered, masked by the positive Covid impact elsewhere. The route back to a reasonable market rating is to beat modest expectations, and the appointment of a new Chair will be key to ensuring management have a focus on this. We have reduced our exposure here until there is clarity on the direction of the new Chairperson.

Looking forward
Despite the obvious challenges ahead, we expect that this year will be one of progress as the catalysts and self-help initiatives within the portfolio are realised.

With high inflation, we are obviously focused on ensuring that portfolio companies are well placed to pass on costs. Inevitably, some will find this more challenging than others, but our expectation remains for the portfolio to modestly grow earnings over the course of the coming year.

Businesses have needed to invest more into working capital to restock inventories at higher prices to satisfy demand. Thus, we are conscious of ensuring ample financial flexibility. We may well see growth at the expense of some short-term margin, which should not be a concern. What is concerning is if the underlying economics are shifting permanently against our businesses and we need to permanently impair our estimation of long-term profits and/or the multiple at which an investor would capitalise those profits. Happily, we do not currently own anything where we deem this as a problem.

Strategically, we will continue to be active, ensuring that our businesses are well positioned to grow over the long term with the right operating structure and management in place. If conditions are right, we may exit positions. Cash remains around 9% (at the time of writing in late April) and the uncertain environment is generating ample opportunities for new investments.

Overall, despite macro uncertainties, we are positive on the prospects for our holdings which are generally cheaper than the wider market, with stronger balance sheets and good growth prospects from the compelling products or services they provide.

Judith MacKenzie
Head of Downing Fund Managers and partner of Downing LLP
6 May 2022

Investments

As at 28 February 2022

	As at 28 February 202 2		As at 2 8 February 202 1
	Market Value (£’000)	% of Total A ssets	% of Total Assets
Hargreaves Services plc	4,345	10.09	7.64
Volex plc	4,296	9.98	15.17
Flowtech Fluidpower plc	3,412	7.92	4.50
Ramsdens Holdings plc	3,358	7.80	7.04
Digitalbox plc	3,184	7.39	3.46
Centaur Media plc	2,814	6.54	-
Fireangel Safety Technology plc	2,705	6.28	6.07
Real Good Food 10% Loan Notes*	2,669	6.19	17.38
Adept Technology Group plc	2,221	5.16	7.43
National World plc	2,140	4.97	-
Synectics plc	2,114	4.91	6.55
Real Good Food 12% Loan Notes*	1,755	4.08	3.78
Tactus Holdings Limited**	1,631	3.79	-
Venture Life Group plc	852	1.98	4.59
Norman Broadbent plc	531	1.23	-
Real Good Food plc	172	0.40	0.44
Duke Royalty Limited	-	-	3.30
Other	1,242	2.88	4.88
Total investments	39,441	91.59	92.23
Cash	3,798	8.82	8.06
Other net current assets	(180)	(0.41)	(0.29)
Total assets	43,059	100.00	100.00

*Unquoted. Stated inclusive of the fair value of unpaid interest income
**Unquoted

All investments are in Ordinary Shares and traded on AIM unless indicated. The total number of holdings as at 28 February 2022 was 15 (28 February 2021: 14).

As at 28 February 2022, loan note principal represented 7.29% (28 February 2021: 16.24%) of total assets and the total of loan note principal and interest represented 10.27% (28 February 2021: 21.16%).

Background to the investments
(unless otherwise stated all information provided as at 28 February 2022)

AdEPT Technology Group PLC (AdEPT) (5.16% of net assets)
Cost: £3.83m Value as at 28 February 2022, £2.22m

Background
AdEPT functions as an aggregator of telecoms services providing a smoother, integrated service to corporate and government organisations. We were attracted by the high operational gearing and recurring revenue streams at attractive 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 as activity continued to normalise in the sector
Focus on strong cash generation to reduce net senior debt
On track to achieve management expectations for FY22
Recent acquisition Datrix secures new contract

Progress against investment case
AdEPT reported a strong start to H1 FY22, with management reporting in the interim results that the group is on track to achieve management expectations for FY22. £0.9m of revenue and its associated margin, deferred from H1 due to supply chain issues and customer resource allocation, underpin the board’s confidence.

Group revenue increased by 20%, there was strong organic growth of 6% in Cloud Centric Strategic Services, and managed service revenue grew organically by 4% - this now represents 87% of revenue. Management focus in H2 is on the continued delivery of its stated objectives, with an emphasis on the achievement of further organic growth, using the group's strong cash generation to reduce net senior debt, as the business capitalises on the macro shift to cloud centric solutions. The aim being to reduce debt below 2x EBITDA. Over time the business should be able to create significant equity value by de-gearing – a strategy which we are supportive of.

Centaur Media PLC (Centaur) (6.54% of net assets)
Cost: £3.58m Value as at 28 February 2022, £2.81m

Background
Centaur Media is an international provider of business information, training and consultancy, creating value through premium content, analytics and market insight within the Marketing and Legal segments. Centaur operates under several flagship brands, namely The Lawyer, MW Mini MBA, Influencer Intelligence and Econsultancy, with the latter three brands forming part of their marketing arm, XEIM.

Update to the investment case

On plan to generate 23%+ margins
Strong growth through pandemic
Continued strong momentum through Q4
Strong balance sheet with net cash ahead of expectations

Progress against investment case
A new addition to the portfolio, Centaur is an attractive business which generates subscription revenues with the aim to move margins from mid-teens now, to 23% by 2023. Growth is coming from improving the revenue mix in both events and content‐based client engagement. Meanwhile, XEIM services the marketing sector with content, research, marketing solutions, and training. Growth has been derived across all divisions but particularly in Econsultancy and the MW Mini MBA – a marketing MBA that has become industry leading and grown exponentially through Covid.

A recent trading update in January highlighted continued strong momentum through Q4, with revenue and profit outperformance against expectations. Higher margin revenue streams nudged the margin above the forecast 15% for the year or an implied H2 margin of 19%, demonstrating management are well on track for the aspiration of 23% margins in 2023. Working capital is always well controlled and net cash was £3m ahead of expectations at £13m, albeit there will be some unwind during 2022. In short, there is a lot to like about our entry point, the quality of management execution, and a defined path to value creation.

Digitalbox PLC (Digitalbox) (7.39% of net assets)
Cost: £1.20m Value as at 28 February 2022, £3.184m

Background
Digitalbox 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 yields ahead of market norms for publishers on mobile.

Update to the investment case

Trading across the group’s brands stronger than anticipated
Consistent earnings upgrades
Improved management and governance
Cash should be available to complete value enhancing acquisitions
Group has re-rated considerably

Progress against investment case
The group successfully generated earnings upgrades through the year, particularly in Q4, aided by the strong digital ad market. The group’s strong performance has not all been market driven and management deserves credit for building a scalable operating platform and for investing in content that has considerable value. Digitalbox’s inventory remains hot property and this is reflected in market‐beating yields.

We think that the prospects for Digitalbox this year are good. Management is focused and incentivised, given the quantum of their own shareholding in the business. They have built a scalable technology platform and proven that their inventory is valued highly by clients. They have also proven that they can acquire and create value quickly from underperforming assets. The company has ample cash on the balance sheet to complete further earnings enhancing acquisitions and to invest for organic growth.

FireAngel Safety Technology Group PLC (FireAngel) (6.28% of net assets)
Cost: £5.73m Value as at 28 February 2022, £2.71m

Background
FireAngel designs, sells and markets smoke detectors, carbon monoxide detectors and home safety products. We were attracted to FireAngel 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 FireAngel will benefit from. Legislative guidance is for the purchase of smoke alarms with a 7–10 year lifespan, and we are already beginning to see a replacement cycle on the installed base in more mature markets.

Update to the investment case

Sales increase of 7% over 2020
£9.8m raised in placing to support strategic priorities
Growth suppressed by supply chain crisis
Review of pricing structure expected to benefit the company from Q2 2022
Began the development of a new generation smoke alarm, supported by a lucrative contract from German power provider Tekham

Progress against investment case
FireAngel issued a trading update for the year ended 31 December 2021 and reported that sales for the period are expected to show an improvement over 2020 of more than 7%. The group raised £9.8m by way of a placing and open offer following the disruption caused in 2020 by Covid-19. While progress was made, the growth was suppressed by the global supply chain crisis. This impacted production due to component shortages, creating shipping and fulfilment delays and driving inflation. An easing of the situation is already evident in early 2022.

The board reported it had been a particularly tough year for the business, however, it is satisfied with performance and pleased with the continued improvement in gross margin, driven mainly by management action and focus. Although supply chain challenges are easing, there may still be some issues during this year, especially in Q1 2022 and the board is monitoring these developments closely. From Q2 2022, FireAngel’s existing strategy, combined with new pricing and supply chain measures, will offer strong validation of the margin improvement opportunity. The Tekham contract validates the strength of the technology in a regulated and growing market.

Flowtech Fluidpower PLC (Flowtech) (7.92% of net assets)
Cost: £2.60m Value as at 28 February 2022, £3.41m

Background
Flowtech 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 £110m, and 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

Revenue improved near pre-pandemic levels
Business performing in line with expectations
Savings achieved from restructuring activities
Two new NEDs appointed

Progress against investment case
Flowtech continues to recover from Covid where its cyclically exposed revenues were impaired due to forced closures of its customers. In the most recent trading update, management signalled those revenues had almost returned to pre‐Covid levels and the business was performing in‐line with expectations.

This is a good business with a leading market share and strong value‐add position in the market. They are a distributor and provide a critical service to customers who need parts and spares expedited, typically next day, to allow their own business’s capital assets (machines, assembly lines, construction equipment) to get back up and running. Flowtech earns respectable margins and should generate reasonable operating leverage as it grows, which it should, since management have been talking about the opportunity to continue taking market share. The value creation proposition here is reasonably simple: build revenues back to pre‐Covid, c.£112m, and from there grind out low‐to‐mid single digit growth; maintain gross margins at 35%, with some growth potential over the medium and longer term; deliver operating cost savings, much of which will be reinvested into the e‐commerce platform; focus on driving best in class working capital turnover; and ensure the operating platform is well invested for growth. Putting all these together, we see a pathway to well over a 10% free cash flow yield from here, with the majority delivered by self‐help.

The recent appointments of James Brooke and Ailsa Webb as Non-Executive Directors will bring additional cross-sectoral experience, strategic, analytical and transformational competences to the board.

Hargreaves Services PLC (Hargreaves) (10.09% of net assets)
Cost £3.07m Value as at 28 February 2022, £4.35m

Background
Hargreaves 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 includes planning for residential, logistics and industrial space.

Update to the investment case

Profit before tax improved materially, including from JVs
Benefitted from strong commodity prices
Sales of first plots at Blindwells delivered
Bank debt eliminated, strong net cash position, and refinanced without bank debenture

Progress against investment case
Hargreaves Services has recovered from the pandemic well, as reflected in latest interim results for the six months to 30 November. These were driven by stronger underlying performance in Services and Land, and in the German associate.

Revenue reduced as expected following the exit from the coal business in December 2020. However, profits increased in all three business segments. In Services, HS2 is now ramping up and is expected to hit £40m per annum and generate £1.5‐2.0m of earnings. Tungsten West, a tin and tungsten mine in Plymouth could also have good scope to drive upgrades. In Land, the group recently announced the financial close of its Westfield site in Fife. This is a substantial industrial site which will benefit from the construction and operation of an EfW plant. The Blindwells site continues to make progress having recently completed the 197 plot, £9.6m sale to Persimmon. Profit after tax from the German joint venture was £9m versus £0.9m for the same period in 2020.

The group carries real momentum in all segments of the business with the German joint venture continuing to deliver substantial profits and the balance sheet remains strong with no bank debt.

National World plc (National World) (4.97% of net assets)
Cost: £2.47m Value as at 28 February 2022, £2.14m

Background
National World is a reverse into the regional publishing assets of the old Johnston Press. The management team are top calibre, with experience seldom found in £70m market caps. The strategic aim is to grow and build, through acquisition, a leading news publishing group.

Update to the investment case

Highly experienced and respected management team
Building a valuable and scalable multi‐platform publishing business.
Restructuring generating significant cost savings
Asset attractive to private equity buyer

Progress against investment case
National World has taken control of established heritage titles such as The Scotsman and the Yorkshire Post and has since launched several regional ‘World Sites’ and a new online national ‘NationalWorld.com’. Management have unpicked the centralisation which drove the decline of the heritage brands, with editorial and commercial responsibilities pushed back into the regions. The acquired assets have been heavily restructured, generating £5m of annualised cost savings to date and with more to come as significant printing and office contracts come up for negotiation this year and next. These savings will allow management to re‐invest in digital and quality content to drive growth. National World is also free of legacy pension liabilities and fixed costs and assets tied to printing activities which are a millstone around many other legacy‐publisher’s necks.

Results for the full year were ahead of expectations and showed some impressive results, particularly in the digital business which is growing strong from a low base. The legacy print business will have to contend with higher newsprint and commodity prices this year but there are plenty of levers within managements grasp to offset this. We expect to see operating progress across all fronts and hopefully an accretive acquisition this year.

Norman Broadbent PLC (Norman Broadbent) (1.23% of net assets)
Cost: £0.40m Value as at 28 February 2022, £0.53m

Background
Another new addition to the portfolio, Norman Broadbent is less than 2% of DSM but Downing client funds now hold an influential stake of almost 20% of the equity. Norman Broadbent offers a bespoke mix of high‐quality Search, Interim Management, Research & Insight, Assessment & Development solutions. A recognised but historically uninspiring brand, Norman Broadbent has market presence but had struggled to gain scale. However, it is profitable, modestly cash generative, and provides a platform for growth. After executing a turnaround in 2017 and a return to stability, Downing and other strategic shareholders recently refreshed the Chair and CEO positions, having identified a strong ‘buy‐in’ team to take Norman Broadbent to the next level of organic and inorganic growth.

Update to the investment case

Highly experience management team with proven track record
Highly likely that a £1.5m+ EBITDA business can be created in the coming 2/ 3 years
Likelihood of corporate activity

Progress against investment case
Management is key in people businesses like recruitment where the assets walk out of the door every evening. Peter Searle, an accomplished entrepreneur in the recruitment sector, became Chair mid‐2021. Prior to Norman Broadbent, Peter grew Delphi before it was sold to Adecco in 1999, and he became CEO of Adecco UK. He left Adecco in 2006 to join Spring Group plc which he subsequently grew and sold to Adecco in 2009. In 2015, he left to join AirSwift – which he left in 2021 to join Norman Broadbent as Executive Chair. Peter brought in Kevin Davidson as Chief Executive who has a proven track record in executive search. Kevin built Ducaus Partners from scratch in 2016 to $5.5m turnover and 16% EBITDA margin, he also took Maxwell Drummond from a small four people business to 55 employees across eight global offices generating £10m revenue and 12% EBITDA margin.

The investment case here is simple: add core quality fee earners in attractive and growing verticals (like renewables) and generate operating leverage on the already well‐established operating platform. This is a management team who have done it before, and who we are backing to do it again. Valuations for well run (10%+ EBIT margin) businesses tend to trade at between 8x‐10x earnings. We believe this team can make key hires and create a £1.5m+ EBITDA business in the coming 2/3 years. This does not assume any acquisitions. We would then expect an exit either through share liquidity or a corporate exit, generating an equity return of between 3‐4x monies.

A ‘strategic’ shareholder list (including the Moulton family and recruitment sector veteran Pierce Casey) indicates that the likelihood of corporate activity is high – over 55% of the equity is held by these parties and Downing.

Ramsdens Holdings PLC (Ramsdens) (7.80% of net assets)
Cost: £3.08m Value as at 28 February 2022, £3.36m

Background
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 over 150 owned stores within the UK and has a growing online presence.

Update to the investment case

Resilient and profitable performance despite difficult trading conditions
Foreign currency income recovering from travel restrictions
Online retail jewellery sales more than doubled
Balance sheet remains strong
Confident management team, positioning the business for growth

Progress against investment case
Ramsdens most recent trading statement for Q1 FY22 (October to December 2021) highlights the resilience of the group’s diversified business model. Investments in the jewellery retail operations have continued to deliver strong results, with store retail jewellery revenue up more than 30% and online retail jewellery up more than 70%. Foreign currency volumes have been severely impacted by international travel restrictions but had increased by c.200% in the period. The group’s pawnbroking service is expected to see increased demand as its customers need for short term financing grow.

The business has been agile in adapting to the challenges and restrictions caused by the pandemic. It has invested in areas of the business that have presented opportunities and continued to make improvements and put capital into growing its retail operations, both instore and online. We are confident that pawnbroking loan books will grow, demand for foreign currency exchange service will return as international travel continues to open up, and there will be further opportunities to grow the footprint of its store estate in the UK. We believe that Ramsdens is well positioned to move forward and deliver on its strategic ambitions to achieve long-term sustainable growth as we return to more normal trading conditions.

Real Good Food PLC (RGD) (equity, loan notes and interest, 10.67% of net assets)
Cost: £5.03m Value as at 28 February 2022 (including loan note interest), £4.60m

Background
Real Good Food is a food manufacturing business serving several market sectors including retail (own label and private label), manufacturing and export. The company’s one remaining business, (Renshaw) focuses on cake decoration, with a leading brand in their chosen markets.

Update to the investment case

Business has gone through material turnaround
Term debt repaid and part repayment of DSM loan notes
Sales impacted by severe shortages and high absence rates
Enhanced relationships through new product development

Progress against investment case
Real Good Food (RGD) is now a focused food ingredients business that has gone through material turnaround. Around £60m has been realised through divestment in the last four years, allowing term debt to be repaid and more significantly a repayment of DSM Loan Notes providing a 11.3% IRR on this capital investment through interest and redemption premium. The DSM investment comprises a loan note, convertible loan note and equity – highlighting the strategic nature of the investment.

The remaining business is Renshaw – a Liverpool‐based manufacturer of cake decorations primarily focusing on fondant icings, marzipan, frostings and caramels. Although the business suffered through Covid with lower wholesale sales, a high level of absenteeism due to Covid and supply chain disruptions, the business continued to trade with a positive EBITDA. Significant cost has been taken out of the business in previous years allowing efficiencies to be achieved – these initiatives continue.

Despite some short‐term setbacks the business trades profitably at the EBITDA level before the shareholder loan note interest obligations. It has also enhanced relationships through new product development – allowing some costs to be passed on in these key client relationships. As we enter a new trading year in April, we expect that accelerating self‐help measures should enable RGD to deliver on the aspirational return to £3m EBITDA targets. The company has recently stated the desire to maximise stakeholder value and reduce loan note debt. We expect further news on organic and inorganic opportunities through the course of 2022. The business has many levers to pull for value realisation, including property and land assets.

Synectics PLC (Synectics) (4.91% of net assets)
Cost: £3.98m Value as at 28 February 2021, £2.11m

Background
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

Gradual recovery in casino and gaming sectors
Latest financial results demonstrate a resilient performance
Significant improvement in underlying losses
Strong balance sheet with net cash and no bank debt
Strong order book

Progress against investment case
Synectics suffered from a dramatic decline in revenue and profits driven by the closure, or collapse in business levels, of most major casinos and gaming resorts in Asia and North America due to the pandemic. The gradual recovery of these markets has begun in North America and should follow in Asia once leisure travel in the region resumes.

The group delivered resilient financial results and reported good strategic progress for the year ended 30 November 2021. Revenue fell by 2.2% to £43.6m, though there was significant improvement in underlying losses and the group returned to profit in the second half of the year. Pre-tax loss was £0.6m compared to a loss of £4.1m in the same period the year prior. This was largely due to cost reductions as a result of restructuring and a recovery in revenues in the Security Division. Both of the group’s operating divisions achieved strong turnarounds to produce positive operating profits for the year as a whole. Net cash at the period end was £4.6m, with no bank debt and undrawn banking facilities of £3m. The order book was up 11.8% to £28.4m, around two thirds of which is expected to be traded in 2022, with the balance largely long-term service and support contracts.

The underlying global market for sophisticated, software-led security systems is fundamentally attractive, with solid long term growth prospects. The group has recently won a number of new contracts, it has a strong management team, it is financially sound, supported by significant intellectual property, and is well positioned to capitalise on its established market positions as the post-COVID recovery continues.

Tactus Holdings Limited (Tactus) (3.79% of net assets)
Cost: £1.00m Value as at 28 February 2022, £1.63m

Background
Tactus is an unquoted UK business which designs, markets, and sells IT hardware ‐ mainly budget laptops and notebooks in the B2B channel. They do not manufacture themselves but outsource this to several Chinese partners within the China Technology Ecosystem. As a result, the Tactus business is capital light and generates high returns on equity.

Update to the investment case

Executing growth strategy in education, budget IT and gaming verticals
Completion of £40m funding round
Several acquisitions completed since DSM investment
Some higher costs on supply chain and freight and logistics

Progress against investment case
Tactus completed several acquisitions in the year, growing its position in the PC gaming e-commerce and system building space. Devices also made progress generating revenues from multiple new customers in Europe and the United States, furthering Tactus’s reach. As with many companies operating in the electronics industry, due to manufacturing being in China, supply chain has been trickier to navigate than usual and freight and logistics availability and delays have led to some higher costs being absorbed. This resulted in some margin erosion, to be expected in the difficult environment, but an expected adjusted EBITDA out turn of £8.5-£9.0m represents progress.

The business has significant opportunity through 2022 to execute a synergy strategy on the back of the M&A progress made over the last 12 months. The strategic vision is sound, and management has executed quickly and decisively over our holding period. We think that a fully formed PC gaming e-commerce platform and devices business with strong growth prospects will attract a strong multiple at IPO.

Venture Life Group PLC (Venture Life) (1.98% of net assets)
Cost: £1.76m. Value as at 28 February 2022, £0.85m

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

Update to the investment case

Revenue increased by 8%
Momentum building post acquisitions
Adjusted EBITDA in line with reduced market expectations
Strong order book
New CFO appointed

Progress against investment case
Venture Life issued a trading update for the year ended 31 December 2021, and reported revenue was up 8% to £32.6m compared to the prior year. There was some recovery in the second half of the year, with revenue of £18.7m, an increase of 35% over the revenues in the first half. Although these numbers are less than initial expectations, it appears that renewed momentum in the second half has continued into 2022.

Supply chain and logistics continue to be an issue, but the group is managing these challenges to meet the needs of suppliers and customers. The new partnership with Samarkand Global, for oral care products in China, has started well, and the acquisitions made in 2021 are now fully integrated and have performed extremely well, contributing significantly to strong growth in revenue and profitability in the second half. The group has started 2022 with an order book significantly ahead of the same time last year, giving a good level of confidence for the year ahead.

Volex PLC (Volex) (9.98% of net assets)
Cost: £1.57m Value as at 28 February 2021, £4.30m

Background
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

Strong interim results but with some margin headwinds
Investing for growth across the business
Successful navigation of supply chain challenges
Shares continue to trade at a discount to sector peers
Significant de-rating of the shares

Progress against investment case
Volex made significant strategic and operating progress in the year, in the face of strong headwinds and supply chain challenges. The geographically diversified manufacturing base and revenue streams shone through, generating very strong growth. In the face of supply chain issues and rapid cost inflation, we thought that the margin out turn was impressive and there is likely mix benefits to come next year as the high-speed business should recover. The de-rating in the year is a function of the market generally and not, as far as we are aware, reflective of any Volex specific issues. Volex is a quality business with structural growth drivers and trades around the lowest multiple in the sector, we think this is unjustified.

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 the UK adopted 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 the UK adopted 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 the UK adopted 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
HughAldous
Chairman
6 May 2022

Statement of Profit or Loss and Other Comprehensive Income

for the year ended 28 February 2022

	Year ended 28 February 202 2			Year ended 28 February 2021
	Revenue	Capital	Total	Revenue	Capital	Total
	£’000	£’000	£’000	£’000	£’000	£’000

Gains on investments at fair value through proﬁt or loss	-	2,454	2,454	-	5,390	5,390
Investment income	7 00	61	761	996	-	996
	7 00	2, 515	3,215	996	5,390	6,386

Investment management fee	(77)	(308)	(385)	(59)	(234)	(293)
Other expenses	(410)	-	(410)	(390)	-	(390)
	(487)	(308)	(795)	(449)	(234)	(683)

Return before taxation	2 13	2, 207	2,420	547	5,156	5,703

Taxation	-	-	-	-	-	-

Return for the year after taxation	2 13	2, 207	2,420	547	5,156	5,703
	Revenue	Capital	Total	Revenue	Capital	Total
	(p)	(p)	(p)	(p)	(p)	(p)
Basic and diluted return per Ordinary Share	0. 42	4. 29	4.71	1.02	9.56	10.58

The total column of this statement represents the Statement of Comprehensive Income of the company prepared in accordance with the UK adopted 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 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.

Statement of Changes in Equity

for the year ended 28 February 2022

	Share capital	Special reserve	Capital reserve	Revenue reserve	Total
	£’000	£’000	£’000	£’000	£’000
Year ended 28 February 2021
At 28 February 2020	56	54,473	(16,617)	1,184	39,096
Return 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

At 28 February 2021	56	54,474	(12,863)	857	42,524
Return for the year	–	–	2, 207	2 13	2,420
Buyback of Ordinary Shares into treasury	–	–	(1,4 6 0)	-	(1,4 6 0)
Transfers between reserves	–	–	-	-	-
Expenses for share buybacks	–	–	(10)	-	(10)
Dividends paid	–	–	-	(415)	(415)
As at 28 February 2022	56	54,474	(12, 126 )	655	43,059

Statement of Financial Position

as at 28 February 2022

	28 February 2022	28 February 2021
	£’000	£’000
Non-current assets
Investments held at fair value through proﬁt or loss	39,441	39,218
	39,441	39,218
Current assets
Trade and other receivables	60	39
Cash and cash equivalents	3,798	3,428
	3,858	3,467
Total assets	43,299	42,685
Current liabilities
Trade and other payables	(240)	(161)
	(240)	(161)
Total assets less current liabilities	43,059	42,524
Net Assets	43,059	42,524
Represented by:
Share capital	56	56
Special reserve	54,474	54,474
Capital reserve	(12,126)	(12,863)
Revenue reserve	655	857
Equity shareholders’ funds	43,059	42,524
Net asset value per Ordinary Share	85.43p	81.16p

Statement of Cash Flows

for the year ended 28 February 2022

	Year ended 28 February 2022	Year ended 28 February 2021
	£’000	£’000
Operating activities
Return before taxation	2,420	5,703
Gains on investments at fair value through proﬁt or loss	(2,454)	(5,390)
UK fixed interest income	(351)	(738)
Receipt of UK fixed interest income	1,162	-
(Increase)/decrease in other receivables	(21)	4
Increase in other payables	79	64
Purchases of investments	(14,493)	(8,877)
Sales of investments	15,913	8,886
Net cash inflow /(outflow) from operating activities	2,255	(348)
Financing activities
Buyback of Ordinary shares into treasury	(1,460)	(1,390)
Expenses of for share buybacks	(10)	(11)
Dividends paid	(415)	(874)
Net cash outﬂow from ﬁnancing activities	(1,885)	(2,275)
Change in cash and cash equivalents	370	(2,623)
Cash and cash equivalents at start of period	3,428	6,051
Cash and cash equivalents at end of period	3,798	3,428
Comprised of:
Cash and cash equivalents	3,798	3,428

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 the UK adopted 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 the UK adopted 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 2 02 1
The following amendments to standards came into effect this accounting period, although they have no impact on the Financial Statements:

Interest Rate Benchmark Reform – IBOR ‘phase 2’ (Amendments to IFRS 9, IAS 39 and IFRS 7)

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

IAS 1 (Amendments to the Classification of Liabilities as Current or Non-Current) – effective 1 January 2023
IAS 1 (Amendments to the Disclosure of Accounting Policies) – effective 1 January 2023
IAS 8 (Amendments to the Definition of Accounting Estimates) – effective 1 January 2023

Critical accounting estimates and judgements
The preparation of ﬁnancial statements in conformity with the UK adopted 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 and classification of unquoted loan notes: unquoted loan note investments, comprising loan note principal, interest and any amounts of redemption premium, are held at fair value through profit or loss and are valued 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.

Valuation of unquoted equity: a key estimate in the financial statements is the determination of the fair value of the unquoted equity by the Directors, as it impacts the valuation of the unquoted investments at the balance sheet date. Of the company’s assets measured at fair value, it is possible to determine their fair values within a reasonable range of estimates. The fair value upon acquisition is deemed to be cost. Thereafter, unquoted equity is measured at fair value in accordance with International Private Equity and Venture Capital Valuation (‘IPEV’) Guidelines.

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

Investments held at fair value
All investments held by the company (quoted equity investments, unquoted loan notes and unpaid loan note interest) 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.

UK fixed interest income represents loan note interest receivable from unquoted investments and is measured on a daily basis. Such amounts form part of the overall fair value of the loan note instruments and are therefore included within investments held at fair value through profit or loss on the Statement of Financial Position.

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.

Income
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.

Dividends 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.

Expenses
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.

Taxation
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 2022		Year ended 28 February 2021
	Net return	Per share	Net return	Per share
	£’000	Pence	£’000	Pence
Revenue return	2 13	0. 42	547	1.02
Capital return	2, 207	4. 29	5,156	9.56
Total return	2,420	4.71	5,703	10.58
Weighted average number of Ordinary Shares^*	51,409,463		53,908,480

^*Excluding treasury shares

4. Net Asset Value per Ordinary Share

NAV per Ordinary Share is based on net assets at the period end and 50,402,145 (28 February 2021: 52,398,491) Ordinary Shares, being the number of Ordinary Shares in issue excluding treasury shares at the period end.

	28 February 2022		28 February 2021
	NAV per share	NAV attributable	NAV per share	NAV attributable
	Pence	£’000	Pence	£’000
Ordinary Shares:
Basic and diluted	85.43	43,059	81.16	42,524

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.
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.
*Operational*
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.
*Financial*
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*
Non-compliance with investment trust eligibility conditions. 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.
Non-compliance with Companies Act 2006, the Alternative Investment Fund Manager’s Directive (‘AIFMD’), the UK Listing Rules and Disclosure & Transparency Rules and the Market Abuse Regulations, the UK adopted 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.
Risk	Mitigation
Emerging risks
*Geopolitical risks*
The Ukraine conflict and the impact of new sanctions placed on Russian businesses and individuals may have some impact on the returns of the Company.	The investment manager’s approach of having a strategic involvement with the investee companies ensures that the Manager is well placed to assess the exposure of the business to the Ukraine conflict and associated developments. Exposure is considered to be low and any direct impact on the Company’s performance not expected to be significant. The Manager will continue to review the evolving situation as part of its ongoing activities.
*Inflation*
The company’s investments could be impacted negatively as a result of increasing inflation, particularly on wages and other costs.	The investment manager’s close relationship with the investee companies allows it to ensure that the businesses properly assess the potential impact of increasing costs, particularly wages, and the extent to which these may or may not be able to be passed on to the end customer. The manager currently considers the net impact to be at a manageable level and continues to monitor developments closely with all investee companies.
*Climate change*
The effects of climate change or those of changing legislation as the world looks to transition towards net zero emissions may impact the returns generated by the portfolio companies.	Whilst the company itself, as an investment entity, has negligible exposure to climate change risk, the investment manager works closely with investee companies to ensure that climate change risk and transition risk is appropriately addressed. The manager believes that the risks within the current portfolio to be manageable and gives consideration to this in reviewing new investment decisions and will continue to assess developments in legislation and their potential impact on portfolio companies. Developments in accounting and disclosure regulations impacting the Company are monitored by the investment and administration manager to ensure full compliance.

Coronavirus pandemic
A key feature of the investment manager’s approach is in seeking to have a strategic involvement with all investee companies. This allowed the manager to be closely involved with the investee companies throughout the coronavirus pandemic, providing support where possible. The board and manager will continue to monitor such developments as the world starts to return to more normal conditions.

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 2022 was
£385,000 (2021: £292,800). The amount outstanding as at 28 February 2022 was £123,000 (2021: £30,868).

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 2021 to 28 February 2022, total fees of £79,000 (2021; £76,000) (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 2022, the amount outstanding was £59,000.

Directors
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 2022, there were no outstanding directors’ fees (2021: none).

7. Non-adjusting events after reporting date
In the period between 28 February 2022 and the date of this report, the following non-adjusting events took place:

The company purchased 823,192 of its own Ordinary Shares, at an average price of 70.0 pence per share, all of which are now held in treasury.

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 2022 but has been extracted from the statutory financial statements for the year ended 28 February 2022 which were approved by the Board of Directors on 6 May 2022 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 2021 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 2022 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 www.downingstrategic.co.uk .

Notes for Editors:

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.

E nquiries:

Hugh Aldous	Chairman	07785 294 789
Robert Finlay	Shore Capital	07771 765 675
Jean Birrell	Downing PR	07799 555 353

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