Final Results

Downing Strategic Micro-Cap IT PLC

06 June 2024

 

Downing Strategic Micro-Cap Investment Trust plc

LEI Code: 213800QMYPUW4POFFX69

5 June 2024

Final Results

 The Directors of Downing Strategic Micro-Cap Investment Trust plc announce the company's results for the year ended 29 February 2024.

Highlights

►  Results of shareholder approved managed wind-down exceeded the board's expectations with distribution of 74% of the reported year end NAV, either announced or in train.

►  Post period-end a payment of 30p per share was made to shareholders by way of a Special Interim Dividend on 26 April 2024. A second Special Interim Dividend of 12p per share will be paid on 21 June 2024. In addition, the board announced on 30 May 2024 the intention to pay a Third Special Interim Dividend of at least 7 p per share by mid/late July 2024.

►  30% of remaining assets are held in companies where there is a bid situation.

►  Portfolio is held in profitable companies with strategic catalysts for value creation.

►  Investments have progressed through classic hockey stick formation and are now in either late-stage turnaround or value realisation phase.

►  Wind up approved by majority of shareholders following 15.75% decrease in NAV and 5.6% decrease in the share price, compared to a 12.6% decrease in the FTSE AIM All-Share TR index over the 12 months to 29 February 2024, driven by continued negative sentiment towards UK smaller companies and a realised loss on unquoted assets

  Judith MacKenzie, lead manager, said

"Given the inherent value of the portfolio, we feel very confident that further meaningful distributions can be achieved in the coming months beyond what is already being delivered, whilst enabling the trust to maintain the optimum outcome for value return to shareholders in a timely manner."

Hugh Aldous, chairman of Downing Strategic Micro-Cap Investment Trust, said:

"Since the shareholders voted for a managed wind-down of the trust, the managers have executed the strategy of exiting the investments exceedingly efficiently, extracting the maximum return for investors. I am confident that they will continue to perform to their mandate. "

Financial highlights
	29 February		28 February	Change
Assets	2024		2023	%
Net assets (£'000)	30,627		38,355	(20.15)
Net asset value ('NAV') per Ordinary Share1	65.71p		77.99p	(15.75)
Mid-market price per Ordinary Share	62.00p		65.70p	(5.63)
Discount1	5.65%		15.76%
1  Alternative Performance Measure
	Year ended		Year ended
	29 February		28 February
Revenue	2024		2023
Revenue return per Ordinary Share	(1.52p)		(1.32p)
Capital return per Ordinary Share	(11.45p)		(6.22p)
Total return per Ordinary Share	(12.97p)		(7.54p)

Chairman's Statement

To date, the results of the shareholder approved managed wind-down of your company's portfolio have exceeded the board's expectations.  We have already paid a dividend of 30p per share, declared a further 12p per share and indicated another 7p per share following Government approval of a bid for one of our investments.  Together those distributions would result in your company distributing some 74% of the reported year end NAV, with further distributions indicated.  Having distributed 30p per share, the remaining NAV was 40.02p per share as at 31 May 2024 giving a view for continuing shareholders of over 70p per share of worth, comfortably ahead of the year end.  Of that remaining 40p, 19p is already slated for distribution in June and July with an indication of more dividends in August and thereafter.

In November 2023 we said, the board [had] been considering what would be the best and fairest way to meet [its] commitment of returning capital to shareholders, realising best value for them equitably, [and] 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'.  At a general meeting of the company held on 28 February 2024, shareholders approved the managed wind-down of the company and, since that date, our manager has sought to realise all of the company's remaining assets in a prudent manner, consistent with the principles of good investment management, and with a view to an orderly return of cash to shareholders.

Having already distributed £13.98 million, 46.0% of the company's NAV at 29 February 2024 (the date the company commenced its managed wind down) the company is ready to distribute a further 12p per share which it declared as a dividend on 28 May 2024 for payment on 21 June 2024 and which amounts to another 18% of that NAV. Given the takeover of FireAngel we have already announced our intention to distribute a further 7p per share in July and together those distributions would amount to approximately 74% of the company's net assets as at 29 February 2024, which is more than we estimated in our announcements made in December 2023 and February 2024.  At current market valuations there would still remain something over 20p per share after those three distributions.  Realisations have been achieved within the spread of market prices; there have been no sales at any undervalue to the market.  Value uplifts, anticipated in my report in November 2023, have been captured as have the uplifts from subsequent events in the portfolio.  In current markets we hope for further uplift.

In its financial year, despite one investment going into administration, on which I comment briefly later, DSM's mid-market price per share held up well.  It was 62.0p at the year-end compared with 60.25p at the half year and 65.7p at the last year end.  As I have said, currently, with the 30p per share distribution already made plus today's NAV for the remaining portfolio at 40.02p per share the potential for continuing shareholders looks to be over 70p per share, less relatively modest costs; and there is further value still to be realised (see manager's report).  In its managed wind down your company is realising value, limiting costs and distributing realisations as cash.

As to the remaining portfolio, the manager's report reviews the stocks, about which their view remains positive, and sets out where further potential value may be realised.  To date, the board is satisfied that the manager has struck the appropriate balance in maximising returns to shareholders whilst also ensuring that such returns are made in a timely manner.

That means that regardless of the events, which I set out below, we are currently on course to return cash well in excess of the company's NAV as at 29 February 2024, meeting the timelines set out in the circular to shareholders dated 2 February 2024, and still able to benefit from indications of further bid interest in our portfolio.   From time to time, if the discount has gone much wider than 15%, we have authorised modest buybacks.

Events following the announcement of a proposed wind down

Following the announcement of the proposed managed wind-down in November 2023, the company received alternative proposals from four counterparties, one of which was Milkwood Capital Limited ("Milkwood").   Each of the four proposals had a different purpose. Only one, from an investment company with similar objectives, offered any significant return of capital.   Milkwood made it clear that its particular purpose was to secure for itself the contract for the future management of the company's portfolio.  Your company therefore undertook market soundings in January 2024 with its then four largest shareholders to gauge those shareholders' appetite for each of the alternative proposals that had been put to us. The feedback indicated a clear preference that the company should proceed with its managed wind-down as originally proposed and return cash to shareholders.

That view was then supported by the broader shareholder response to the wind down proposal put to the February general meeting at which voting shareholders overwhelmingly voted in favour of a change to the company's articles so as to realise all remaining assets and return cash to shareholders.  The votes were approximately 86.6% in favour, with the only significant vote against being lodged by Milkwood.  A further general meeting was needed to approve the implementation of a B share scheme, which would ensure a tax efficient capital return, and such a meeting was called for 3 April 2024.  In the meantime, Milkwood built up a shareholding of approximately 28 per cent in the company by, among other things, acquiring stakes held by two of the company's institutional shareholders both of which had indicated strong support for the company's managed wind-down and concomitant return of cash to shareholders. At the general meeting held on 3 April 2024, Milkwood used those acquired stakes to vote against the resolution to implement the B share scheme designed to ensure that distributions would be treated as capital receipts for all shareholders. Notwithstanding that the resolution still received the support of more than 50% of the shareholders who cast votes (which amounted to approximately 56.7% of the company's issued share capital) the resolution had to be a special resolution, requiring 75% of the votes cast in order to pass, and hence it was not carried.  However over 99.7% of the other voting shareholders (i.e. non-Milkwood) still voted for that resolution to achieve full realisation and tax efficient distribution.  That indicated a continuing and overwhelming vote of support for the managed wind-down of the company and for the distribution of cash proceeds.

Your board, committed to doing the right thing for all shareholders, was, therefore, blocked, by a new shareholder with its own agenda, from distributing cash in a particularly tax efficient way. 

Mindful of the other shareholders' vote for a return of cash proceeds, the board therefore proceeded to declare special dividends to shareholders which, while not our preferred route, has the merit of fulfilling the mandate we were given to wind down the company and return cash.  With the remainder of the portfolio looking, as the manager puts it, readily realisable at carrying value, full realisation is anticipated with, in current markets, some further uplift.

We have met Milkwood several times.  They are a small team with whom we have had reasoned discussions.  We and our advisers know little of their investment credentials and we have asked, more than once, for verification material on which to do some diligence.  At the time of writing, this information has not been received.  It is not for self-interest that we cannot see for what reason we would recommend them; we are, after all, on track to wind up DSM.  If shareholders wish to invest in Milkwood, or otherwise, then through the timely return of realisation proceeds they are free to do so.

The board will continue to attend to its mandate of returning cash to shareholders until such time as the managed wind-down is complete or shareholders, as a collective, direct otherwise.

Portfolio performance

Most of the portfolio has held its value and companies have generally had a positive reporting season during Q1 2024.  The knock-back last year was Real Good Food, for which we already had a provision, but which issued in October 2023 a comparatively upbeat RNS on future performance.  It was then (one might note after the pre-Christmas sales) put into administration by its bankers and sold via a pre-pack administration to Backels Bakery.  The write-off for us has been £3.8 million.

The stocks that remain valued in the portfolio are all listed and traded.  By and large those amounts not yet realised are there because the manager notes some interesting catalysts (private equity interest in Equals, approaches to Centaur, new and historically effective chairman in Synectics, Flowtech re-rated as examples).  The manager is therefore balancing realisation against value enhancement.  A matrix of price against prospects is set out in the manager's report.

Expenses

There is one large legal charge.  A while ago we reported wrongdoing at Real Good Food to the AIM team, who at least fined them.  Recently we reported another investment where the balance sheet was repeatedly misstated.  Sadly, no action.  As I said last November, 'We are resolutely intolerant of misstatements or misleading statements by investee boards and their companies'.  Had we not decided to wind up DSM, we would have pursued that latter case in which our King's Counsel was confident that he was reading up on fraud.

Dividends

The dividend of 30p per share paid on 26 April seems to have been well received.  A further 12p declared on 28 May 2024 with a Third Special Interim Dividend of 7p proposed for July (see above) and indications of another in August will hopefully be welcome, with more to be anticipated as the manager's work continues. 

Governance

We review ourselves rigorously.  That comes from a free and open speaking board.  As the company is well on its way to being wound up, which is proceeding well with all the board actively involved, we have not repeated the immensely thorough board appraisal on which we reported last year, but we observe its findings.  Progress to wind-down is such that the AIC tenure recommendation is not relevant.  I am the only director standing for re-election under our established policy. 

Will Dawkins

The board has reduced its directorships to three.  Will Dawkins volunteered to step down and as a result we have lost a first-class director with a distinguished, international record as Foreign Editor of the FT and a subsequent career at Odgers and then Spencer Stuart where he was head of UK board appointments.  He has been a valuable contributor to this board, helping focus and clarity.  We are very sorry to lose him.

Forward View

As for the UK economy, the country continues to lack direction.  I noted the following in the company's last half-yearly report, and believe it needs repeating:

The UK desperately needs growth and the creation of economic and social values to fund ever increasing liabilities.  That will have to come from the foundation of entrepreneurial business, managerial determination (just go visit the US, never mind its politics, to see real determination at work) re-thinking of productivity, depth of technology, process, skill levels, training and education.  All that will take far longer than an electoral span to achieve and hence barely features in UK politics and establishment drive.   Meantime short-term muddle and often ineffectual initiatives continue.  Corporate UK needs more drive, determined entrepreneurs, investment in the future and, wherever possible, constructively challenging governance.  As an optimistic perspective, I said…. small companies are the seedbed of growth for the UK.  Our institutions and our future well-being needs that growth.  Desperately.  The UK can punch way above its weight in a range of knowledge intensive, highly skilled industry and research.  That is underrated in the application of national and institutional resources. It appears only in political humbug. Centrally the country has become so bound by departmental statements that cold feet respond to opportunity and a confused 'establishment' fails to foster the personal and local determination that drives growth.   Success demands determination (vide, again, the USA) not a country that is stuck in something akin to administration (for those familiar with the Insolvency Acts) with decisions taken, effectively, by the bank manager - HM Treasury.  I would suggest that over the last 75 years that Treasury fixation has run its course.  The 'private' governance of public money has not been very clever. 

The country's needs and liabilities will not wait for introverted economics and a blinkered Treasury.  I make no comment on politics of any colour.

Thanks

This has been a very time-consuming and not at all an easy year.  My thanks go to all the fellow board members who have given far more time than is usual for investment companies, to our advisers, to our manager team who have risen to the challenge of wind-down and whose matrices of progress, which we monitor, have proved reliable.  Thank you for continued focus and working with the board.

AGM

The AGM will be held at 12:00 pm on 21 August 2024 at Downing's office at St Magnus House, 3 Lower Thames Street, London EC3M 6HD. We ask shareholders intending to attend to register by email to [e-mail] so that the Registrars have your details. The notice of the AGM is set out on page 91 of the annual report. We encourage shareholders to submit their proxy votes in advance of the deadline of 19 August 2024.

Hugh Aldous

Chairman

5 June 2024

Investment Manager's Report

In the year to 29 February 2024 the NAV of the company fell 15.75% against the wider FTSE AIM Index Total Return which fell by 12.6%.  This reflected the underperformance of a larger position in the company (Real Good Food Plc) and the wider volatility in smaller company markets.

In November 2023 the board and manager announced the managed wind-down of the company and the intention to return at least 20% of NAV to shareholders in early 2024.  Since then, authority to change the mandate of the company and proceed with wind down has been approved by shareholders, and the payment of a 30p dividend (42% of the NAV as at the time of the November announcement of intention to return capital), has been repaid to shareholders by way of special dividend.   The remaining portfolio is valued at a NAV of 40.02p per share (as at 31 May 24).

In the period, there were realisations of £11.6 million across the portfolio realising net gains on cost of £2.0 million.  Write downs of unlisted assets resulted in a realised loss of £3.8 million in the period.

The main contributors and detractors in the year included;

Journeo Plc which had realised and unrealised gains of £1.5 million in the period of which £1.3 million were realised.

Synectics Plc also made a positive contribution to performance with unrealised gains of £0.96 million in the period.  As did Equals Plc which booked realised and unrealised gains of £0.54 million in the period of which £0.17 million were realised.

A full realisation was made in OntheMarket Plc which was subject to a trade sale from an international buyer, which returned a gain in the period of £1.1 million.

The main detractors included:

Real Good Food Plc, which fell into administration which led to a near 100% write off and realised loss in the period of £3.8 million.  The current holding value is £0.275 million although there is a prospect of a further modest return of capital from the administration process given the prior ranking status of the loan note instrument held.  However, the outcome of this and quantum is too uncertain to recognise within the valuation.  

FlowTech Fluid Power Plc also saw a significant unrealised loss in the period of £1 million as it underwent management changes and restructuring.  We have confidence in the longer-term prospects of this business which is now proving resilient against challenging industrial market headwinds.

Centaur Media Plc also subjected the portfolio to a £1 million unrealised loss in the period, mainly due to market sentiment.  We believe that this company is undervalued in relation to the quality of earnings and its ability to generate free cash flow.  This was evidenced by a speculative private equity bid that was announced during April, which has subsequently fallen away.

Outlook and Post Balance Sheet events

As at 31 May 2024, the net assets were £18.3 million or 40.02 per share post the payment of the special interim dividend of 30p per share on 30 April 2024. The remaining portfolio amounts to £12.7 million, and cash was £5.6 million. 

Since the year end, as at 31 May 2024, FireAngel (12.8% of NAV) is now under a mandatory offer subject to shareholder support, which should it be approved, alongside other realisations would return a minimum of 8p per share to shareholders in DSM later in the summer of 2024.

As highlighted below the remaining portfolio, is held in companies that are profitable, cash generative, reporting positive operational trading momentum and where we believe that they sit at a material discount to intrinsic value with clear catalysts in place.

A summary of the remaining positions at 31 May 2024 and our belief of their intrinsic value is highlighted in the table below.  The share price target is the market analyst expectations of fair value over the course of the next 12 months. 

Company	Current share price	Analyst Target	Catalyst	Upside	% of NAV
Centaur Media	39.0p	78p	Earnings	100%	9.5%
DigitalBox	3.0p	7.6p	Earnings	111%	4.5%
Equals	118.0p	160p	Corporate activity/earnings	36%	5.6%
FireAngel	6.5p	7.4p	Corporate activity	14%	12.8%
Flowtech	113.5p	150p	Earnings	32%	7.8%
National World	14.5p	40p	Earnings	175%	8.6%
Norman Broadbent	8.5p	12-18p**	Earnings	41%-111%	0.4%
Synectics	180.0p	277p	Earnings	54%	18.7%
Volex	350.0p	441p	Earnings	26%	7.5%

** based on Downing internal estimates predicated on the achievement of the incentive scheme.

Given the inherent value with the portfolio, the manager feels very confident that further meaningful distributions can be achieved post the Summer, whilst maintaining the optimum outcome for value return to shareholders in a timely manner.

Judith MacKenzie

Head of Downing Fund Managers and partner of Downing LLP

5 June 2024

Investments

As at 29 February 2024

	As at 29 February 2024			As at 28 February 2023
	Market Value (£'000)	% of Total Assets		Market Value (£'000)	% of  Total Assets
Synectics plc	3,362	10.98		2,402	6.26
Volex plc	2,541	8.30		1,568	4.09
Centaur Media plc	2,479	8.09		3,484	9.08
Flowtech Fluidpower plc	2,046	6.68		3,273	8.53
Fireangel Safety Technology plc	1,986	6.48		1,904	4.96
Equals Group plc	1,705	5.57		1,494	3.90
National World plc	1,401	4.57		2,040	5.32
Ramsdens Holdings plc	1,011	3.30		2,520	6.57
Journeo plc	832	2.71		1,419	3.70
Digitalbox plc	805	2.63		1,724	4.50
Theworks.co.uk plc	694	2.27		868	2.26
Norman Broadbent plc	609	1.99		334	0.87
Hargreaves Services plc	317	1.04		3,269	8.52
Inspecs Group plc	291	0.95		1,769	4.61
Real Good Food 12% Loan Notes1 *	275	0.90		1,420	3.70
Real Good Food 10% Loan Notes1 *	-	-		2,528	6.59
Adept Technology Group plc	-	-		2,394	6.24
Onthemarket plc	-	-		1,445	3.77
Tactus Holdings Limited1 *	-	-		760	1.98
Norman Broadbent 10% Loan Notes1*	-	-		215	0.56
Real Good Food plc	-	-		97	0.25
Total investments	20,354	66.46		36,927	96.26
Cash	10,463	34.16		1,505	3.93
Other net current liabilities	(190)	(0.62)		(77)	(0.19)
Total assets	30,627	100.00		38,355	100.00
1  Unquoted. * in administration

All investments are in Ordinary Shares and traded on AIM unless indicated. The total number of holdings as at 29 February 2024 was 15 (28 February 2023: 18). Details of the equity interests comprising more than 3% of any company's share capital are set out in note 17 of the annual report. As at 29 February 2024, loan note principal represented 0.90% (28 February 2023: 9.64%) of total assets and the total of loan note principal and interest represented 0.90% (28 February 2023: 10.85%).

Unquoted Investments

As at 29 February 2024

		As at 29 February 2024				As at 28 February 2023
	Cost (£'000)	Market Value (£'000)	% of  Total Assets		Cost (£'000)	Market Value (£'000	% of Total Assets
Real Good Food 12% Loan Notes	1,507	275	0.90		1,232	1,420	3.70
Real Good Food 10% Loan Notes	2.051	-	-		2,051	2,528	6.59
Tactus Holdings Limited *	1,227	-	-		1,002	760	1.98
Norman Broadbent 10% Loan Notes*	200	-	-		200	215	0.56
Total investments	4,985	275	0.90		4,485	4,923	12.83

Background to the investments - top 10 positions

(unless otherwise stated all information provided as at 29 February 2024)

Centaur Media PLC (Centaur) (8.09% of net assets)

Cost: £3.58 million Value as at 29 February 2024: £2.48 million

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

Comfortably exceeded MAP23 EBITDA margin objective

Strong growth in EBITDA and EBITDA margin

Revenue down slightly on the year prior

Higher quality revenue streams demonstrate resilience

Speculative approach from private equity which has not developed into a bid

Progress against investment case

Centaur issued its preliminary results for the year ended 31 December 2023 and reported that the group's performance was the culmination of its Margin Acceleration Plan (MAP) 23 strategy which achieved its three clear objectives: to implement a simple, efficient and scalable operating model, develop high-quality, trusted products which are the leaders in their markets, and build the credibility of Centaur's management team for delivering on its strategic and financial commitments. Centaur has significantly grown its profitability and built a business with an impressive proportion of higher-quality revenue, providing it with a scalable platform for long-term sustainable future growth.

Centaur generated an adjusted EBITDA margin of 26% (up from 21% in 2022 and 12% in 2020), comfortably exceeding the MAP23 target and resulting in net cash of £9.5 million at 31 December 2023 after paying ordinary and special dividends of £8.9 million in the year. Revenue of £37.3 million was slightly down from £38.4 million in 2022 after a softening in the macroeconomic environment trading conditions and inflationary pressures. The group recorded good performance across its higher quality revenue streams in Premium Content and Training and Advisory, which now collectively represent 80% of the business, up from 76% in 2022. 

The group issued a response to recent media speculation on 10 April 2024 and confirmed that it has received an expression of interest from Waterland Private Equity Investments regarding the proposed acquisition of its entire issued share capital. Waterland subsequently declined to formalise their intention to make an offer for Centaur.

Digitalbox PLC (Digitalbox) (2.63% of net assets)

Cost: £1.13 million Value as at 29 February 2024: £0.81 million

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 revenues per session significantly ahead of market norms for publishers on mobile.

Update to the investment case

Challenging markets impacted revenues

Significantly reduced profitability

Algorithm changes

Scaled up the portfolio to five operational brands

Acquisition of tvguide.co.uk and onboarding of Graphene platform

Acquired Media Chain assets growing the social follower base to over 20 million

Progress against investment case

Digitalbox published its final results for the year ended 31 December 2023. While headline financial performance metrics were down on the previous year, the group traded profitably and generated £193k in operating cash in 2023, while experiencing some very challenging market conditions. Despite the difficult backdrop, the group further scaled the Digitalbox portfolio from four to five operational brands in the period. In addition, it completed the acquisition of tvguide.co.uk and onboarded to the Graphene platform, acquired Media Chain assets, growing the group's social follower base to over 20 million. The Daily Mash premium ad-free subscription experience continues to grow with an uplift of over 180% taking its current base to over 4,000. There was a significant focus on the diversification of the audience sourcing model, helping to lessen the impact of algorithmic changes made by the major platforms.

Performance of the acquired properties - The Daily Mash, The Tab, The Poke and TV Guide has proved the potential of the Digitalbox operating model and its Graphene platform as it builds a larger portfolio of successful profitable digital brands. Trading for the current financial year remains in line with expectations and the company expects advertising markets to bounce back in 2025.

Equals PLC (Equals) (5.57% of net assets)

Cost: £1.03 million Value as at 29 February 2024: £1.70 million

Background

Equals Group is a technology-led international payments group augmented by highly personalised service for the payment needs of SMEs, whether these be FX, card payments or via Faster Payments. Founded in 2007, the group listed on AIM in 2014 and currently employs around 265 staff across sites in London and Chester. 

Update to the investment case

Strong trading performance

Strong growth in the Solutions business

Strategic review underway.

Private equity showing interest in acquiring Equals.

Progress against investment case

Equals issued an update on current trading and an update on the Strategic Review on 20 March 2024. Trading has continued the strong growth trajectory of FY 2023, with revenues in the period reaching £22.2 million, an increase of 28% over the same period the year prior. In keeping with recent trends, trading has been robust across the business with particularly strong growth from Solutions.

The board announced that it is conducting a review of strategic options that would deliver greater value to Equals' shareholders than pursuing a standalone independent strategy. This process is ongoing and is considered to be in the best interests of shareholders and could lead to the group being acquired.

FireAngel Safety Technology Group PLC (FireAngel) (6.48% of net assets)

Cost: £6.54 million Value as at 29 February 2024: £1.99 million

Background

FireAngel designs, sells and markets smoke detectors, carbon monoxide detectors and home safety products under the FireAngel, FireAngel Pro, FireAngel Connect, AngelEye and SONA brands.

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 volumes down as group tackles trading challenges

New management concentration on refocusing the business

Improvement of operational and sales processes

Bid received from ISE

Progress against investment case

FireAngel provided an update on trading in the year ended 31 December 2023 and on its strategic review. The group expects to report sales of approximately £41.0 million, down 28.8% on the preceding year. As anticipated, the measures taken by the board to manage the trading challenges and significant inflationary pressures experienced, have come at the expense of a significant reduction in sales volume. Whilst the recent restructuring of its sales team will ensure that FireAngel is well positioned to build momentum in 2024, the changes have inevitably had some impact in the short term, particularly in UK Trade performance. International sales also remained comparatively depressed in H2 2023 as new legislation in Benelux in 2022, which had led to a surge in customer demand in the region for products during 2022, was not carried into 2023 as customers looked to reduce inventory intake.

Throughout H2 2023, the group remained focused on the ongoing strategic review to return it to profitability as quickly as possible. This has included exploring all options available to realise value for shareholders. Further progress has been made by the new management team on refocusing the business to recover sales performance and increase cash generation. There has been significant improvement in both operational and sales processes.

On 27 October 2023, the boards of Intelligent Safety Electronics PTE. LTD ("ISE") and FireAngel announced that they had reached an agreement on a recommended cash offer for FireAngel. ISE is a company incorporated in Singapore and is wholly owned by Siterwell, a leading manufacturer of intelligent security protection. ISE currently holds approximately 17.46% of FireAngel's issued share capital.

The offer was conditional upon, among other things, the satisfaction of a condition relating to a material official authorisation or regulatory clearance, in this instance being the National Security and Investment Act 2021.

On 30 May 2024 it was confirmed that the timetable in respect of the recommended offer has resumed, following the approval of the conditions required by the Secretary of State.  The date by which all conditions in respect of the Offer must either be satisfied or waived is now 27 June 2024.

Flowtech Fluidpower PLC (Flowtech) (6.68% of net assets)

Cost: £2.42 million Value as at 29 February 2024: £2.05 million

Flowtech is a value‐added distributor of hydraulic and pneumatic components into a wide array of sectors predominantly in the UK and Ireland. The group 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 down 2.4% on the year prior

Simplified operating model to unlock full margin potential

New leadership team in place

Continued focus on working capital management delivering £1.8 million improvement

Improvement in product distribution stock availability

Progress against investment case

Flowtech issued its results for the full year ended 31 December 2023 and reported a challenging period for the business. Management believes that it has addressed the root causes of underperformance in Product Distribution and is confident that 2024 will see the beginnings of a return to stronger historic EBITDA margins. Flowtech has achieved significant growth in Ireland and despite the continued challenging external market, there are reasons for optimism. The group has a new and energised leadership team, with a performance improvement plan that is beginning to deliver measurable results and clarity of strategy which serves to unlock its full potential across six defined EBITDA growth engines.

Journeo PLC (Journeo) (2.71% of net assets)

Cost: £0.34 million Value as at 29 February 2024: £0.83 million

Background

Journeo provides solutions in the transport sector, including displays and passenger management. This is a sector that we are particularly enthusiastic about. The underinvestment in UK infrastructure, particularly transport, is well‐known and we as managers have capitalised on this in other investments over the last decade.  The sector tends to be serviced by a number of niche/small companies, and therefore a smart buy-and-build strategy can yield attractive returns if executed by a management team focused on return on investment.

Update to the investment case

Set to benefit from long‐term government spending trends in the transport sector

Strong trading

New contract wins

Acquisitions performing well

Strong order book and growing sales pipeline

Progress against investment case

Journeo announced strong final results for the year ended 31 December 2023 and reported revenue up 118%, gross profit up 84%, and adjusted profit before tax up 325%. It has a strong balance sheet with cash and cash equivalents of £8.1 million. Operationally, the acquisitions of Infotec and MultiQ are expanding the reach of Journeo's solutions into new markets, both domestic and international. There has been continued investment into R&D and increasing capacity at the group's Ashby-based Infotec manufacturing and production facility. The group has secured several significant new contract wins throughout the year, including a £1 million award from Transport for Wales (TfW) for a country-wide content management solution. The Arriva framework to supply CCTV and associated services for new and retrofit vehicles was also extended.

National World PLC (National World) (4.57% of net assets)

Cost: £2.92 million Value as at 29 February 2024: £1.40 million

Background

National World was a reverse into the regional publishing assets of the old Johnston Press, the third largest newspaper publisher in the UK. The business is highly cash-generative and unencumbered by legacy assets typical of other large publishers. This leads to improved cash generation and cash flow can be re-invested into content and a digital transition which will offer more opportunities for growth and higher margins.

Update to the investment case

Adjusted EBITDA up 6%

Digital revenues up 13%

Strong balance sheet with financial flexibility

Seven acquisitions completed in the period

Restructuring generating significant cost savings.

Progress against investment case

National World announced its results for the year ended 30 December 2023 and highlighted adjusted EBITDA 6% above expectations at £9.5 million, and digital revenues up 13%. The group reported strong revenue growth and annualised cost savings of £6.0 million, with restructuring costs of £3.6 million expensed in the period. NWOL has a strong balance sheet with financial flexibility and a closing cash balance of £10.7 million. This follows a £12.9 million cash consideration for seven acquisitions, a £2.5 million final deferred consideration payment for JPI Media, and the repayment of £1.0 million loan note.

In Q1 2024, the group's EBITDA was slightly higher than management expectations, with total revenue slightly lower. There is still some continuing market volatility as audience and programmatic yields are impacted by algorithm changes by global social media platforms. The board believes that with the introduction of further consolidation plus cost efficiency and productivity enhancements, the pace of the operating model change has accelerated, with initiatives embedded in both the heritage portfolio and newly acquired assets. The future model is based on original and expert content in specific sectors and genres to better serve both consumers and advertisers. Examples are business information, including events and the transformation of premium brands to populate all platforms reaching a wider, increasingly global audience.

Ramsdens Holdings PLC (Ramsdens) (3.30% of net assets)

Cost: £0.93 million Value as at 29 February 2024: £1.01 million

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 157 owned stores within the UK and has a growing online presence

Update to the investment case

Trading strong and in line with expectations

Strong balance sheet conservatively managed

Store estate expanded to 167 stores

Progress against investment case

Ramsdens issued a trading update for the financial year to date for the five months from 1 October 2023 to 29 February 2024. Trading has remained strong and in line with the board's expectations. Foreign currency gross profit increased c.3% YoY with encouraging momentum building ahead of the key summer trading period.  The pawnbroking loan book has continued to grow, increasing by £0.4 million, however, jewellery retail revenue was broadly flat compared with the prior year. The group's strategic expansion has continued, with two further stores opened and the total estate now comprises 167 stores (including two franchised stores).

Synectics PLC (Synectics) (10.98% of net assets)

Cost: £3.98 million Value as at 29 February 2024: £3.36 million

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

Significant turnaround in performance

Strong order book

New contract wins

Solid net cash position

New Chairman announced

Progress against investment case

Synectics announced strong results for the year ended 30 November 2023 and reported revenue increased 26% to £49.1 million. There was a substantial increase in underlying operating profit to £3.1 million and underlying EBITDA increased by 50% to £4.8 million. The group highlighted its strong order of £29.2million, up 20% on the same period the year prior. Net cash was £4.6 million with no bank debt. The business performed well over the period, exceeding market expectations, and this was underpinned by growing demand from the oil and gas sector. Synectics has a strong order book, reinforced by sound order intake and significant contract wins across all sectors, with continued momentum into 2024. Management retains its focus on specialist, core markets - gaming, oil and gas, public space, transport and critical infrastructure - all of which offer significant growth opportunities. Post reporting period end, the group completed its agreement with National Grid, with contracts of £4.0 million signed to upgrade more sites across its estate.

Volex PLC (Volex) (8.30% of net assets)

Cost: £1.46 million Value as at 29 February 2024: £2.54 million

Background

Volex manufactures complex cable assemblies and power cords through a global manufacturing base for a wide variety of industries. The business has been growing sales in high structural growth sectors such as electric vehicles and data centres.

Update to the investment case

Electric Vehicles and Consumer Electricals performance improving but revenues below FY2023 levels

Strong FY trading, slightly ahead of analyst expectations

Operating profits improved in H2

Strong organic growth

Structural growth drivers in place

Progress against investment case

Volex issued a trading update for the financial year ended 31 March 2024. The group highlighted that full-year performance is ahead of market expectations, with revenue now expected to be at least $900 million, representing an increase of at least 25% over the prior year. This includes seven months' contribution from the acquisition of Murat Ticaret. Underlying operating profit1 is also anticipated to be slightly ahead of analyst expectations. This performance underscores Volex's ability to secure additional customer commitments and deliver new projects, whilst maintaining robust financial and operational discipline.

The group's strong organic growth has been driven by attractive positions in diversified end markets that have structural growth characteristics. The board is confident that exposure to a number of growth sectors will allow the business to make strategic progress even in volatile market conditions. The acquisition of Murat Ticaret also delivered significant incremental revenue, in a largely new end-market. In response to increasing customer demand, the group invested in the further expansion of its global manufacturing base, creating additional capacity to facilitate growth as part of its five-year growth plans which target revenues of $1.2 billion by the end of FY2027.

[1] Underlying operating profit is before adjusting items which are one-off in nature and significant (such as restructuring costs, impairment charges or acquisition-related costs), the amortisation and impairment of acquired intangible assets and share-based payment charges. This trading update is based upon unaudited management accounts information. Forward-looking statements have been made by the Directors in good faith using information available up until the date that they approved this statement. Forward-looking statements should be regarded with caution because of the inherent uncertainties in economic trends and business risks.

Statement of Directors' responsibilities in respect of the Annual Report and Financial Statements

The directors are responsible for preparing the annual report and the financial statements in accordance with UK adopted international accounting standards and applicable law and regulations.

Company law requires the directors to prepare financial statements for each financial year.  Under that law the directors are required to prepare the company financial statements in accordance with UK adopted international accounting standards.  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 the company 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 accounting estimates that are reasonable and prudent;

·       state whether they have been prepared in accordance with UK adopted international accounting standards, subject to any material departures disclosed and explained in the Financial Statements;

·       prepare the Financial Statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. As stated in note 2 below the directors do not consider the company to be a going concern and have prepared the Financial Statements on a basis other than that of a going concern;

·       prepare a directors' report, a strategic report and directors' remuneration report which comply with the requirements of the Companies Act 2006.

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 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 responsible for ensuring that the annual report and accounts, taken as a whole, are fair, balanced, and understandable and provides the information necessary for shareholders to assess the company's performance, business model and strategy.

Website publication

The directors are responsible for ensuring the annual report and the Financial Statements are made available on a website.  Financial Statements are published on the company's website in accordance with legislation in the United Kingdom governing the preparation and dissemination of Financial Statements, which may vary from legislation in other jurisdictions.  The maintenance and integrity of the company's website is the responsibility of the directors.  The directors' responsibility also extends to the ongoing integrity of the Financial Statements contained therein.

Directors' responsibilities pursuant to DTR4

The directors confirm to the best of their knowledge:

·         The Financial Statements have been prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and loss of the company.

·         The annual report includes a fair review of the development and performance of the business and the financial position of the company, together with a description of the principal risks and uncertainties that they face.

For and on behalf of the board

Hugh Aldous

Chairman

5 June 2024

Statement of Profit or Loss and Other Comprehensive Income

for the year ended 29 February 2024

		Year ended 29 February 2024			Year ended 28 February 2023
	Revenue		Capital	Total	Revenue	Capital	Total
	£'000		£'000	£'000	£'000	£'000	£'000
Losses on investments at fair value through profit or loss		-	(5,219)	(5,219)	-	(2,774)	(2,774)
Investment income		664	-	664	1,088	-	1,088
		664	(5,219)	(4,555)	1,088	(2,774)	(1,686)
Investment management fee		(47)	(189)	(236)	(62)	(247)	(309)
Loan interest write off		(451)	-	(451)	(1,196)	-	(1,196)
Other expenses		(884)	-	(884)	(483)	(61)	(544)
		(1,382)	(189)	(1,571)	(1,741)	(308)	(2,049)
Return before taxation		(718)	(5,408)	(6,126)	(653)	(3,082)	(3,735)
Taxation		-	-	-	-	-	-
Return for the year after taxation		(718)	(5,408)	(6,126)	(653)	(3,082)	(3,735)
		Revenue	Capital	Total	Revenue	Capital	Total
		(p)	(p)	(p)	(p)	(p)	(p)
Basic and diluted return per Ordinary Share (note 3)		(1.52)	(11.45)	(12.97)	(1.32)	(6.22)	(7.54)

The total column of this statement represents the Statement of Profit or Loss and 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 29 February 2024

		Share capital	Capital redemption reserve	Special reserve	Capital reserve	Revenue reserve	Total
		£'000	£'000	£'000	£'000	£'000	£'000
At 28 February 2022		56	-	54,474	(12,126)	655	43,059
Return for the year		-	-	-	(3,082)	(653)	(3,735)
Buyback of Ordinary Shares into treasury		-	-	-	(812)	-	(812)
Cancellation of treasury shares		(4)	4	-	-	-	-
Expenses for share buybacks		-	-	-	(8)	-	(8)
Dividends paid		-	-	-	-	(149)	(149)
As at 28 February 2023		52	4	54,474	(16,028)	(147)	38,355
At 28 February 2023		52	4	54,474	(16,028)	(147)	38,355
Return for the year		-	-	-	(5,408)	(718)	(6,126)
Buyback of Ordinary Shares		-	-	-	(1,582)	-	(1,582)
Expenses for share buybacks		-	-	-	(20)	-	(20)
As at 29 February 2024		52	4	54,474	(23,038)	(865)	30,627

Statement of Financial Position

as at 29 February 2024

		29 February 2024	28 February 2023
		£'000	£'000
Non-current assets
Investments held at fair value through profit or loss		-	36,927
		-	36,927
Current assets
Investments held at fair value through profit or loss		20,354	-
Trade and other receivables		63	88
Cash and cash equivalents		10,463	1,505
		30,880	1,593
Total assets		30,880	38,520
Current liabilities
Trade and other payables		(253)	(165)
		(253)	(165)
Total assets less current liabilities		30,627	38,355
Net Assets		30,627	38,355
Represented by:
Share capital		52	52
Capital redemption reserve		4	4
Special reserve		54,474	54,474
Capital reserve		(23,038)	(16,028)
Revenue reserve		(865)	(147)
Equity shareholders' funds		30,627	38,355
Net asset value per Ordinary Share		65.71p	77.99p

Statement of Cash Flows

for the year ended 29 February 2024

		Year ended 29 February 2024	Year ended 28 February  2023
		£'000	£'000
Operating activities
Return before taxation		(6,126)	(3,735)
Losses on investments at fair value through profit or loss		5,219	2,774
UK fixed interest income		(12)	(380)
Receipt of UK fixed interest income		27	-
Impairment expense		451	1,196
Decrease/(increase) in other receivables		25	(28)
Increase/(decrease) in other payables		88	(75)
Purchases of investments		(2,831)	(6,321)
Sales of investments		13,719	5,244
Net cash inflow/(outflow) from operating activities		10,560	(1,325)
Financing activities
Buyback of Ordinary shares into treasury		(1,582)	(812)
Expenses for share buybacks		(20)	(7)
Dividends paid		-	(149)
Net cash outflow from financing activities		(1,602)	(968)
Change in cash and cash equivalents		8,958	(2,293)
Cash and cash equivalents at start of period		1,505	3,798
Cash and cash equivalents at end of period		10,463	1,505
Comprised of:
Cash and cash equivalents		10,463	1,505

Notes to the Financial Statements

for the year ended 29 February 2024

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.    Material 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') in July 2022, 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.

Basis other than going concern

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

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

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

►    A provision for the costs of liquidation of £25,000 has been made and is shown in note 11 on page 78 of the annual report.

Presentation of Statement of Profit or Loss and Other 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 loss 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 2023

Management have assessed all new standards and amendments to standards and interpretations that are effective for annual periods after 1 January 2023 and considered none to have a significant effect on these Financial Statements.

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

The Directors do not expect the adoption of the following amended standards or interpretations to have a significant impact on the Financial Statements of the company in future periods.

►    IAS 7 Disclosures to add disclosure requirements, and 'signposts' within existing disclosure requirements about supplier finance arrangements - effective 1 January 2024

►    IAS 21 The Effects of Changes in Foreign Exchange Rates - effective 1 January 2025

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 Statement of Profit or Loss and Other Comprehensive Income and the Statement of Financial Position. 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 assessment of the valuation of unquoted loan notes by the directors take into account the dependability of the estimated EBITDA for the upcoming financial year. The valuation of the unquoted investment is based successful implementation of management's plan for the business in the next financial year. If the EBITDA estimate is not met, it would have a significant impact on the valuation of the unquoted loan notes.  At the year-end the directors have valued all loan notes at nil other than the loan notes on Really Good Food which is currently in administration and has been valued at £275,000 reflecting the amount expected to be received from the Administrators. The directors consider all loan note investments to be current assets.

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 and unquoted equity investments, redemption premium, 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.

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.

Fixed returns on debt securities are recognised on a time-apportioned basis so as to reflect the effective yield. and recorded in the revenue column of the Statement of Profit or Loss and Other Comprehensive Income.

Where, immediately before recognition is due, it is not considered probable that a return will actually be received the recognition of the return is deferred until the doubt is removed.

Where, subsequent to the recognition of an amount of income, it becomes clear that payment will not be received or the collectability becomes doubtful, an impairment provision to reduce the value of the asset to the recoverable amount is made. The provision in the year of £451,000 on the Real Good Food loan notes is recognised as an expense, rather than as an adjustment of the amount of income originally recognised and is shown separately in the Statement of Profit or Loss and Other Comprehensive Income on page 67.

Dividend's 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 Profit or Loss and Other 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 profit or loss and other 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. Details of transaction costs are given in note 9. 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.

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.

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 made from total distributive reserves and 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 Capital Redemption 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 or loss for the year recognised in the revenue column of the Statement of Profit or Loss and Other 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 29 February 2024				Year ended 28 February 2023
	Net return	Per share			Net return	Per share
	£'000	Pence			£'000	Pence
Revenue return	(718)	(1.52)			(653)	(1.32)
Capital return	(5,408)	(11.45)			(3,082)	(6.22)
Total return	(6,126)	(12.97)			(3,735)	(7.54)
Weighted average number of Ordinary Shares1	47,242,771				49,519,100

¹Excluding treasury shares

4.   Net Asset Value per Ordinary Share

NAV per Ordinary Share is based on net assets at the period end and 46,608,486 (28 February 2023: 49,176,599) Ordinary Shares, being the number of Ordinary Shares in issue excluding treasury shares at the period end.

	29 February 2024				28 February 2023
	NAV per share	NAV attributable			NAV per share	NAV attributable
	Pence	£'000			Pence	£'000
Ordinary Shares:
Basic and diluted	65.71	30,627			77.99	38,355

5.   Principal and emerging 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.

The board identifies risks and mitigating actions to reduce the potential impacts should any of the risks materialise.  The Audit Committee and the board regularly monitor the effective operation of the controls. Risks are updated on an ongoing basis, with new risks added as they are identified. 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.
The price of the company's shares trade at either a discount or premium relative to the underlying NAV of its shares. Shareholders could become dissatisfied with a continuing discount to NAV.	The board actively monitors the company's share price discount to the published NAV and continually engages with the company's corporate broker regarding share trading volumes, comparative data from the company's peer group and significant buyers and sellers. The board look to manage the value through a programme of share buybacks, subject to liquidity and other considerations, whilst seeking to broaden the interest in the company's shares through a series of marketing activities.
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.	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 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.	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 Note 14 to the Financial Statements in the annual report, 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.
Emerging risks
Geopolitical risks
The continuing conflict in Ukraine and the impact of 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.
Interest rate rises and Inflation
The company's investments could be impacted negatively as a result of increasing interest rates and continued high 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 manager and administrator to ensure full compliance.

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 29 February 2024 was

£236,000 (2023: £309,000). The amount outstanding as at 29 February 2024 was £12,000 (2023: £26,000).

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 2023 to 29 February 2024, total fees of £72,500 (2023; £79,000) (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 29 February 2024, the amount outstanding was £3,400.

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 on pages 55 to 58 of the Annual Report. At 29 February 2024, there were no outstanding directors' fees (2023: none).

7.   Non-adjusting events after reporting date

In the period between 29 February 2024 and midday on the date of this report, the following non-adjusting events took place:

►    The company has purchased 963,245 of its own Ordinary Shares, at an average price of 31.57 pence per share, all of which have been cancelled.

►    Following the shareholder vote at the General Meeting on 28 February 2024 the directors proposed a return of capital to shareholders through a tax efficient B share scheme. At a General Meeting held on 3 April 2024 the special resolution to issue the B Shares s did not secure the required approval of shareholders. In the light of this result, and in order to give immediate effect to the plan overwhelmingly supported by shareholders at the 28 February General Meeting to adopt the managed wind-down investment policy and return cash to shareholders, the board decided to make a distribution to shareholders by way of the First Special Dividend of 30 pence per share, equivalent to £13.98 million.

The First Special Dividend was paid on 26 April 2024 to shareholders on the company's register of members at close of business on 12 April 2024. The company's shares ex-dividend date was 11 April 2024.

►    On 3 April 2024 the board announced the following measures to reduce administration costs in line with the reduction in the size of the company as cash proceeds are paid out to shareholders: (i) a reduction of the size of the board, with one director stepping down; and (ii) a reduction of fees paid to each remaining director by £5,000 per annum, both with effect from 1 May 2024. The board is committed, in principle, to further reductions in costs as and when appropriate given the progress of its cash return plan.  

►    The board has also agreed with the investment manager that the investment manager's capital return fee will now be set at 0.5 per cent. of the total value of distributions made during the company's managed wind-down, instead of its former proposed sliding scale. This change will incentivise the investment manager to realise value for shareholders over the whole of the managed wind-down period.

►    On 28 May 2024, the board declared a second special interim dividend of 12 pence per share, equivalent to, in aggregate, £5.5 million (the "Second Special Interim Dividend").

The Second Special Interim Dividend will be paid on 21 June 2024 to shareholders on the company's register of members at close of business on 7 June 2024. The company's shares will go ex-dividend on 6 June 2024.

►    On 30 May 2024 the board announced that the timetable in respect of the recommended offer for FireAngel, one of DSM's investee companies, by Intelligent Safety Electronics Pte. Ltd (the "Offer") had resumed, following the approval of the conditions required by the Secretary of State.  The date by which all conditions in respect of the Offer must either be satisfied or waived is now 27 June 2024. The company intends to return the value of its investment in FireAngel to shareholders as soon as possible and expects to be able to do so by way of a third special interim dividend of at least 7 pence per share, equivalent to, in aggregate, £3.2 million (the "Third Special Interim Dividend"). It is expected that the Third Special Interim Dividend would be paid to shareholders by mid-late July 2024.

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 29 February 2024 but has been extracted from the statutory financial statements for the year ended 29 February 2024 which were approved by the Board of Directors on 5 June 2024 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 2023 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 29 February 2024 will be printed and posted to shareholders shortly. Copies will also be available to the public at the registered office of the company at The Office Suite, Den House, Den Promenade, Teignmouth TQ14 8SY and will be available for download from www.downingstrategic.co.uk

Notes for Editors:

► The company will achieve the investment objective by effecting an orderly realisation of its assets in a manner that seeks to maximise the value received from those assets within a reasonable timescale, having regard to both catalytic corporate events and markets generally. This process might include sales of individual assets or running-off the portfolio in accordance with the existing terms of the assets, or a combination of both.

Enquiries:

James King Cavendish 0207 397 1913

Jean Birrell Downing PR 020 7630 3319

ISCA Administration Services Limited - Company Secretary 01392 487056

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