Half-year Report

RNS Number : 3103V

Downing Strategic Micro-Cap IT PLC

02 November 2017

 

DOWNING STRATEGIC MICRO-CAP INVESTMENT TRUST PLC

('DSM', 'the Trust' or 'the company')

HALF-YEARLY 2017 RESULTS FOR THE PERIOD FROM

17 FEBRUARY TO 31 AUGUST 2017

The directors present the Half-Yearly Financial Report of the company for the period 17 February to 31 August 2017.

Investment objective

The investment objective of Downing Strategic Micro-Cap Investment Trust PLC is to generate capital growth for shareholders over the long term, from a focused portfolio of UK micro-cap companies (those with market capitalisations of under £150 million at the time of investment), targeting a compound return of 15% p.a. over the long term.

FINANCIAL SUMMARY

	31 August 2017
Performance
Net assets (£'000)	53,377
Net asset value per Ordinary Share	96.00p
Mid-market price per Ordinary Share	100.75p
Premium	4.95%
Revenue return per Ordinary Share:	(0.20)p
Capital return per Ordinary Share:	(1.91)p
Total return per Ordinary Share:	(2.11)p
	31 August 2017
	%
Increase in net asset value since admission (9 May 2017)	(4.00)
Increase in share price since admission (9 May 2017)	0.75

Share price performance relative to net asset value from 9 May 2017 to 31 August 2017

http://www.rns-pdf.londonstockexchange.com/rns/3103V_-2017-11-1.pdf

Chairman's statement

In the Prospectus for IPO, your board stated its expectations for the manager's approach in selecting strategic positions in micro-caps, where market inefficiencies had resulted in those companies being undervalued. This approach includes:

·      an investment style more akin to private equity than to typical public market investing;

·      a focus on quality management who "behave as if they are owner-managers of the business and nurture shareholder interests";

·      an entry value at a discount to our investment manager's intrinsic valuation of the investee; and

·      a value-bias style that favours proactive engagement with management.

The investments that the manager seeks to select are companies:

·      driving a strategy that has a foreseeable, defined value catalyst;

·      deploying capital effectively and efficiently with evident valuation of long-term free cash flow; 

·      generating good, sustainable margins;

·      with balance sheets that are robust or that can be made so through restructuring onerous debt to support the funding of growth and acquisitions. 

I am pleased to report that those are exactly the principles that the manager has applied.

At the time of this report, the Trust is 36% invested in five companies, taking a strategic stake in each at a defining moment in its growth. The investments have been made with a demonstrable margin of safety against the manager's expected return and in each case Downing is close to the investee management.

In the investment manager's report, you will find out more about the key investments made and the manager's view of the opportunities in this increasingly under-analysed market. We bring close interest, monitoring and support to the companies we invest in but we do so with a demand for good corporate governance. If lacking, this board supports our manager's actions to improve governance.

To emphasise the importance that we place on governance, we have set out, after the investment manager's report, our expectations of investee companies. We hope all our investments will match these expectations.

The management team

These are early days, but your board is delighted with the management team, led with great vigour by Judith MacKenzie. Without interfering in their work of selection and portfolio management, there is nevertheless a constructive relationship between the board and the manager; we discuss every investment proposal and there is a growing respect from us for the rigour of their work. The manager aims to be fully invested during 2018.

Shares and the capital base

Demand in the market for shares in the Trust has continued. The share price has stayed at a modest premium to NAV, which we believe reflects interest in a good and exceptional management team.

Your board will continue to watch the share price against the NAV. In normal markets, we will aim to keep any emerging discount to a minimum so that, once fully invested, we can see how far we can both grow the capital base to build opportunities, within a still focused portfolio, and maintain liquidity in the company's shares.

Your board is committed to shareholder engagement. To receive regular email news and updates about your trust please visit downing.co.uk/strategic and register.

Hugh Aldous, Chairman, DSM

Investment manager's report

Overview

During the period the Trust performed as expected, given we are still in the early stages of deploying capital into long-term, strategic holdings. The NAV per share decreased by 4.0%. The shares traded consistently at a premium to NAV.

DSM has successfully deployed 36% of the monies raised, which we believe is an encouraging rate of investment. Rather than commenting on the share price performance of our underlying holdings, which are at the beginning of their investment journey, we have outlined our reasons for investing in what we view as quality UK listed micro-cap businesses. In future commentary we will explore the progress of our investments cases and share price performance.

Portfolio As at 31 August 2017

Holding	Market value (£'000)	% of investments#
Real Good Food 6.5% Loan Note 28/06/2020*	4,906	28.01
Redhall Group	3,781	21.59
AdEPT Telecom	3,246	18.53
Gama Aviation	2,325	13.27
Braemar Shipping Services**	2,038	11.63
Real Good Food	1,220	6.97
Total investments	17,516	100.00

All investments are quoted on the Alternative Investment Market ("AIM") unless otherwise stated.

* Unquoted

** Quoted on the Main Market

^# Excludes cash

Redhall Group PLC ('Redhall')

DSM's first investment was in Redhall, the manufacturer of specialist high-integrity products for nuclear, defence, oil and gas, and infrastructure projects. Downing funds have been investors in Redhall since 2015. Our original investment case was predicated on reducing inefficiencies and rolling off loss-making contracts. Management demonstrated their ability to deliver on this and had grown their order book in attractive, high margin engineering segments. More recently, the growth in order book from the likes of Hinckley Point C, and associated execution risk, have led to a requirement for further working capital to deliver these contracts. In June, the Trust participated in a placing and invested £4.5 million in the business to provide the capital to realise this growth.

We believe that Redhall is in a position to win further high-value tenders in nuclear and infrastructure projects around the UK. We believe that it may also present an attractive opportunity to foreign trade buyers seeking exposure to these high-barrier growth sectors. Post period-end, the company announced a delay in one of their larger contracts. We expect that this margin will be realised in the next full-year reporting period and therefore leave our investment case unchanged.

While disappointing in the short term, lumpy contracts are the reality of the sector in which investors are rewarded with visible, high-quality order books and barriers to entry.

Real Good Food PLC ('RGD')

The second investment was RGD, a company which we had been following for over a year. RGD has a number of subsidiaries operating in the bakery sector. Downing client funds hold 10% of the equity in the business and it accounts for 2.3% of DSM. DSM also holds loan notes, the bulk of the debt yields 6.5% and a smaller bridging loan yields 10%. The purpose of the loan notes is to give client funds investor rights and security.

Alongside the loan notes we took a board seat, which has been instrumental in our ability to drive positive change in the business. Prior to investing we believed, alongside the board, that the company would benefit from greater independence on the board. Our board position and the appointments of another new independent director and finance director have helped to enhance governance and we believe has left the company in a better position to deliver returns to shareholders.

Downing's funding, along with follow-on investment from the other two largest shareholders, was to provide expansionary capital expenditure (capex) and working capital to the Hayden's bakery business and the Renshaw icing business. This expansion was on the back of demand from the major multiples for new products. We believe that, with the capex in place, RGD will be in a position to greatly increase revenues and improve profits through operational efficiencies and other cost-reducing measures. We believe that RGD now represents one of the best invested diversified food businesses in the UK. This, along with the domestic and international power of the Renshaw brand, may make it an attractive target for a larger consolidator or conglomerate.

Adept Telecom PLC ('Adept')

Adept was the third investment of DSM. This is also a long-term holding across Downing funds. Adept is one of the UK's leading independent telecommunications providers to the public and private sectors. We have known the management team for seven years and have been impressed with the growth that they have achieved. They have consistently demonstrated their ability to acquire smaller businesses at very attractive multiples. Our investment case is founded on the strength of the management team, the earnings visibility provided through recurring revenues and the opportunity to act as the leading consolidator in a fragmented sector.

While we took positions in Redhall, RGD and Adept through off-market block trades and/or placings, we had to work harder to achieve the Trust's holdings in Gama Aviation and Braemar Shipping. We believe that this is one of the strengths of our non-centralised dealing function, allowing us to use our close relationships with management and brokers to engineer liquidity into (and out of) our investments.

Gama Aviation PLC ('Gama')

Gama is a leading global business aviation service provider. Management has grown the business from one aircraft under management to over 250 aircraft, both organically and through selective acquisitions over 34 years. The attraction to Gama's operational model is the high degree of visibility of gross profits - over 70% are contracted - and we believe that a further 20% could be deemed recurring where owners have used Gama's services for many years. Under normal conditions, the business is light on capex and working capital, which facilitates the conversion of profits to cash. Overlaying these attractive attributes are regulatory pressures which are crowding out smaller fleet operators who cannot afford to comply with increasingly stringent requirements from regional aviation authorities. This highly fragmented market is, we believe, therefore ripe for consolidation by the larger players, of which Gama is one of the top five by fleet size. We were also drawn to the highly-aligned management team who own over 30% of the equity.

Braemar Shipping Services PLC ('BMS')

BMS is a leading international provider of knowledge and skills-based services to the shipping, marine, energy, offshore and insurance industries. It has three operational divisions; shipbroking, technical and logistics. BMS is committed to developing a portfolio of broking and advisory businesses within its market sectors. Downing client funds first invested in Braemar in 2013, therefore we know the management team well. The investment case is simple; the business benefits from the long-term upward trend in seaborne trade, where BMS is currently riding a wave.

The technical services division has undergone restructuring and we believe that there will be a benefit to earnings from an increased focus on improving controls and systems. Downing client funds own 5.1% of the equity in BMS and it represents 3.8% of DSM.

Value process

Our investment decisions are driven by value. Our view is that value tends to outperform over the long term, principally because during downturns, a value approach preserves capital for growth in more bullish times. We also have more affinity to the concepts of value investing rather than growth, or indeed, momentum, which isn't driven by fundamentals at all.

Downing has a pedigree in small-cap investing. Within that universe we prefer micro-cap companies as they can offer investors unique opportunities to take influential, strategic stakes in small and growing businesses at potentially attractive valuations. We believe that the primary drivers to these valuations is that very small companies lack sell side coverage and institutional attention. Our view is that for the diligent and well-resourced fund manager, it is a buyers' market.

Data from the Numis Smaller Companies Index ('NSCI') confirms our views. Generally, value outperforms growth and small companies outperform large companies. The small-cap value investor should be in a good position to outperform other strategies over the long term and through cycles. Given that we are also long term investors, this suits our process well. Since the inception of the NSCI, a small and value led investor would have outperformed large value by 180bps, large growth by 550bps and small growth by 650bps per annum. The compounding effect of this outperformance is significant - at the end of 11 years, small value would have twice as much capital as small growth.

Outlook and pipeline

Our outlook for UK companies is largely influenced by what we hear from the management teams that we meet. Notwithstanding the potential adverse impact of sterling devaluation and a general election, we believe that most are cautiously optimistic.

A useful source of gauging wider sentiment that we use is the Deloitte CFO Survey, published quarterly. The Q3 2017 issue highlights increasing optimism versus earlier in the year. Adverse impacts from Brexit are still the greatest concern and this is expected to curtail investment plans for the time being until the picture becomes clearer. Weak domestic demand is cited as the second greatest cause for concern while an interest rate hike is the third - 92% of CFOs surveyed expect base rates in one year to be higher than today's 0.25%.

Companies with high exposure to the discretionary consumer have had to experience the combined impact of weaker sterling increasing their purchasing costs, higher inflation and low to no wage growth reducing spending power. This has squeezed margins and reduced profitability.

However, there are promising pockets of growth particularly with British manufacturing activity, which is growing at its fastest pace in three years. The Confederation of British Industry's measure of export order books was its highest in almost 30 years, fuelled by sterling weakness and economic growth elsewhere in the world.

These macro views aside, we believe that we have a strong pipeline of potential investments. Our deal flow comes from two directions. The first is from our existing holdings across other Downing client funds. In these holdings we have long and established relationships with management teams. The second is from our extensive network of industry contacts. We are therefore not solely dependent on screening tools where we believe that there is a lack of integrity of data, particularly in smaller companies, which can lead to missed opportunities.

The diversity of our investment team and our individual interests ensures that we challenge our investment thesis on every investment that comes through our process.

Judith MacKenzie, Partner and Head of Public Equity, Downing LLP

Our expectations of investee companies

When we invest in companies we expect, in return, rigorous and effective corporate governance; directors who understand their duties and who are familiar with The General Duties section of the Companies Act 2006 and The UK Corporate Governance Code from the Financial Reporting Council in 2016.

·     Directors' responsibilities: in our view directors' responsibilities are demanding. They stand accountable for the culture, foresight and success of the company, to which they should apply the best of their knowledge and ability to enquire and act in the interests of the company as a whole for its current and future shareholders. A company's success depends on investment in its long-term, sustainable advantage as well as its financial strength and profitability. A company's return on investment underpins its shareholders' returns.

·     Constructive challenge: we look for alert, questioning, competent boards that constructively challenge management, help develop strategy and long-term objectives, monitor performance, ensure the build-up of necessary assets, skills and capable management and lead in setting a culture of integrity. We will take action if we do not find that level of competence.

In particular we would expect to find:

·     Leadership: every investee company should be headed by an independent Chairman leading an effective, questioning, challenging board that sees itself as collectively responsible for the long-term success of the company. We will encourage that if it is missing. We will say so publicly if we do not think the Chairman is up to the job.

·     Effectiveness: the board and its committees should be engaged with the business and have the skills, experience, independence and knowledge to enable them to challenge constructively, and fully undertake their duties. It should be clear to investors why each director is on the board, what skills and contribution that director is there to provide and all directors and senior management should regularly update and refresh their skills and knowledge. There should be a rigorous process for the appointment of new directors.

The Chairman should lead the board, create the conditions for overall board and individual director effectiveness, ensure that the board gets information in a form and of a quality sufficient to discharge its duties and should undertake a formal annual evaluation of the board and each director's performance.

·     Accountability: We expect all directors to appreciate that accountability for culture, integrity, the 'tone from the top', the creation of value, of corporate and shareholder value, and the company's success lies with them.

It is with those expectations of the boards of directors that we invest.

Condensed statement of comprehensive income (unaudited)

For the period 17 February 2017 (date of incorporation) to 31 August 2017

	Revenue (£'000)	Capital (£'000)	Total (£'000)
Losses on investments at fair value through profit or loss	-	(922)	(922)
Investment income (note 3)	78	-	78
	78	(922)	(844)
Investment management fee (note 4)	(35)	(142)	(177)
Other expenses	(153)	-	(153)
	(188)	(142)	(330)
Net return before taxation	(110)	(1,064)	(1,174)
Taxation	-	-	-
Total comprehensive income /(expense) for the period	(110)	(1,064)	(1,174)
	Revenue (p)	Capital (p)	Total (p)
Gain/(loss) per Ordinary Share (note 5)	(0.20)	(1.91)	(2.11)

The total column of this statement represents the Statement of Comprehensive Income of the company prepared in accordance with International Financial Reporting Standards ('IFRS') as adopted by the European Union.

The supplementary revenue and capital return columns are prepared under guidance published by the Association of Investment Companies ('AIC').

All items in the above statement derive from continuing operations. No operations were acquired or discontinued during the period.

Condensed statement of changes in equity (unaudited)

For the period 17 February 2017 (date of incorporation) to 31 August 2017

	Share capital	Share premium account	Special reserve	Capital reserve	Revenue reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
For the period ended 31 August 2017
At 17 February 2017	-	-		-	-	-
Total comprehensive income/(expense) for the period	-	-		(1,064)	(110)	(1,174)
Issue of Ordinary Shares	56	55,544		-	-	55,600
Expenses of share issue	-	(1,049)		-	-	(1,049)
Cancellation of share premium account	-	(54,495)	54,495			-
Dividends paid (note 6)	-	-		-	-	-
At 31 August 2017	56	-	54,495	(1,064)	(110)	53,377

Condensed statement of financial position (unaudited)

As at 31 August 2017

	2017 £'000
Non-current assets
Investments held at fair value through profit or loss	17,516
	17,516
Current assets
Trade and other receivables	64
Cash and cash equivalents	35,937
	36,001
Total assets	53,517
Current liabilities
Trade and other payables	(140)
	(140)
Total assets less current liabilities	53,377
Net assets	53,377
Represented by:
Share capital (note 7)	56
Special Reserve (note 8)	54,495
Capital reserve	(1,064)
Revenue reserves	(110)
Equity shareholders' funds	53,377
Net asset value per Ordinary Share (note 9)	96.00p

The notes form an integral part of these financial statements.

Hugh Aldous, Chairman

31 October 2017

Condensed statement of cash flow (unaudited)

For the period 17 February 2017 (date of incorporation) to 31 August 2017

	£'000
Operating activities
Net return before tax	(1,174)
Losses on investments at fair value through profit or loss	922
Increase in other receivables	(64)
Increase in other payables	140
Purchases of investments	(18,438)
Sales of investments	-
Net cash outflow from operating activities	(18,614)
Financing activities
Issue of Ordinary Shares	55,600
Expenses of Ordinary Share issue	(1,049)
Issue of Management Shares	50
Cancellation of Management Shares	(50)
Dividends paid	-
Net cash inflow from financing activities	54,551
Change in cash and cash equivalents	35,937
Cash and cash equivalents at start of period	-
Cash and cash equivalents at end of period	35,937
Comprise of:
Cash and cash equivalents	35,937

Notes to the condensed financial statements as at 31 August 2017

1.       General information

Downing Strategic Micro-Cap Investment Trust PLC was incorporated in England and Wales on 17 February 2017 with registered number 10626295, as a closed-ended investment company.

The company commenced its operations on 3 May 2017. The company intends to carry on business as an investment trust within the meaning of Chapter 4 of Part 24 of the Corporation Tax Act 2010.

The company's shares were admitted to the Official List of the UK Listing Authority with a premium listing on the 9 May 2017. On the same day, trading of the Ordinary Shares commenced on the London Stock Exchange.

The financial information contained in this Interim Report does not constitute statutory financial statements as defined in Section 434 of the Companies Act 2006.

This report has not been reviewed by the company's auditors.

2.       Accounting policies

The principal accounting policies followed by the company are set out below:

Basis of accounting

This report has been prepared in compliance with International Accounting Standard 34 'Interim Financial Reporting' as adopted by the European Union.

The annual financial statements of the company will be prepared in accordance with the International Financial Reporting Standards ('IFRS') as adopted by the European Union. These comprise standards and interpretations approved by the International Accounting Standards Board ('IASB'), together with interpretations of the International Accounting Standards and Standing Interpretations Committee ('IASC') that remain in effect, and to the extent that they have been adopted by the European Union.

These financial statements are presented in sterling (£) rounded to the nearest thousand. They have been prepared on a going concern basis under the historical cost convention, except for the measurement at fair value of investments classified as fair value through profit or loss. 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 (dated January 2017), is consistent with the requirements of IFRS, the Directors have sought to prepare the financial statements on a consistent basis compliant with the recommendations of the SORP.

Presentation of Statement of Comprehensive Income

In order to reflect the activities of an investment trust company 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 net revenue 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.

Critical accounting judgements and uses of estimation

The preparation of financial statements in conformity with IFRS 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. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future period if the revision affects both current and future periods. There were no significant accounting estimates or significant judgements in the current period.

Investments held at fair value

All investments held by the company are recorded at 'fair value through profit or loss'. Investments are initially recognised at cost, being the fair value of the consideration given. After initial recognition, investments are measured at fair value, with unrealised gains and losses on investments and impairment of 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 cost.

For investments actively traded in organised financial markets, fair value is generally determined by 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 require delivery 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 ('IPEVC') Valuation 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.

·     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 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 the sources of the dividend on a case-by-case basis.

When the company elects to receive scrip dividends in the form of additional shares rather than in cash, the amount of the cash dividend forgone is recognised as income. Any excess in the value of the cash dividend will be recognised in the capital column.

Other investment income and interest receivable are included in the financial statements on an accruals basis.

Expenses

All expenses are accounted for on an accruals basis. Expenses are allocated in the statement of comprehensive income as revenue with the exception of the investment management fee which has been allocated 80% to capital and 20% to revenue, and:.   

·     expenses which are incidental to the acquisition of an investment are included within the costs of the investment; and

·     expenses which are incidental to the disposal of an investment are deducted from the disposal proceeds of the investment.

Taxation

The charge for taxation is based on net revenue for the year. Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the date of the statement of financial position. Investment trusts which have approval under section 1158 of the Corporation Tax Act 2010 are not liable for taxation on capital gains.

Cash and cash equivalents

Cash in hand and in banks and short-term deposits which are held to maturity are carried at cost. 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.

Segmental reporting

The Directors are of the opinion that the company is engaged in a single segment of business, being investment business. DSM only invests in companies listed in the UK.

Capital reserve

Capital reserve 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 net revenue recognised in the revenue column of the Statement of Comprehensive Income.

3.       Income

	17 February 2017 to 31 August 2017
Income from listed investments	£'000
UK dividend income	22
UK fixed interest income	56
	78

4.       Investment management fee

In respect of its services provided under the Management Agreement, the investment manager is entitled to receive a management fee payable monthly in arrears calculated at the rate of 1/12th of 1% of the market capitalisation as at the relevant calculation date.

The investment manager has agreed that, for so long as it remains the company's investment manager, it will rebate such part of any management fee payable to it so as to help the company maintain an ongoing charges ratio of 2% or lower.

At 31 August 2017, an amount of £94,000 was outstanding and due to Downing LLP in respect of management fees.

		17 February 2017 to 31 August 2017
		Revenue	Capital	Total
		£'000	£'000	£'000
Investment management fee		35	142	177

5.       Gain/ (loss) per Ordinary Share

17 February 2017 to 31 August 2017

	Net return £'000	Per share pence
Revenue return	(110)	(0.20)
Capital return	(1,064)	(1.91)
Total return	(1,174)	(2.11)
Weighted average number of Ordinary Shares		55,600,002

6.       Dividends

The board has decided that no interim dividend will be paid.

7.       Called-up share capital

The company was incorporated on 17 February 2017 with an issued share capital of £50,002 represented by 50,000 Management Shares of £1.00 each and two Ordinary Shares of £0.001. These Management Shares were redeemed immediately following admission of the Ordinary Shares on the 9 May 2017 out of the proceeds of this issue.

On 9 May 2017, the company issued 55.6 million Ordinary Shares £0.001 at £1.00 per share in a placing, offer for subscription and intermediaries offer, raising £54.5 million after expenses.

As at 31 August 2017 there were 56,600,002 Ordinary Shares in issue.

8.       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.

9.       Net asset value per Ordinary Share

NAV per Ordinary Share is based on net assets at the period end and 56,600,002 Ordinary Shares, being the number of Ordinary Shares in issue at the period end.

31 August 2017	NAV per	NAV
	share	attributable
	pence	£'000
Ordinary Shares: Basic and diluted	96.00	53,377,000

10.     Fair value hierarchy

Financial assets and financial liabilities of the company are carried in the balance sheet at their fair value. The fair value is the amount at which the asset could be sold or the liability transferred in a current transaction between market participants, other than a forced or liquidation sale. For investments actively traded in organised financial markets, fair value is generally determined by reference to Stock Exchange quoted market bid prices and Stock Exchange Electronic Trading Services ('SETS') at last trade price at the balance sheet date, without adjustment for transaction costs necessary to realise the asset.

The company measures fair values using the following hierarchy that reflects the significance of the inputs used in making the measurements. Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant assets as follows:

Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities.

An active market is a market in which transactions for the asset or liability occur with sufficient frequency and volume on an ongoing basis such that quoted prices reflect prices at which an orderly transaction would take place between market participants at the measurement date. Quoted prices provided by external pricing services, brokers and vendors are included in Level 1, if they reflect actual and regularly occurring market transactions on an arm's length basis.

Level 2 inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices). Level 2 inputs include the following:

·     quoted prices for similar (i.e. not identical) assets in active markets;

·     quoted prices for identical or similar assets or liabilities in markets that are not active. Characteristics of an inactive market include a significant decline in the volume and level of trading activity, the available prices vary significantly over time or among market participants or the prices are not current;

·     inputs other than quoted prices that are observable for the asset (for example, interest rates and yield curves observable at commonly quoted intervals); and

·     inputs that are derived principally from, or corroborated by, observable market data by correlation or other means (market-corroborated inputs).

Level 3 inputs for the asset or liability that are not based on observable market data (unobservable inputs).

31 August 2017	Level 1	Level 2	Level 3	Total
	£'000	£'000	£'000	£'000
Quoted on London Stock Exchange	2,038	-	-	2,038
Quoted on AIM	10,572	-	-	10,572
Unquoted Loan notes	-	-	4,906	4,906
	12,610	-	4,906	17,516

11.     Going concern

The Directors have reviewed the company's financial resources at the period end and concluded that the company is well placed to manage its business risks.

The Directors confirm that they are satisfied that the company has adequate resources to continue to operate for the foreseeable future. For this reason, the Directors believe that the company continues to be a going concern and that it is appropriate to apply the going concern basis in preparing the financial statements.

12.     Related parties

Downing LLP have been appointed as 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 31 August 2017 was £117,000. The amount outstanding at 31 August 2017 was £94,000.

Interim management report

The directors are required to provide an Interim Management Report in accordance with the UK Listing Authority's Disclosure and Transparency Rules 4.2.3 to 4.2.11. They consider that the Chairman's Statement and the Investment Manager's Report on of this Interim report, the following statement on related party transactions and the Directors' Responsibility Statement below together constitute the Interim Management Report for the company for the period ending 31 August 2017.

The directors confirm that the company undertook no related party transactions over the period to 31 August 2017 and that there have been no changes to the related party disclosures set out in the Prospectus.

The directors do not expect the principal risks and uncertainties as described in detail within the Prospectus to change during the remaining six months of the financial year. The company's auditor, Grant Thornton UK LLP, has not reviewed the Interim Report for the period ending 31 August 2017.

Directors' responsibility statement

The directors listed at the back of this Interim Report confirm that to the best of their knowledge:

a) the condensed set of Financial Statements, which has been prepared in compliance with the IAS 34 'Interim Financial Reporting' and gives a true and fair view of the assets, liabilities, financial position and profit of the company for the period ended 31 August 2017;

b)   the Interim Management Report includes a fair review, as required by Disclosure and Transparency Rule 4.2.7 R, of important events that have occurred during the first six months of the financial year, their impact on the condensed set of financial statements and a description of the principal risks and uncertainties for the remaining six months of the financial year;

c)    the Interim Management Report includes a fair review of the information concerning related party transactions as required by Disclosure and Transparency Rule 4.2.8 R; and

d)   the Interim Report was approved by the board on 31 October 2017 and the above Responsibility Statement was signed on its behalf by:

Hugh Aldous, Chairman

31 October 2017

Shareholder information

Financial calendar

Company year end: 28 February

Annual results announced: May

Annual general meeting: June

Company half-year end: 31 August

Half-yearly results announced: November

Share price and NAV

The company's Ordinary Shares are listed on the main market of the London Stock Exchange. The market price of these shares can be found in the London Stock Exchange Daily Official List and in the Financial Times. The company's NAV is published daily.

Share dealing

Shares can be traded through your usual stockbroker.

Website

Your board is committed to shareholder engagement. To receive regular email news and updates about your trust please visit downing.co.uk/strategic scroll to the bottom and click on 'Sign up'.

Registrar enquiries

The register for the Ordinary Shares is maintained by Computershare Investor Services PLC. In the event of queries regarding your holding, please contact the registrar on 0370 702 0000. Changes of name and/or address must be notified in writing to the registrar, whose address is shown overleaf.

Company information

Downing Strategic Micro-cap Investment Trust PLC is an investment company as defined under section 833 of the Companies Act 2006 and a member for the Association of Investment Companies.

Country of incorporation

England

Company Number

10626295

Registered office

Springfield Lodge, Colchester Road, Chelmsford, Essex, CM2 5PW

DIRECTORS & ADVISORS

Directors		Investment manager
Hugh Aldous (Chairman)		Downing LLP
Andrew Griffiths		6th Floor
Diana Hunter		St Magnus House
Stephen Yapp		3 Lower Thames Street
		London
		EC3R 6HD, United Kingdom
Company secretary & administrator		Registrar
Maitland Administration Services Limited		Computershare Investor Services PLC
Springfield Lodge		The Pavilions
Colchester Road		Bridgwater Road
Chelmsford		Bristol
Essex		BS99 6ZZ
CM2 5PW, United Kingdom		United Kingdom
Telephone: [phone]		Telephone: [phone]
Solicitor		Custodian
Dentons UKMEA  LLP		The Northern Trust Company
One Fleet Place		50 Bank Street
London		Canary Wharf
EC4M 7WS		London
United Kingdom		E14 5NT
		United Kingdom
Broker		Auditor
Stockdale Securities Limited		Grant Thornton UK LLP
Beaufort House		30 Finsbury Square
15 St. Botolph Street		London
London		EC2P 2YU
EC3A 7BB		United Kingdom
United Kingdom

A copy of the company's Interim Financial Report for the period from 17 February to 31 August 2017 will shortly be available to view and download from the company's website. Neither the contents of this website nor the contents of any website accessible from hyperlinks on this website (or any other website) is incorporated into or forms part of this announcement.

Printed copies of the Report will be sent to shareholders shortly. Additional copies may be obtained from the company secretary.

END

 

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