DSM: Final Results

*Downing Strategic Micro-Cap Investment Trust plc*
*LEI Code: 213800QMYPUW4POFFX69*
*9 May 2023*
*Final Results *

The Directors of Downing Strategic Micro-Cap Investment Trust plc announce the company's results for the year ended 28 February 2023.

*Key points*

· 8.7% decrease in NAV per share and 9.7% decrease in the share price, compared to a 17.4% decrease in the FTSE AIM All-Share TR index over the 12 months to 28 February 2023, driven by increasing negative sentiment towards UK smaller companies given the macro-economic headwinds.

· Focused portfolio of actively managed investments with exciting catalysts in play, which should prove reliable in volatile markets.

· Most of the investments have progressed through the ‘J curve’ and are now in either late-stage turnaround or value realisation phase.

· The majority of investee companies are well-financed, and resilient in the face of the macro headwinds.

· c.£1.5 million of cash to deploy as at 28 February 2023 and a strong list of potential new investments which will be executed during the right conditions and at attractive valuations.

· Optionality of a liquidity event in May 2024.

· Improving market conditions favour the Company’s active, value style.
*Judith MacKenzie, the lead manager, said*
“Despite what we think will be volatile markets over the coming 12 months, we believe the catalysts put in place
by management within this portfolio should provide non-index correlated returns, with value creation playing out
in a maturing portfolio. More generally, we think the focus of the market is likely to play to DSM’s favour. Higher
inflation isn’t great for larger monolithic companies but favours smaller companies that can grow faster than
inflation. As the cost of capital increases, there will be investor focus on real assets and real earnings (cash) –
which is a feature of the DSM portfolio where the majority of positions hold cash on the balance sheet. Capital
allocation, buybacks and self-help are features of the DSM portfolio, as is the focus on organic growth versus
M&A. We believe the market headwinds could in fact be DSM tailwinds once combined with the strategic
catalysts playing out in the portfolio.”

Financial highlights     *28 February* *28 February* *Change*
*Assets* *202**3* *202**2* *%*
Net assets (£’000) *38,355* 43,059 (10.92%)
Net asset value (‘NAV’) per Ordinary Share *77.99**p* 85.43p (8.71%)
Mid-market price per Ordinary Share *65.70**p* 72.75p (9.69%)
Discount *15.76**%* 14.84%         *Year ended* *Year ended*   *28 February* *28 February*  
*Revenue* *202**3* *202**2*  
Revenue return per Ordinary Share *(1.32**p**)* 0.42p  
Capital return per Ordinary Share *(6.22**p**)* 4.29p  
Total return per Ordinary Share *(7.54**p**)* 4.71p  

*Chairman’s Statement*
*Overview*
Looking back over 2022, it was a difficult year for almost all markets and portfolios, marked by steep declines for small-cap and micro-cap investing entities. Nevertheless, even though ending 8.7% down over the year, DSM outperformed the AIM index comfortably and has eventually beaten the FTSE Small Cap. That follows last year’s performance when the company’s NAV was up 5.3% compared to the FTSE AIM All-Share’s decline of 21%. 2023 is proving almost impossible to assess as central banks tussle to bring down inflation, the IMF sees no growth at all for the UK and inflation continues to dictate interest rates. Markets have been largely inactive and depressed. The worst was through the summer and autumn of last year and companies had to be resilient and determinedly managed, not highly indebted, to cope with that economic environment.

Your company’s portfolio demonstrated that resilience and during 2023 to date DSM has been a good performer amongst micro-cap investment trusts with a 10% increase in NAV.

*Portfolio performance*
Although NAV per share declined in the financial year, from 85.43p to 77.99p, that better than most investment company comparators. More to the point, the constituents of the portfolio remained largely strong and adequately financed. Its constituent companies have generally sorted themselves. There has already been successful M&A activity within the portfolio since the year end. The Manager’s Report will take you through the prospect of further advantageous realisations.

Something like half of DSM’s portfolio is ripe to be acquired or otherwise realised. DSM has consistently pointed out that its portfolio is at carried values that are something like 40% to 50% below market analysts’ consensus values. In the first quarter of this year, one investment has been bought by Macquarie at a premium of over 70% to its carrying value. We will just have to see what interest develops in the rest.

*Dividend*
In the past, we have usually paid a small dividend in line with the Investment Trust regulations (0.3p per share in 2022) when we have generated a revenue surplus for the year. This year we have taken a cautious view on loan stock interest, deferring recognition until it is paid.  As a result, there is no revenue surplus showing on the Income Statement and consequently there will be no small year-end dividend.

*Shareholders’ interests*
Your board is well aware of the share price discount and consistently tries to ameliorate unnecessary volatility in the share price. We have been constrained in efforts from time to time: once, at the back end of last year, when inside information stopped any discount management, and once at the beginning of this year when an unusual technical issue did the same. So, the discount has rather wandered between 20% and 15%. We have been modestly buying back of late whenever markets are stable. At the time of writing, the discount is 15.9%.

On 9 January 2023 we re-iterated our cash redemption offer in a regulatory announcement. Before issuing that announcement, we talked to all our largest shareholders. Our published intentions met their interests. That January announcement discusses the board’s steps ahead including its policy on discount management, the cash redemption offer and the varied outcomes that might follow from a strategic review if the cash offer is widely taken up. Those assertions make for an attractive potential return in these worrisome times.

Even so, communicating with the wider body of shareholders and potential investors is not easy. Commentators and analysts do not have the time. Reports and accounts are too long (ours is 100-odd pages). Thousands of shareholdings are held in nominee names via platforms. To try to overcome some of those problems, we embarked on an extensive exercise using s793 of the Companies Act to penetrate the holdings in nominees. We received a response of about 10% and we were told that was good! Our managers ran several webinars and to the latest we received a couple of dozen responses, all of which were supportive and positive. I continue to contact the larger shareholders two or three times a year, which is apparently unusual for chairmen.

*Provision of information to shareholders*
The board and a team at Downing have been developing a new DSM website from which shareholders and potential investors can navigate across sources of information set out for them including investor letters, analysts’ reports, DSM’s performance and its portfolio. The link to the new website is:

www.downingstrategic.co.uk

We press on to try to obtain more interested parties to register their interest so we can keep you up to date with our communications.

*Governance*
Our own governance
As in all years, the board undertakes an extensive appraisal of itself and the managers (and they of us, as a matter of interest) which is a process of continuous improvement that works well.

More widely
High quality corporate governance and clarity of objectives support shareholder value through constructively critical executive oversight. Boards of directors are not there simply to feel comfortable. Directors are the critically important stewards of their companies. The buck does stop with them, whether that is the board of a large bank or the vitally important board steering and monitoring a small AIM business. The failings of boards are all too tiresome as well as economically damaging. A DSM principle is to be constructively determined in aiming for effective boards.

*Forward view*
Across a range of indicators, financial conditions are now very tight. That suggests more economic difficulties for the US and Europe and continuing concern amongst investors about their cash holdings and investments. If in addition UK inflation becomes entrenched, the cost to the economy and society of dealing with that will be tough. Unwinding will expose the consequences of past lack of investment and just how many things are now going to be more difficult if money is no longer cheap.

Your board can take a view on whether businesses have clear objectives whilst the managers assess management, direction, and balance sheets. Most of DSM’s portfolio has proved to be resilient and comparatively cheap. Much of its management has been assessed and improved. As to the UK, slowly, all too slowly, its leadership is, maybe, learning; learning politically, in its establishment and its governance that poor management leads to poor returns and comparative decline whilst, sadly, its leaders tackle stagnation and inflation through a playbook of responses. In the meantime, your portfolio should do much better than that, as it has done in recent years. It is a portfolio for the future of the more determined UK.

As to DSM’s managers – the team are one of the few who have real determination to change, improve and inject catalytic transformation into their investments. DSM’s portfolio is a portfolio for change and for a hopefully recovering country.

Thanks go to the board and managers through a difficult year for markets but another year of progress for DSM.

*AGM*
The AGM will be at 12:00 pm on 6 July 2023 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 dsmagm@downing.co.uk so that the Registrars have your details. The notice of the AGM is set out within the Annual Report with notes in respect of special business to be proposed at the meeting. We encourage shareholders to submit their proxy votes in advance of the deadline of 4 July 2023.

In addition to the AGM, the Company is also planning to issue a circular shortly to complete the resolution of the technical matter regarding the company’s share capital which was addressed earlier in the year.

Hugh Aldous
*Chairman*

5 May 2023

Investment Manager’s Report
Hunting Value, Enabling Transformation
As we have written about many times before - strategic investing takes time, requires catalysts to be exercised, and outcomes tend not to be correlated to wider markets. Negative sentiment has not been the friend of smaller UK companies over the last two years. This has made it even more important for the DSM philosophy and style to be adhered to. We believe that the coming months and years could lend themselves to our style of stock-picking, value orientated investing, as the absence of ‘free money’ and the importance of cash flows returns to investors’ minds.

DSM builds and helps realise value in UK small companies. DSM is focused, long term, and the managers unlock value by executing on specific catalysts driven by company management. We are able to do this by concentrating on a focused portfolio (12-18 positions) and taking between 3-25% of the underlying equity, awarding us a seat at the table.

We focus on companies under £150m market capitalisations as they tend to be overlooked by investors, therefore providing pricing anomalies. We are engaged investors. We like investing in companies which, whilst solid, might be underperforming their potential and are overlooked by the market. We invest where we see the opportunity for constructive corporate engagement to unlock improved sustainable returns for all stakeholders.

This style is likely to lead to periods of NAV per share performance that is quite different to the wider market. Out of the 70 months of DSM’s life for instance, the performance has been 1st or 2nd quartile for over 30 months, whilst 4th quartile for 21. We realise there is still significant ground to make up from the early years of the Company. However, we think that recent performance should allow the current and potential investor to understand the journey of our underlying portfolio, and how it is reaching maturity with some significant catalysts playing out within it. We highlight these later in the report.

Since inception, we have undertaken a multitude of constructive engagements, these include board improvements, engaging on operational improvements, M&A, disposals, and helping to guide strategic direction. More specifically, in the last 12 months we have engaged with management teams in the following capacities (this list is a sample and just an example of some of what goes on behind the scenes):

· AdEPT Technology Group, invested in 2020 when revenues were £34m and EBITDA £7.8m. Based on the last full year accounts, revenues were £68m and EBITDA £11.9m. We worked with management and other shareholders to deliver a trade exit during 2022/23. In Feb 2023 the company achieved a successful exit to WaveNet (a Macquarie backed company) at a 75% premium to our holding value pre- announcement.

· New Chairman at Synectics. Succession and appropriate handover period. DSM managers were involved in interview process and selection.

· Attended DigitalBox board meetings in a monitoring capacity.

· Engaged with a number of investees on next steps and strategic realisations and approaches both for exit and M&A.

· Engaged with new position Journeo and its shareholders regarding the appointment of a new NED.

· Catalysed new FD appointment at Norman Broadbent.

· Continued active engagement in a non-executive capacity at Real Good Food.
We know that constructive corporate engagement can unlock value because we can see the results in our portfolio, (see tables below for an illustration of the catalysts in play to date, and where we believe value will be found in our Top 10 positions).

Good ESG practice has always been core to the DSM investment ethos. We probably didn’t realise how well we were doing it. We have now become more diligent in ensuring accurate reporting of ESG credentials within the portfolio, and we include some key metrics below.

Over the period, we have conducted 24 engagements with 13 companies on various ESG issues such as board independence, climate change and ESG disclosures. Four of the engagements are resolved, while the rest are ongoing. All of this stewardship activity is logged in an Engagement Tracker to monitor the companies’ progress and performance, as well as manage escalations. We voted on 160 shareholder resolutions, whereby 9% of votes were against management recommendations. All of the votes against management were due to changes in capital structure.

A summary of our voting at General Meetings for the year is below (unless otherwise stated all meetings are Annual General Meetings):


*Meeting date* *Number *
*of *
*resolutions* *Management
**recommendation* *Our *
*votes*

*Rationale *
*for decision*
Synectics plc 20/04/2022 10 For all For all  
Centaur Media plc 11/05/2022 17 For all For all
(excl. 14 & 15) Against pre-emption rights waiver
Equals Group plc 17/05/2022 4 For all For all
(excl. 4) Against pre-emption rights waiver
Digitalbox plc 16/05/2022 11 For all For all  
National World plc 11/07/2022 13 For all For all  
Flowtech Fluidpower plc 01/06/2022 13 For all For all
(excl. 12)  
Venture Life Group plc 20/06/2022 7 For all For all
(excl. 5 & 6)  
Fireangel Safety Technology plc 21/06/2022 9 For all For all  
Norman Broadbent plc 23/06/2022 9 For all For all  
Volex plc 19/08/2022 12 For all For all
(excl. 11 & 12)  
Adept Technology Group plc 20/09/2022 9 For all For all
(excl. 7) Against pre-emption rights waiver
Hargreaves Services plc 27/10/2022 10 For all For all
(excl. 10 & 11)  
Real Good Food plc 27/10/2022 7 For all For all  
Theworks.co.uk plc 27/10/2022 14   For all  
Ramsdens Holdings plc 27/02/2023 12 For all For all  

We decided not to ‘outsource’ ESG, as this is an important part of our diligence and monitoring process. We as managers need to be accountable. Therefore, we have created our own ‘scorecard’ for companies, which considers that one-size-does not fit all. We are pragmatic but lack patience where we see behaviours that are not acceptable socially, corporately, or environmentally. Often, we are engaging with our investees on how to improve their reporting and disclosures.

The added benefit of our integrated approach is that an investee that reports well on all matters ESG should pique the attention of new shareholders, drive more efficient returns on equity, and over time achieve a better rating.

*Performance and **p**ortfolio activity*
The year ending February 2023 represented a depressing and volatile period for equity investors, particularly those investing in small UK businesses. The macro issues are well known and don’t need reiteration here. We believe that the time where cheap money was available has gone, inflation hasn’t stabilised and hence the ‘tool’ of interest rates to balance the economy hasn’t played out yet. Hence, this is a good time for a value orientated stock-picker in an overlooked market. The UK market now looks cheaper on relative terms than it has done for most of our careers.

Below we include a slide from our recent investor presentation which summarises the outlook and reporting from the top 10 positions in the portfolio over the reporting year, and our expectations for 2023.

*Company* *% of NAV* *FY22 reporting* *Outlook for FY23*  
Real Good Food plc 10.5% Resilient trading through Covid. Headwinds of cost inflation hit in 2022 Costs being passed through. FY March 24 forecast of £2-4m EBITDA
Centaur Media plc 9.1% Impressive 2022 earnings, EBITDA £8.5m +33%. Two special dividends Commitment to £45m revenue and 23% EBITDA margin in '23 on track
Flowtech Fluidpower plc 8.5% Covid recovery has played through as expected Distributors generally do okay in an inflationary environment. Inventory turns and cash generation can improve
Hargreaves Services plc 8.5% Record year aided by associate contribution Land resilient. Services growth. Potential capital return from associate
Ramsdens Holdings plc 6.6% A year of recovery, and restructure of online business Continued recovery in FX. Good Loan Book progression
Synectics plc 6.3% Restructure bedded in. Recovery in infrastructure markets Recovery in gaming driving earnings. Better quality of recurring revenue deserving higher multiples
National World plc 5.3% Strong year in a challenging market. Growing cash balance Upgraded EPS expectations. Flexible operating model expected to provide benefits versus peers
Fireangel Safety Technology plc 5.0% Headwinds on supply chain disappointed earnings outcome Cost pass through driving operational gearing with tail wind of strong demand
Inspecs Group plc 4.6% Annus horribilis provided a buying opportunity Earnings recovery from 2022 trough driven by reduced Norville losses and Eschenbach cost initiatives
Digitalbox plc 4.5% Very strong full year but with H2 headwinds Headwinds continue but cash balance provides optionality

The Top 3 Contributors:

Centaur Media saw its share price rise by 23.9% in the period and contributed 2.3% to performance. Centaur is certainly coming of age – having weathered Covid well, we had been concerned about potential negative macro influences that could affect this media orientated business. However, given the levers it had to pull from an operational perspective, we have been reassured to see the continued resilience in the business. This was in part due to the unique aspects of its brands and offerings – The Lawyer being the predominant title for the legal profession, and the growth of the ‘Mini MBA’ continuing to buck the trend of a relatively stagnant wider marketing industry. Upgrades and a special dividend have buoyed the share price, but we still believe there is significant latent value here and as the company delivers on its MAP-23 margin plan, it will have a double-digit free cash flow yield and a single digit PE.

Ramsdens saw its share price up by 21.8% in the period and contributed 1.4% to performance. This was a reflection of trading improving to close to pre-Covid levels, the articulation of a refreshed new store opening program, and the results of a revitalised online jewellery offering. In the thick of Covid, Ramsdens was one of DSM’s worst hit investments – store closures put the business strategy on ice. However, we believe that this management team is one of the strongest and most manoeuvrable in the portfolio, and they used their time well. After only modest spend on the online jewellery site and a revamp of FX, the opening up of Covid restrictions evidenced an improvement in jewellery sales. The group recently reported in a trading update that jewellery retail gross profit increased by over 20% on the prior year, reflecting further growth both in store and online. Meanwhile FX has returned to c.70% of pre-Covid and the loan book has improved to £9.7m.

Synectics saw its share price up by 18.2% in the period and contributed 1.5% to performance. This was a recognition of good order intake and new contract wins which included the most recent Saudi pipeline surveillance contract for £3.5m. The analyst forecasts are underpinned by this contract’s strength and therefore look to an EBITDA of £4.3m in 2023, implying an EV/EBITDA multiple of sub 5x. Next year (2024) this drops to sub 4x, delivering a 10% free cash flow yield. Clearly the market is cynical on delivery of this, however, confidence from management and the arrival of a new chair has begun to attract attention to a company that has been overlooked by the market.

Top 3 Detractors:

FireAngel saw its share price down by 26.9% in the period and detracted 3.3% from performance. We often describe this company as the one in the portfolio that is notorious for finding the banana skin to slip on. Although our confidence in management’s ability to execute was heightened through the last 18 months as the gross margin delivery plan was delivered, this has been further hampered recently by macro headwinds. Although demand is strong and the barriers to entry are significant, we are ensuring management focus on the execution of getting product out the door. The recent Techem contract news illustrates the strength of the IP and the market leading advantage of FireAngel. This has yet to translate to shareholder value. Ultimately, we believe that FireAngel should be part of a much larger entity, who could benefit from the IP, the dominant market position and regulatory growth in the market.

DigitalBox saw its share price down by 42.3% in the period and detracted 4.0% from performance. After a stellar first half of the year, trading deteriorated in the second half as a result of wider ad spend headwinds. Regardless, the group still delivered a strong performance, owed to the lean operating model centred around the Graphene Ad-Stack and core titles Entertainment Daily, The Daily Mash, The Tab, and now, The Poke. While strategic progress has been relatively slow due to the valuations of media businesses through 2021 and the first half 2022, expectations of the vendors of private businesses are now reducing and there is greater opportunity for Digitalbox management to deploy capital. Buying sub-scale assets is a proven strategy in public markets but requires patience. Management is also proving their track record here with The Tab paying itself back in less than a year. The Poke, acquired at the end of 2022, will add to the group’s depth in satirical content which generates strong yields, and we believe this can generate similar payback to The Tab. Overall, we remain positive on the group’s prospects. While they can be subject to algorithm changes on the social media platforms, they have proven adept at navigating these in the past and a healthy net cash balance sheet provides comfort and opportunity in a market currently facing headwinds.

Tactus, a private holding, saw the value of its C shares written down by 34.9% in the period, detracting 1.8% from performance. While near term trading is difficult, Tactus retains a strong market position in the PC gaming space which is one of the fastest growing forms of digital entertainment globally. It also has an established market position through supply of its own and third-party branded PCs to the consumer, enterprise, and education sectors. Tactus experienced difficulties through 2022, mostly driven by a weaker consumer environment and significant de-stocking of all retail channels following buoyant Covid trading. There were also fewer new product releases through the year which often provide a catalyst for upgrade and replacement cycles. While earnings were significantly lower, operating cash generation was very strong as the company was able to prioritise inventory sell through and to reduce overall levels of working capital. Consumer appetite should return as attitudes adjust to a higher cost of living through 2023, and Tactus has significant untapped opportunity in the B2B space where they have added headcount and are significantly under penetrated versus peers. While the write down is disappointing, this should be taken in the context of the total investment and returns to date. Of a total investment of £1.9m across equity and loan notes, DSM has realised a total of £1.4m. The loan notes were fully redeemed less than four months after our investment, returning 13% in total, including the redemption premium and arrangement fee. The equity element disposed of at the same time returned over 3.6x our cost. Overall, DSM has recouped 75% of its total cost of investment to date yet retains over 84% of its equity stake.

*Activity in the period*
Four new investments were made in the period: Norman Broadbent, TheWorks, Inspecs, and OnTheMarket, and we topped up modestly in another three positions. This incurred a spend of £6.3m. Meanwhile, an outright disposal was made in one company, Venture Life, where we had lost confidence in management’s capabilities re capital deployment and controls.

Alongside this transaction we took profits in four others, realising £5.2m in total, at a realised gain of £852,000. Net cash at the period end was 3.9% of net assets, before the proceeds of AdEPT Technology which, received post period end, will add c£2.48m to cash.

*Outlook*
In terms of our outlook, we focus on where we are on the value creation journey with our portfolio. The table below highlights where we believe value creation is likely to be derived within our top 10 holdings over the course of the next 12-24 months.

As you can see, there is a clear pathway to value realisation, or an identification of where the market has undervalued companies, across the portfolio.

*Company* *% of NAV* *Comment*
Real Good Food plc 10.5% Value sits in Loan Stock, with double digit accrued interest and redemption premium.  Capital is £3.28m, with interest accrued of £3.1m, of which c£2m is not reflected in the DSM NAV
Centaur Media plc 9.1% Delivery of commitment to £45m revenue and 23% EBITDA margin in '23 will drive a 12% free cash flow yield. Rerating from EV/EBITDA of 7x towards sector multiple of 12.5x. Consensus at 78p which is below our SOTP assumption
Flowtech Fluidpower plc 8.5% Pathway to double digit margins is established, now needs strategic execution. Online can facilitate cross sell and wallet share growth. Re-rating to 10x+ and de-gearing opportunity over short-medium term
Hargreaves Services plc 8.5% Associate and renewables realisations could be £50+ million. Cleaner group without pension is easier to understand and value
Ramsdens Holdings plc 6.6% Return to pre-Covid earnings is on track, with improved efficiencies with online offering improving margin. Expansion into SE should provide enhanced ROI
Synectics plc 6.3% Return to pre-Covid trading in Asia.  Earnings forecasts underpinned by better margin on services and infrastructure contracts. FY'23 EBITDA of £4.3m, Net Cash of £4.3m and a double-digit free cash flow yield deserves a re-rating from 4.6x EV/EBITDA to c. 9/10x
National World plc 5.3% Digital progress offsetting print declines can transform the earnings profile and rating. Cash deployed on earnings accretive deals can prove the strategy. Rating recovery will be market/ sentiment dependent
Fireangel Safety Technology plc 5.0% Delay in earnings progression due to headwinds of supply chain in 2022 are lifting. 2023 key year for the Techem contract –not included in forecasts.  Currently 3xEV/EBITDA due to cynicism on delivery of earnings – as news flow improves this should change. Delivery is key
Inspecs Group plc 4.6% Earnings recovery to c$24m EBITDA in 2023 largely underwritten by cost savings and self-help, accompanied by a re-rating. Medium- and longer-term growth opportunities and delivery against strategy can regain a premium multiple
Digitalbox plc 4.5% M&A opportunities and organic growth can build a £2m EBITDA business. Requires media recovery for a fair rating

Despite what we think will be volatile markets over the coming 12 months, we believe the catalysts put in place by management within this portfolio should provide non-index correlated returns, with value creation playing out in a maturing portfolio. More generally, we think the focus of the market is likely to play to DSM’s favour. Higher inflation isn’t great for larger monolithic companies but favours smaller companies that can grow faster than inflation. As the cost of capital increases, there will be investor focus on real assets and real earnings (cash) – which is a feature of the DSM portfolio where the majority of positions hold cash on the balance sheet. Capital allocation, buybacks and self-help are features of the DSM portfolio, as is the focus on organic growth versus M&A. We believe the market headwinds could in fact be DSM tailwinds once combined with the strategic catalysts playing out in the portfolio.

*Judith MacKenzie*
Head of Downing Fund Managers and partner of Downing LLP
5 May 2023

*
*

*Investments *as at 28 February 2023
*As at*
*28 February*
*202**3* *As at*
*2**8** February*
*202**2* *Market* *Value*
*(£’000)* *% of* *Total*
*A**ssets* *% of* *Total *
*Assets*
Centaur Media plc 3,484 9.08 6.54
Flowtech Fluidpower plc 3,273 8.53 7.92
Hargreaves Services plc 3,269 8.52 10.09
Real Good Food 10% Loan Notes* 2,528 6.59 6.19
Ramsdens Holdings plc 2,520 6.57 7.80
Synectics plc 2,402 6.26 4.91
Adept Technology Group plc 2,394 6.24 5.16
National World plc 2,040 5.32 4.97
Fireangel Safety Technology plc 1,904 4.96 6.28
Inspecs Group plc 1,769 4.61 -
Digitalbox plc 1,724 4.50 7.39
Volex plc 1,568 4.09 9.98
Equals Group plc 1,494 3.90 -
Onthemarket plc 1,445 3.77 -
Real Good Food 12% Loan Notes^* 1,420 3.70 4.08
Journeo plc 1,419 3.70 -
Theworks.co.uk plc 868 2.26 -
Tactus Holdings Limited** 760 1.98 3.79
Norman Broadbent plc 334 0.87 1.23
Norman Broadbent 10% Loan Notes* 215 0.56 -
Real Good Food plc 97 0.25 0.40
Venture Life Group plc - - 1.98
Other - - 2.88
Total investments *36,927* *96.26* *91.59*
Cash 1,505 3.93 8.82
Other net current assets (77) (0.19) (0.41)
*Total assets* *38,355* *100.00* *100.00*
*Unquoted. Stated inclusive of the fair value of unpaid interest income
**Unquoted

     

All investments are in Ordinary Shares and traded on AIM unless indicated. The total number of holdings as at 28 February 2023 was 18 (28 February 2022: 15).

As at 28 February 2023, loan note principal represented 9.64% (28 February 2022: 7.29%) of total assets and the total of loan note principal and interest represented 10.85% (28 February 2022: 10.27%).

*Background to the investments*
(unless otherwise stated all information provided as at 28 February 2023)

*AdEPT Technology Group PLC (AdEPT) (6.24% of net assets) *
*Cost: £3.83m Value as at 28 February 2023: £2.39m*

*Background*
AdEPT is one of the UK's leading independent providers of managed services for IT, unified communications, connectivity, and voice solutions. AdEPT's tailored services are used by thousands of customers across the UK and are brought together through the strategic relationships with tier-1 suppliers such as Openreach, Vodafone, Virgin Media, Avaya, Microsoft, Dell, and Apple.

AdEPT functions as an aggregator of telecoms services providing a smoother, integrated service to corporate and government organisations. We were attracted by the high operational gearing and recurring revenue streams at attractive margins. Communications and technology have converged over recent years and that is only set to accelerate into the future, and AdEPT is well placed to benefit from this trend.

*Update to the investment case*

· Trade exit to Wavenet, a subsidiary of the private equity backed Macquarie Group Limited, at a 75% premium to the holding value in DSM at the time of the announcement.
*Progress against investment case*
Wavenet Group, a subsidiary of Macquarie Group, a global financial services group, based in Australia, announced an all-cash offer for AdEPT. We believed that AdEPT had over-geared, and that it would take considerable time for the market to realise the quality of the earnings and market position that the business had achieved. Therefore, we were keen to drive an exit as we believed the derisory multiple that the company has been trading at since before Covid was likely to continue in public markets. With the managers of DSM urging an exit, management embarked on a process to sell the business which resulted in Wavenet offering a significant premium of 74.8% to the closing price of 115 pence per AdEPT share on 7 February 2023 (the last business day before the date of the commencement of the offer period); and 77.4% to the volume-weighted average price of 113 pence per share for the three-month period ended 7 February 2023. The acquisition by Wavenet Group completed in April.

*Centaur Media PLC (Centaur) (9.08% of net assets)*
*Cost: £3.58m Value as at 28 February 2023: £3.48m*
*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*

· Strong progress on strategy to drive profitable revenue growth despite macro headwinds.
· Net cash balance grew to £16m which equates to a double-digit free cash flow yield.
· Another special dividend of 2p announced, which results in a pay-out per share of 6.1p in the year (previous year 1p).
· Significant director share-buying.

*Progress against investment case*
Centaur is a multi-faceted media and IP business where we believe the sum of the parts is significantly greater than our entry price. There is value in the Flagship 4 brands which management consider to be the key drivers of organic growth: ‘Econsultancy’, Influencer Intelligence’, ‘MW Mini MBA’ and ‘The Lawyer’. The first stage in that value realisation is the group’s Margin Acceleration Plan (MAP23) which aims to raise adjusted EBITDA margin growth to 23% and increase revenue to more than £45m by 2023.

The group reported strong trading for the year to December 2022. This resulted in revenue of £41.6m, EBITDA margins of 20% and EBITDA of £8.5m. This puts the MAP23 firmly on track. While management highlighted that the macro conditions resulted in slowing growth in H2, the fact that it grew at all is testament to the defensive revenue model largely in subscriptions. The strong operating performance continues to translate well into cash, and net cash balances grew to £16m, allowing a 6.1p cash return in the year through normal and special dividends. This puts Centaur at an interesting juncture, with a strong net cash balance sheet and a highly cash generative business model. The special return might indicate that the board now deem excess cash as distributable, and since the business is generating a free cash flow yield of around 10%, if it doesn’t re-rate and earnings don’t decline, then double-digit returns are all but guaranteed from here (the usual caveats apply). We also believe in our investment thesis that the sum-of-the-parts is significantly greater than the market capitalisation, providing optionality for value realisation which is not just earnings driven.

*Digitalbox PLC (Digitalbox) (4.50% of net assets)*

*Cost: £1.13m Value as at 28 February 2023: £1.72m*

*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*

· Increased advertiser demand for high-quality audiences on mobile.
· FY2022 delivered a strong revenue and profit year despite H2 headwinds.
· Strategy delivering acquisitions as expected and in a more favourable pricing environment.
· 2023 likely to be tougher in the face of ad-spend headwinds.

*Progress against investment case*
The company acquired The Poke, a satirical website, in December 2022. The acquisition provides a great opportunity for Digitalbox to strengthen its position within the satire/comedy space. The Poke has over three million monthly sessions, which when combined with The Daily Mash's three million monthly sessions, will establish Digitalbox as a leading destination for online humour.

*Equals PLC (Equals) (3.90% of net assets)*

*Cost: £1.19m Value as at 28 February 2023: £1.49m*

*Background*
Equals Group is a technology-led international payments group augmented by highly personalised service for the payment needs of SME's, 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*

· Continued significant revenue growth.
· Gross profits and adjusted EBITDA upgrades on the back of the Full Year 2022 results.
· Tight control of cost base in the face of high inflation and labour market tightness.
· Strong balance sheet.

*Progress against investment case*
Equals continued to outperform expectations with revenues up 58% to £69.7m. Most significantly, the KPI that we monitor – the revenue per day – was up to £342k in Q1 2023, an increase of 52% over £225k per day in Q1 2022. Ian Strafford‐Taylor, the CEO, is very focused and motivated to grow Equals into one of the predominant payments/FX solutions, rivalling the big banks for service and cost. Our investment thesis here is predicated by the operational gearing achievable from the quality of revenue growth and careful management of the core cost base. We acknowledge that software driven solutions businesses require constant investment and evolution in development, which can often hamper the earnings of a small company. But here we believe that Equals has got to a scale that supports that spend, complemented by a steely eye on return on investment for development spend.

*FireAngel Safety Technology Group PLC (FireAngel) (4.96% of net assets) *
*Cost: £5.73m Value as at 28 February 2023: £1.90m*

*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*

· Strong revenue performance.
· New contract wins.
· Increasing legislation driving sales.
· Supply chain challenges remain.
· Forward currency hedge.
*Progress against investment case*
FireAngel announced a trading update for the year ended 31 December 2022 and reported that the group delivered a resilient performance in 2022, resulting in its strongest revenue performance since 2017. Business Unit performance was strong across most territories with demand outweighing supply, driven by the tailwind of increasing legislation. Sales were up 32% to £57.5m, adjusted loss before tax reduced by 30% to £2.1m, and adjusted EBITDA was £1.6m from £0.3m the year prior.

FireAngel had some ‘self-help’ measures to implement which has allowed it to broadly maintain gross margins despite the headwinds. These were achieved despite low availability of higher margin products and strong input price pressures. Planned mitigations against inflation and volatile input prices began to improve performance from mid-Q2 2022 and the company delivered gross margin of c.26% in the six months to the 30 June 2022, leaving it well positioned for the historically stronger second half of the year. While impact of the global supply chain challenges improved across H2 2022, the group and its suppliers are still having to commit to purchases 12 to 15 months ahead, as opposed to a historic norm of 3 to 6 months. Changes in product and sourcing mix along with extended shipping times from Asia have impacted the level of stock held. As a result, stock at 31 December 2022 stood at approximately £8.0m, compared to an abnormally low comparable position as at 31 December 2021 of £3.7m. The board had anticipated a year end stock number closer to £7.0m.

At the end of December 2022, the group had £1.4m of cash, £4.8m of debt, and an Inventory Discount Finance (IDF) facility draw down of £3.4m. The majority of the group’s goods and services are currently purchased in USD. FireAngel chose to establish a level of certainty by hedging a large proportion of the USD purchases for the remainder of the year and into 2023 at an average rate of 1.14 USD/GBP. This established a level of certainty as regards cash performance in the rest of the year and into 2023. At 31 December 2022, there was a mark-to-market loss on the forward currency contracts taken out from September 2022 of £1.6m against a gain of £0.3m in 2021.

There was further pain in the form of exceptionally high Purchase Price Variance costs for securing scarce components of £1.4m which were incurred in the year compared to £0.8m in 2021. Management does not expect these costs to be a material cost going forward. FireAngel has made significant progress with its project to develop a new generation smoke alarm alongside its German partner, Techem. This is a paid-for project that will yield some exciting international opportunities in the coming year. In a highly challenging macro environment, the group has performed well and while the reported result will not be what the group had set out to achieve, the underlying numbers demonstrate the strong progress made in line with its growth ambitions.

*Flowtech Fluidpower PLC (Flowtech) (8.53% of net assets) *
*Cost: £2.60m Value as at 28 February 2023: £3.27m*

*Background*
Flowtech is a value‐added distributor of hydraulic and pneumatic consumables into a wide array of sectors predominantly in the UK and Ireland. The group is a leading UK player in this space, with pre‐Covid revenues of over £110m, and it sits between much larger global manufacturers and a highly fragmented and localised cohort of smaller distributors. The company’s high service levels, broad stock offering and exposure to maintenance, repair and overhaul markets were key attractions, and these attributes facilitate Flowtech’s relatively high gross margins of over 35%.

*Update to the investment case*

· Trading performance in line with market expectations.
· Re-structuring providing a more scalable operating cost base.
· Post-Covid revenue recovery has played out as expected.
· Impairment of goodwill in relation to legacy acquisitions.
· Higher inventory investment affected cash generation and net debt.
*Progress against investment case*
Full year results were in line with expectations, with revenue up 5.2% and a strong recovery in underlying earnings with a healthy positive return from the Services segment. The business continues to streamline with further cost base improvements. Net debt was higher, owed to higher working capital investment, but we expect this to reduce in due course. A detractor was the impairment of several legacy acquisitions, driven by the current interest rate environment demanding a higher cost of capital. Given these are non-cash and were made under a prior management regime and different growth strategy, this should not be too concerning.

Flowtech has been a post-Covid recovery play, and this has now come through in revenue terms. The business is now investing in its e-commerce platform which will allow it to better target existing customers and open up new revenue opportunities. From a margin perspective, we think that there are gross margin tailwinds, and the effects of the ongoing re-structuring should provide a more scalable operating cost base which can deliver improved drop through on revenue growth.

Progress against our original thesis has been slower than expected, however, there remains a significant potential upside if management can demonstrate reasonable top line growth combined with improving margins and payback from e-commerce investment. Working capital efficiencies should be well within their grasp to execute once trading conditions normalise. We remain confident and view the equity as significantly mispriced

*Hargreaves Services PLC (Hargreaves) (8.52% of net assets) *
*Cost: £2.56m Value as at 28 February 2023: £3.27m**Background*
Hargreaves is a diversified group delivering key projects and services to the industrial and property sectors. The Distribution and Services division aims to generate sustainable profitability through operations across the energy and infrastructure sectors in the UK, Europe and Asia. The Property and Land division aims to generate value through the development and/or disposal of the company’s significant land bank which includes planning for residential, logistics and industrial space.

*Update to the investment case*

· Strong trading with profitable growth across business sectors.
· Pre-tax profits up 80%.
· Strong balance sheet.
· Potential reduction in trading opportunities in the German commodity business.
· Numerous strategic catalysts available to unlock value.
*Progress against investment case*
Hargreaves reported interim results for the six months to 30 November 2022, and highlighted strong revenue growth in Services, leading to an overall increase of 53% year on year, primarily due to HS2. Pre-tax profit was up 80%. The group increased the dividend by 7.1% to 3.0p and the balance sheet remains robust, with £18.1m in cash, up from £8.5m in November 2021.

Hargreaves has developed a strong platform from which to create value for shareholders. The core Land and Services businesses are well positioned to generate slow and dependable growth and there are numerous strategic catalysts to unlock value, including from the renewable asset portfolio and the German associate which we expect could play out sooner rather than later.*Inspecs Group PLC (Inspecs) (4.61% of net assets) *
*Cost: £1.54m Value as at 28 February 2023: £1.77m*

*Background*
A new investment in the reporting period was made in Inspecs, a company we have been following as a potential recovery trade since around the summer of 2022. Inspecs is a vertically integrated designer, manufacturer and distributor of eyewear and lenses. It owns its own brands, some of which are market leading, and it also licenses brands and provides white label options for others.

*Update to the investment case*

· FY trading performance expected to be in line with revised market expectations.
· Norville losses narrowed in Q4 and further progress continues to be made.
· Operational efficiencies expected to deliver further benefits in 2023.
· Operating costs need to be well-managed.
· Net debt (excluding leases) increased by $1.4m during the year to $34.1m.
*Progress against investment case*
As Inspecs is a new position, there is little to report against our thesis at this stage. However, we broadly expect that 2023 will be a recovery year as cost savings and improved demand play through such that the current guidance is achievable, and the risk of a covenant breach is reduced. This should drive a re-rating as the business is priced on its growth and quality potential. Longer term, there remains significant upside opportunity in smart eyewear and other growth initiatives. The business has historically been valued between 15-20x EV/EBITDA, which is also in the range of its publicly quoted peers, thus we would expect a return to around this rating in a normal market.*Journeo PLC (Journeo) (3.70% of net assets) *
*Cost: £1.13m Value as at 28 February 2023: £1.42m*

*Background*
Another new addition to the portfolio is Journeo. Journeo provides solutions into 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 and increasing levels of earnings visibility.
· Strong sales opportunity pipeline.
· Net margins expected to improve.

*Progress against investment case*
We have followed Journeo for many years, not least because the ex‐CEO of another portfolio position (Synectics) had become CEO at Journeo. Russ Singleton overcame some contractual and structural issues at the company and created a profitable business, ready to make acquisitions. We took a 6.6% equity stake in Journeo on the acquisition of Infotec and the subsequent £7m fundraising in late December 2022.

The business is set to benefit from long‐term government spending trends in the transport sector to help reduce emissions by improving the quality and quantity of public transport journeys. There are a number of multi‐billion‐ pound government projects which Journeo is able to tap into to expedite the growth of the business, such as the c.£2.4bn Transforming Cities Fund, the c.£3bn Bus Back Better strategy, and the Williams‐Shapps Plan for Rail. Post reporting period end, the group announced that Journeo has won a SaaS contract with Transport for Wales to supply a new displays Content Management System for the Welsh Bus Data Content Management System. The initial contract value is £1m and has a five-year term, with two additional one-year extensions available through to 2030. Infotec, has received a £0.7m purchase order from Network Rail for the supply of customer information displays for stations operated by Southeastern throughout the Kent region.

Journeo’s products and services may be familiar – these include displays at bus stops throughout the UK (where bus due times are shown). There are also displays in railway stations – notably the new displays at both Euston and Paddington stations. Journeo has strong and increasing levels of earnings visibility with a scalable SaaS business model which has been in existence for over two years. Investments made over recent years in the group’s technology have been focussed on the delivery of a cloud‐based, modular, hardware‐agnostic SaaS platform. The number of connections on the platform has now reached 10,000. The sales opportunity pipeline currently sits at over £50m post‐acquisition. Beyond the near‐term acquisition target, the company will continue to look for opportunities to strengthen and deepen the product portfolio, extend the range of services offered, and potentially add growth into adjacent market opportunities. In terms of valuation, we believe the acquisition of Infotec was undertaken at a good price (c.2.5x EV/EBITDA) and is an excellent fit – even being in the same town as the main activities of Journeo. However, we have not baked in any synergies on cost, or indeed on cross selling. Therefore, just putting the businesses together for FY 23 (E) should yield a turnover of £33m, and EBITDA of £4.2m. Net margins should improve by 2% to 9%. At our entry price, post‐acquisition Journeo therefore trades on a FY 23 (E) EV/Sales multiple of 0.3x, an EV/EBITDA of 2.4x and a P/E of 5.7x. Compare this to wider peers, like Tracsis Plc which trades on a P/E of 25x, and discounting this by 30% for size and liquidity – would reflect a peer P/E of 17.5x – or 311p per share valuation, a 127% uplift to the current price of 137p

*National World PLC (National World) (5.32% of net assets) *
*Cost: £2.62m Value as at 28 February 2023: £2.04m*

*Background*

National World is 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 that 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*

· Strong trading for FY22.
· Digital revenues up 25%.
· Acquisitions increase online audience by 10%.
· Restructuring generating significant cost savings.
· Difficult consumer environment reducing advertising demand.
*Progress against investment case*
National World issued a strong trading update in January 2023 which was especially welcome given the company seemed to have been completely forgotten by investors. Many had evidently assumed that the woes of other publishers were being replicated here, however, the lean operating model shone through, and the business generated a strong result. EBITDA of £9.4m and cash less loans and deferred consideration of £23.5m provides a strong balance sheet.

The business made some strategic progress in the year, with several acquisitions and investments. A $1.25m investment into The News Movement which should provide access to new audiences through serving content via more engaging short format stories. ScoopDragon and NewsChain bring football and video‐first content, respectively, into the group. Video received a lot of focus through 2022 and grew strongly, as well as providing higher yields, so it makes sense that management continue to focus on this area for growth.

*Norman Broadbent PLC (Norman Broadbent) (equity, loan notes and interest, 1.43% of net assets) *
*Cost: £0.62m Value as at 28 February 2023 (including loan note interest): £0.55m*

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

*Update to the investment case*

· Strong revenue growth and Net Fee Income (NFI).
· Highly experience management team with proven track record.
· Highest expected annual NFI and EBITDA figures since FY. 2019.
· Average fee per engagement increased by 50%.
· Economic headwinds.
*Progress against investment case*
Norman Broadbent issued a trading update for the three months ended 31 December 2022 and the year ended 31 December 2022 in January 2023. Over Q4, the group reported that group NFI was up 29% to £2.34m, which was up 40% compared to the average for the previous three quarters of £1.67m. The group is progressing with its plans to expand its position in Scotland and opened an office in Edinburgh ahead of plan. It has sub-let the overcapacity in its London office with income entirely offsetting cost in 2023 of the newly opened Aberdeen and Edinburgh offices.

Over the full-year, NFI was up 27% to £7.34m and EBITDA is expected to be approximately £100k, up c.£400k on FY 2021's LBITDA of £303k. The business is now on a much firmer footing and very much back to pre-pandemic levels, with the highest expected annual NFI and EBITDA figures since FY 2019.

In addition to the positive annual EBITDA, the group has been growing headcount significantly, thus building the platform for continued profitable growth in future years. This includes a number of fee generating hires made in Q4 2022 who will begin delivering revenue in Q1 2023. The quality and seniority of mandates consistently rose over 2022, with the average fee per engagement increasing by 50% over that period.

Management is aiming to deliver annual EBITDA of £1.25m in 2025 through organic growth whilst continuing to seek acquisition opportunities. The economic headwinds remain challenging; however, we have confidence that the necessary foundations are in place to enable NBB to achieve this target.*OnTheMarket PLC (OnTheMarket) (3.77% of net assets)*
*Cost: £1.70m Value as at 28 February 2023: £1.44m*

*Background*
OnTheMarket is a majority agent-owned and backed property portal with around 60% share of UK agents. The new strategy will recycle the profits and cash generation from the undervalued portal into ancillary tech services to provide more value for agents and facilitate further wallet share.

*Update to the investment case*

· FY23 pre-close indicated that results would be in-line.
· Cash balance of £10.4m provides operating flexibility and potential for capital returns.
· Small agents sell down of shares indicates good support for the business.
*Progress against investment case*

OnTheMarket is a new holding and therefore there is not much to report against the investment case at this stage. However, we view the FY23 pre-close as positive, signalling per agent revenue growth which is key to our thesis. Within this we expect that new home revenue will be particularly strong as housebuilders try to sell through stock more quickly. While the economic conditions are less supportive, we view OTMPs value offering compared to the two larger portals as having particular merit since agents are more likely to reassess their business costs and return from that investment. There was a sell-down of shares as agent backers exited their lock-up period and this was lower than we expected, signalling good support for the business from its backers and customers.

*Ramsdens Holdings PLC (Ramsdens) (6.57% of net assets)*
*Cost: £1.90m Value as at 28 February 2023: £2.52m*

*Background*
Ramsdens is a growing, diversified, financial services provider and retailer, operating in the four core business segments of foreign currency exchange, pawnbroking loans, precious metals buying and selling and retailing of second hand and new jewellery. Ramsdens does not offer unsecured high-cost short term credit. Headquartered in Middlesbrough, the group operates from over 150 stores within the UK (including 2 franchised stores) and has a growing online presence.

*Update to the investment case*

· Strong performance as trading conditions normalised.
· Revenue and gross profit significantly improved.
· Quality management team.
· Strong balance sheet conservatively managed.
· Store estate expanded to 158 stores.
*Progress against investment case*
Ramsdens issued FY22 results that were significantly ahead of FY21 as the group recovers from the impact of Covid-19. Revenues were up 62% on the year prior, and profits up 71%. FY22 profit has been driven primarily by the strong recovery in foreign currency gross profit to £12.6m as international travel returned to a reasonable level. Revenue generated by the jewellery retail segment increased by almost 50% to £27.1m, supported by strategic investments in stock, merchandising and the website. Demand for the group's pawnbroking loans grew during the year as a result of customer spending habits returning to normal and fewer alternative options for small sum short term credit being available. As at 30 September 2022, the loan book had increased by over 40% to £8.6m.

In an update on Q1 FY23 trading, the group reported further positive progress: jewellery retail gross profit increased by over 15% primarily as a result of strong premium watch sales both instore and online; volumes of foreign currency exchange remained at approximately 70% of pre pandemic levels; the pawnbroking loan book has grown further from the year-end balance of £8.6m to £9.1m; new stores have been opened in Bootle, Basildon, Croydon and a second store in Bradford, taking the store estate to 158 stores (including two franchised stores).

While Ramsdens is a consumer facing business, its diversified model has proven resilient, and we expect that a tighter consumer environment will continue to drive strong business growth for the pawnbroking segment. This is also likely to be replicated in precious metals purchasing, which is growing from a relatively low base, where consumers are likely to dispose of unwanted items to boost cash flows. Jewellery retail and FX may find the operating environment tougher, but we think that there is still some recovery trade to play through here, and scope to benefit from consumers trading down.

Margins should be stable, and we think that there is upside as the business continues to benefit from operating leverage and investment into cross-selling and a more scalable e-commerce platform. We don’t expect any shocks in terms of cash flow – t