The little companies that could

When Downing Strategic Micro-Cap (DSM) was launched in April 2017, the vision was clear. It sought to offer “ordinary” investors the opportunity to invest in the cream of the smallest listed UK companies, benefitting from the knowledge, experience and information sources of its management team.

As we approach the sixth anniversary of DSM’s inception, taking a glance through some of the companies in the underlying portfolio gives a snapshot of where the trust is – and where it may be going. A feature of investing in smaller companies is that the investment case will be longer term, and this is particularly true in DSM’s case, as the team seeks out businesses which they believe are mispriced, and where they expect to see an improvement story playing out in the future.

With this in mind, the trust is at an interesting point in its trajectory. Some of its earlier investments are now established in the portfolio and their investment cases are playing out. At the same time, its managers, lead Judith Mackenzie and co-manager Nick Hawthorn, have not rested on their laurels; they have added new names to the portfolio throughout the trust’s lifespan when compelling opportunities come to light. Together, both old and new holdings exemplify the DSM focus on trying to identify misunderstood businesses with a clear rerating opportunity.

An investment case in play

Ramsdens has been a portfolio holding since late 2017. The company specialises primarily in consumer-facing financial services and retail, including foreign currency exchange. At the time DSM invested, the team believed the company was fundamentally mispriced, with a strong management team and opportunity for expansion meaning it had potential for earnings upgrades.

While the company struggled through COVID lockdowns as its physical stores were closed and demand for some of its services fell, it has seen a bounceback in consumer demand since. Its business streams should also perform well in challenging economic conditions, a reality which is now beginning to feed through to its share price.

Added to the portfolio in 2021, National World had a clear vision for improving the execution of local news, fighting on two fronts. The first was to streamline back office functions by centralising them, and the second is to empower local managers when it comes to editorial and commercial activities.

The company has executed this strategy convincingly, bringing new titles into the fold and recording strong results. However, the market has remained sceptical, categorising it alongside struggling publishers despite its financial success. Judith and Nick are encouraged by a proactive acquisition strategy, which has seen it broaden its capabilities in new media and enabling it to repurpose its intellectual property for different channels. With this in mind, and the gap between the businesses EV and share value still wide, they have added to their allocation.

New opportunities in a new era

Of course, the managers of DSM are also constantly looking for new opportunities in the market and two recent acquisitions exemplify their process. They recently participated in the Journeo fundraising to acquire IGL Limited, which trades as Infotec.

Journeo provides solutions for the transport industry, such as live digital timetabling. The addition of IGL brings additional exposure to the rail industry – Infotec made the screens used for the Elizabeth Line - with resulting cross-selling opportunities. The valuation was particularly attractive, on an EV/EBITDA of c. 2.5x, which meant it met DSM’s investment criteria perfectly, and is expected to raise profits and profitability.

An investment was also made into Inspecs, a global designer, manufacturer and distributor of optical frames and lenses. The company’s theory is that bringing a suite of brands within its own manufacturing and distribution operations enables them to be marketed more effectively.

Inspecs had a challenging 2022. Challenges in the market and some operational issues meant that its cash balance was seriously stressed into the end of the year, and its shares fell over 90%. However, with an accommodative bank, demand strengthening in Europe, a well-incentivised management team and clear opportunities for self-help, DSM’s managers believe that Inspecs’ earnings and rating will recover over the next year or two. This sort of unloved improvement story is exactly the sort of opportunity DSM’s managers seek.