Since the gating of Neil Woodford’s flagship open-ended Equity Income fund, the share price of the closed-ended Woodford Patient Capital Trust (LSE: WPCT) has crashed to a 37% discount to its net asset value (NAV).
The shares are trading at a new all-time low of 55p (market-cap £500m) as I’m writing, versus today’s reported NAV per share of 86.69p (total NAV £788m).
My Foolish colleague Jean-Philippe Serbera recently argued that the discount to NAV “makes an investment in Patient Capital a bargain.” However, I see a unique situation here, which leads me to continue to avoid the stock like the plague.
True NAV
Patient Capital has been coming under increased scrutiny from the mainstream financial press in recent days. We’ve read of issues around the independence of the board of non-executive directors, regulatory oversight, and the valuation of Woodford’s unquoted holdings (as in today’s article ‘Inside BenevolentAI’ by Jamie Powell over on the Financial Times‘ free-to-register Alphaville website).
These issues are longstanding, having been brought to light over the 2017 Christmas period, in a series of in-depth articles (under the general heading ‘Woodford Patient Capital Trust: The Big Short’) by ‘Cynical Bear’ on the now-subscription website Shareprophets.
Today, some 80% of Patient Capital’s value is in illiquid unquoted holdings. Meanwhile, the trust’s broker, Winterflood, reckons 74% of the portfolio by value is also held by Woodford’s gated equity income fund (or as much as 90%, factoring in the trust’s borrowings, which give it gearing of 20%, according to analysts at Stifel).
Patient Capital is in a uniquely adverse position for an investment trust, due to the combination of three things:
- A preponderance of unquoted holdings, notably in niche biotech areas, where Woodford and a limited number of fellow cornerstone investors are ‘the market’.
- His need to slash his exposure to these stocks in the equity income fund.
- Patient Capital’s high level of gearing.
Now, Woodford has claimed he’s not a ‘forced seller’ of the unquoted stocks in his equity income fund. Be that as it may, I’ve previously suggested these holdings could be worth 45% less than the value ascribed by their cornerstone investors. I think Patient Capital’s current discount to NAV shows the market moving towards what I believe is a more realistic level of true NAV.
Critical cash
The trust is faced with a further problem, because many of the unquoted companies are loss making, and require ongoing injections of cash if they’re not to wither on the vine. Not only is Woodford’s equity income fund seeking to exit from unquoted stocks, but also Patient Capital has no cash to support them.
In fact, at the last year-end, it was maxed-out on its £150m overdraft facility provided by Northern Trust, having remaining headroom of just £34,000. Patient Capital’s assets are held as security. Originally, the overdraft facility was for £75m, with any borrowings “repayable on demand.” If this is still the case and Northern Trust was to demand repayment, things would go from bad to very ugly indeed for Patient Capital.
Ordinarily, I’d view an investment trust trading at a deep discount to NAV as a potentially interesting value proposition. However, due to the unique circumstances Patient Capital is in, I’m more than happy to continue avoiding the stock.
