There was speculation over the weekend that Neil Woodford would today be fired as manager of the investment trust that bears his name.
However, this morning’s half-year results from Woodford Patient Capital (LSE: WPCT) noted only that the “board continues to evaluate the position of the portfolio manager and remains in dialogue with other potential managers.”
Here, I’ll review today’s results, and give my opinion on the trust’s current valuation and prospects.
Performance
In her opening remarks, Patient Capital chairman Susan Searle said: “This has undoubtedly been the most challenging period for the company since it floated in 2015.” Woodford chimed in with “shareholders have endured an extremely disappointing six-month period, for which I am very sorry.”
WPCT reported a 26.2% fall in net asset value (NAV) per share from 97.6p to 72p over the six months to 30 June. Since the period end, there’s been a further decline to 65p, with the trust having suffered more writedowns of the value of a number of its unquoted holdings.
Meanwhile, its overdraft at 30 June stood at £116.1m, down from £150m at the start of the period. However, with NAV having fallen to £654m from £807m, gearing has only come down to 17.7% from 18.6%. Furthermore, while the overdraft has been further reduced since the period end to £111.1m, NAV has fallen to £591m, meaning gearing has gone back up, to 18.8%.
As such, Woodford has made no headway on meeting the board’s instruction to get gearing below 10% by the end of the year, and zero by mid-2020.
Valuation
The shares are trading at 44.5p, as I’m writing (1.1% up on the day). This is a 31.5% discount to the 65p NAV.
The hefty discount suggests despite the writedowns, the market still doesn’t believe the official NAV, and is anticipating significant further use of the red pen on the valuations of the trust’s unquoted holdings. These holdings account for 80% of the portfolio.
Back in February, when the NAV was 96.3p, I suggested the true valuation of the unquoted companies could be as much as 81% lower. With quoted companies representing a fifth of the portfolio, and unquoteds four-fifths, this would equate to the trust having a NAV of as low as 34p.
Prospects
What WPCT’s true NAV will ultimately prove to be in, say, year’s time, is really anyone’s guess. Another big unknown (and risk) is how the situation with the overdraft will play out.
Covenants, particularly those concerning collateral in the loan agreement, may constrain Woodford from being able to make certain decisions on disposals or follow-on funding — and he has many loss-making companies that need further funding just to survive.
Furthermore, the overdraft facility expires in less than four months, and there’s no guarantee Woodford will be able to renew it or secure new borrowings from another lender. This raises the spectre of potentially winding up the trust, with the sale of assets at what would surely be seriously distressed prices.
Woodford is clinging to the hope that “it only requires a few of the larger companies in the portfolio to deliver and to generate the returns investors envisaged.” But I reckon there’s far too much downside risk and far too many uncertainties to consider investing at the current level. As such, I continue to see WPCT as a stock to avoid.
