During March, the Trust declined in absolute terms and underperformed its benchmark. Lowland’s net asset value declined 3.0% on a total return basis (using debt at fair value) versus the FTSE All-Share which declined 1.8%. Within this, a decline in bond yields meant that Lowland’s private placement note was fair valued upwards. Keeping debt at par, Lowland’s net asset value declined 2.7%.
The best performer during the month was K3 Capital, a financial services provider. The company issued a very strong trading update, showing good performance across all divisions. We see further upside in the story given the strength of the deal pipeline and ongoing revenue growth opportunities.
The worst performer during the month was drinks wholesaler, Conviviality. The company was partially hit by a difficult trading environment. However, the key issue was a series of internal control breakdowns that led to an initial profit warning over the current year’s guidance level and, subsequently, to an unexpected tax bill which had not been accounted for in the company’s cash flow forecasts. These two events resulted in a cash flow shortfall. Management approached investors and suppliers with the aim of raising £125m in order to provide adequate financial flexibility to trade out of their financial difficulties. They were unable to raise the necessary funds and management has since announced that they will likely file for administration. There are several parts of the business that could be sold off to create value, but the ability of the company to do this fast enough to plug the cash shortfall seems limited in our view. It is clear now that there was a lack of controls and oversight in the business. In fact, board members and management were purchasing shares shortly before the initial profit warning, and again following the first profit warning. We have written the value of the company down to zero and await further developments regarding potential asset sales.
Gearing has increased versus last month and currently stands at approximately 14% of net assets. We are marginal net buyers on weak days. We are gradually purchasing sound companies, which may be facing challenges, but that are trading on undemanding valuations. For example, during the month, we added to positions in Greene King, Pennon and National Grid, where valuations are low and the problems are well aired.