Since the gating of Neil Woodfords 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 Im writing, versus todays 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. Weve read of issues around the independence of the board of non-executive directors, regulatory oversight, and the valuation of Woodfords unquoted holdings (as in todays 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 Capitals value is in illiquid unquoted holdings. Meanwhile, the trusts broker, Winterflood, reckons 74% of the portfolio by value is also held by Woodfords gated equity income fund (or as much as 90%, factoring in the trusts 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 Capitals high level of gearing.
Now, Woodford has claimed hes not a forced seller of the unquoted stocks in his equity income fund. Be that as it may, Ive previously suggested these holdings could be worth 45% less than the value ascribed by their cornerstone investors. I think Patient Capitals 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 theyre not to wither on the vine. Not only is Woodfords 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 Capitals 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, Id 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, Im more than happy to continue avoiding the stock.
