The Italian Job: Worsley’s Rollercoaster Year Explained
Worsley Investors’ latest annual report lands with a thud – a 20.32% drop in Net Asset Value (NAV) per share. That headline figure might induce a sharp intake of breath, but dig beneath the surface, and you’ll find a fascinating tale of tenant treachery, Italian intrigue, valuation battles, and an equity portfolio quietly punching above its weight. Let’s unpack the drama.
The Curno Catastrophe: When Your Tenant Does a Runner
The undisputed star (or villain) of this year’s report is the Group’s Italian multiplex cinema in Curno, near Bergamo. The plot thickened dramatically when the previous tenant, UCI Italia S.p.A., decided wilful default was the way to go in January 2025. After a brief grace period, the lease automatically terminated under Italian law on 25 February.
UCI’s departure wasn’t just rude; it was costly. The immediate fallout was a massive write-down in the property’s value on the books:
- IFRS Fair Value (Knight Frank): Slashed to €2.8 million (from €7.3 million just six months prior).
- Directors’ Valuation (for NAV announcements): More optimistic at €5.0 million.
This €4.5 million (£3.79 million) IFRS valuation hit is the primary engine behind that 20% NAV drop. The valuer’s pessimism stemmed from assuming the new tenant, Notorious Cinema, would only pay minimum rent and exit at the earliest opportunity (2031), ignoring potential upside from turnover-based rents.
Enter Notorious: Lights, Camera, Refurbishment!
Credit where it’s due – Worsley’s Investment Advisor moved fast. By 31 March, they’d secured a new lease with Notorious Cinema S.r.L, a growing Italian operator:
- Lease Structure: 10-year initial term (to 2035), tenant option to extend 8 years, tenant break option in 2031.
- Rent: Turnover-based (23.5% tickets, 10% F&B, 5% other) with inflation-linked minimums starting at €500k/year (rising annually).
- Sweetener: Worsley agreed to a €108k/year rent reduction for the first 5 years to contribute to Notorious’s €2 million+ refurbishment.
- Refurb: A significant upgrade creating a “cinema lounge” with digital ads, leather armchairs, expanded food (pizza, burgers!), and deluxe reclining seats. Five screens reopened on 27 June (reportedly well-received), with the full nine due this autumn.
The Board clearly believes Notorious, unlike the “uninspiring” UCI, is committed and capable. Early trading is “ahead of expectations,” though they rightly caution it’s early days. The valuation gap between Knight Frank (€2.8m) and the Directors (€5.0m) boils down to differing views on achievable turnover rent and occupancy duration. Future quarterly NAVs will stick with the Directors’ €5m valuation.
The UCI Hangover: Lawyers at the Ready
Worsley isn’t letting UCI off the hook. They’re actively formulating a claim for damages covering unpaid rent (minimum €11.26m until 2035) and other breaches, including alleged neglect of the property. Crucially, no value for this potential claim is included in the financial statements or NAV. This represents a potential future upside catalyst, but litigation is always uncertain.
Equity Portfolio: The Unsung Hero
While the cinema drama dominated headlines, Worsley’s core equity strategy quietly delivered strong results:
- Portfolio Return: +16.3% for the year.
- Outperformance: Crushed the FTSE Small Cap (+6.0%) and FTSE All-Share (+10.5%).
- Since Strategy Inception: Annualised return just under 23% – very respectable.
Key holdings include:
- Smiths News (LSE: SNWS): >4% holding. Praised for good interims, cost control offsetting print decline, and securing publisher contracts (91% revenue secured to 2029+). Shares volatile but up post-year-end.
- Daniel Thwaites (LSE: THW): Added to on weakness after regional pub sector jitters. Reported “modest progress.”
- Northamber (LSE: NAR): Price down 25% in H2 despite holding. Engaged with management viewed as “out of its depth.”
- LMS Capital (LSE: LMS): Acquired shares during its managed wind-down.
- River Global (fka AssetCo) (LSE: RGO): Added to holding.
The portfolio ended with a 48% surplus on cost (£6.54m cost vs £9.68m value).
Financials & The Discount: Silver Linings
- Loss: Net loss £2.81m (vs £0.03m profit prev. year), Loss per share: 8.33p.
- Revenue Hit: Cinema rent €830,700 (£699k) vs €1,058,700 (£915k). Higher Italian legal costs also bit.
- Balance Sheet: Net Assets £11.68m (down from £15.9m at H1). Strong liquidity: £594k cash, zero debt.
- Share Price Paradox: Despite the NAV drop, the share price rose 12.1% over the year! The discount to NAV narrowed sharply from a cavernous 42.92% to 19.70%. The Board points out that at the current share price, investors are effectively getting the core equity portfolio (and cash) for free, with the cinema asset and the UCI claim thrown in as optional extras.
Outlook: Navigating Choppy Waters
The Chairman’s statement doesn’t shy away from macro concerns: Trump-era trade tensions, UK fiscal pressures, and geopolitical risks (Israel/Iran mentioned). The cinema’s contribution will be materially lower in the near term under the Notorious lease.
However, the core message remains focused:
- Cinema Recovery: Banking on Notorious’s refurb driving footfall and exceeding minimum rents. Disposal only when price reflects “medium term prospects.”
- Legal Pursuit: Actively pursuing UCI for damages.
- Equity Focus: The strategy targets “specific companies with unique paths” at “deep discounts,” using activism where needed. The small-cap focus is seen as fertile ground amidst uncertainty.
- Position of Strength: No debt, strong liquidity, portfolio performing well.
The Takeaway: Value in the Rubble?
Worsley’s 20% NAV drop is undeniably stark, a direct consequence of the seismic shift in Italy. The valuation debate around Curno (€2.8m vs €5.0m) highlights the uncertainty inherent in turnaround situations. However, several factors mitigate the gloom:
- Swift Action: Securing a new, seemingly committed tenant (Notorious) quickly was crucial.
- Hidden Upside: The unquantified UCI legal claim offers potential recovery.
- Equity Strength: The core portfolio continues to deliver strong returns, significantly outperforming benchmarks.
- Market Sentiment Shift: The dramatic narrowing of the share price discount suggests the market sees value here, potentially pricing in the Notorious upside and legal claim.
- Clean Balance Sheet: Zero debt provides resilience.
Worsley finds itself at a juncture. The success of the Notorious venture and the outcome of the UCI claim are key variables. The core equity engine, however, is humming nicely. For investors with a tolerance for turnaround stories and legal tangles, and who believe in the Directors’ €5m cinema valuation over the valuer’s €2.8m, the current discount might just look like an opportunity. It’s a classic case of high risk, potentially high reward – stay tuned for the next reel.
