Worsley Investors Reports 20% NAV Drop Amid Cinema Tenant Default and Recovery

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:

1. Swift Action: Securing a new, seemingly committed tenant (Notorious) quickly was crucial.
2. Hidden Upside: The unquantified UCI legal claim offers potential recovery.
3. Equity Strength: The core portfolio continues to deliver strong returns, significantly outperforming benchmarks.
4. 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.
5. 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.