Is now the time to buy Woodford Patient Capital Trust?

News from Woodford Patient Capital Trust plc (LON: WPCT) suggests the board is aiming to de-risk this investment, says Roland Head.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Woodford Patient Capital Trust (LSE: WPCT) share price rose slightly in early trade on Friday, after the board issued a statement revealing plans to cut debt.

After seeing the WPCT share price fall by 30% over the last year, shareholders will probably be hoping that today’s news marks a turning point for the trust’s fortunes. I’ve been taking a closer look at today’s statement and will share my view in this piece.

Debt worries

The concept behind WPCT is that it offers investors a long-term opportunity to make money from unlisted, early-stage companies. However, in the short-term the value of assets like these can fluctuate. Using debt in an effort to boost returns can be risky, as borrowing is secured against the value of the trust’s assets.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

That appears to be the situation here. According to today’s update, WPCT has withdrawn £126m of the £150m available on its overdraft. Measured against the trust’s net asset value (NAV), this gives gearing of 16.8%. The maximum level of gearing allowed is 20%.

My reading of this situation is that the trust has very little headroom. The board appears to agree. They’ve agreed a plan with Mr Woodford to reduce gearing to below 10% of NAV within six months, and to approximately zero within 12 months.

Cash from asset sales and more mature investments will be used to fund debt repayment and future investments. This seems a sensible plan to me, although I’m not sure how easy it will be to raise cash for the initial debt repayment.

Valuation risk

In my opinion, the most likely reason why WPCT’s gearing may rise is that the value of assets held in the trust could fall.

What’s particularly worrying is that the troubled Woodford Equity Income Fund (WEIF) holds some of the same companies as the Patient Capital Trust. If the WEIF sells its investments at a discount, then logically, this could push down valuations of equivalent assets held in WPCT.

In today’s statement, the board has tried to address this concern. It says that if sales by WEIF are considered to be “forced transactions“, then these valuations won’t be applied to the matching WPCT holdings. But if WEIF sales are considered to be “orderly transactions”, then the WPCT holdings will probably be revalued accordingly.

I should add that this is all in accordance with regulatory guidelines for valuing unlisted companies. There’s nothing amiss here. But in my view, there is a risk that sales by WEIF could affect the valuations of some holdings in WPCT.

Buy at a 36% discount?

In fairness, some of this risk is already reflected in the share price of the Woodford Patient Capital Trust. Shares in the trust currently trade at a 36% discount to their last-reported net asset value of 89.6p per share.

 If you have a patient outlook and are happy to wait a few years, buying shares in this trust could be a profitable decision.

The problem is that Neil Woodford’s record as an investor in small, early-stage companies is mixed, at best. I don’t feel I have enough understanding of the companies held in the WPCT portfolio to want to invest ‘blind’ in this way.

For me, the risks are greater than the potential rewards. I won’t be buying shares in this trust.

This AI stock is becoming a digital juggernaut in a £ 12.5 billion market!

🤖 Curious about the next big player in AI? 🤖

Our leading industry analysts have uncovered a trailblazing content platform that's revolutionising the industry with its unparalleled generative AI technology, setting new standards in creativity and efficiency.

Care for a sneak peek?

Trusted by global giants like Amazon, Disney, and Netflix, this innovative company is not just transforming digital media with AI-generated 3D content but is also capturing a significant share of a £12.7 billion market!

With a remarkable 62% gross margin, indicating exceptional profitability and operational efficiency, this company's growth trajectory positions it as a must-watch for savvy investors.

Best of all, we're offering exclusive access to the name of this game-changing stock, absolutely free!

Discover your free AI stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Older couple walking in park
Investing Articles

Could £300 a month invested in US and UK shares reach a million by retirement?

Could an investor retire with a million pounds just by dedicating £300 a month to US and UK shares? Mark…

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

Is £800 enough to start an ISA?

Is it worth bothering with an ISA with less than £1,000 to spare? This writer believes it may be --…

Read more »

Investing Articles

3 reasons Tesla stock may be a long-term bargain

This writer is keen to buy Tesla stock at the right price. He doesn't think it's there yet -- but…

Read more »

Investing Articles

Nvidia stock is a lot cheaper than before – or is it?

Nvidia stock has been caught in the whirlwind of market volatility. This writer has been waiting to buy, so might…

Read more »

Top Stocks

3 FTSE stocks Fools are eyeing up for choppy markets

A selection of companies listed on the UK stock market on the watchlists of four Foolish investors.

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

A £10,000 investment in Rolls-Royce shares last week is now worth this…

Harvey Jones says Rolls-Royce shares couldn't escape the volatility of recent weeks, but wonders if the recent dip is a…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

Prediction: in 2 years these S&P 500 stocks will be much higher than they are today

These two S&P 500 stocks have been beaten down in recent weeks. But Edward Sheldon expects them to move much…

Read more »

Investing Articles

10% yields! Why a volatile stock market is great news for passive income investors

The recent stock market volatility has given passive income investors the chance to earn double-digit returns. But they still need…

Read more »