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Final Results

Released 11:02 02-May-2017

Final Results

2 May 2017

BlackRock Smaller Companies Trust plc

LEI:  549300MS535KC2WH4082 - Article 5 Transparency Directive, DTR 4.2

Annual results announcement for the year ended 28 February 2017


FINANCIAL HIGHLIGHTS

Year ended 
28 February 2017 
Year ended 
29 February 2016 
Change 
Performance
Net asset value per share (debenture at par value) 1,247.03p  992.18p  +25.7 
Net asset value per share (debenture at par value, capital only)1 1,232.56p  978.61p  +25.9 
Net asset value per share (debenture at fair value)2 1,237.77p  982.59p  +26.0 
Numis Smaller Companies plus AIM (excluding Investment Companies) Index3  5,265.38   4,372.19  +20.4 
Share price 1,060.00p  863.00p  +22.8 
 --------   --------   -------- 
Revenue return per share 22.47p  20.57p  +9.2 
Interim dividend per share 8.00p  7.00p  +14.3 
Proposed final dividend per share 13.00p  10.50p  +23.8 
Total dividends paid and payable 21.00p  17.50p  +20.0 
 --------   --------   -------- 
Total assets less current liabilities (£’000)  646,994   514,962  +25.6 
Equity shareholders’ funds (£’000)  597,073   475,055  +25.7 
 --------   --------   -------- 
Ongoing charges ratio4 0.7%  0.7% 
Ongoing charges ratio (including performance fees) 1.0%  0.9% 
Dividend yield 2.0%  2.0% 
Gearing 8.5%  6.6% 

1.    The capital only NAV is calculated without income for the year to 28 February 2017 and 29 February 2016 respectively, net of dividends paid in respect of the relevant financial years. More detail is given in the glossary on page 76 of the Annual Report and Financial Statements.
2.    The basis of calculation for the fair value of the debenture is disclosed in note 13 on page 55 of the Annual Report and Financial Statements.
3.    Excludes income reinvested.
4.    Ongoing charges ratio calculated as a percentage of average shareholders’ funds and using expenses, excluding finance costs, performance fees and taxation, in accordance with AIC guidelines.

Sources: BlackRock and Datastream.
 

CHAIRMAN’S STATEMENT

Your Company has a remarkable record. For fourteen consecutive years it has outperformed its benchmark and increased its dividend. Over that period, the NAV has grown nearly ten-fold whereas the benchmark has almost quadrupled. The compound annual increase in dividends paid over the past five years has been 20% per annum.

PERFORMANCE

During the year to 28 February 2017, the Company’s net asset value (“NAV”) increased by 25.7% to 1,247.03p per share, compared with its benchmark, the Numis Smaller Companies plus AIM (excluding Investment Companies) Index, which increased by 20.4%1. During the financial year, your Company’s share price increased by 22.8%1 to 1,060.00p per share, and subsequently reached an all-time high of 1,151.50 pence per share on 26 April 2017.

The year under review was exceptionally volatile, with the results of the EU referendum and the US General Elections being major factors. In the UK markets initially recovered well following the sharp setback at the time of the EU referendum in June, buoyed by strong UK GDP growth and the effect on export revenues (and balance sheet values) caused by the substantial fall in sterling. In the US, markets reacted positively to President Trump’s indicated economic policies which were seen as supportive to US GDP growth. Recent economic data from China and Europe was also better than expected.

Against this improving backdrop, small capitalisation stocks outperformed mid and large capitalisation stocks; the FTSE AIM All Share Index1 rose by 30.9% compared with the FTSE 250 Index1,2 which increased by 11.0% and the FTSE 100 Index1 which rose by 19.1%.

The significant outperformance of the Company’s NAV over the year was largely attributable to good stock selection and to the positive impact of gearing. The best individual stock performances came from companies with exposure to leisure and UK consumer discretionary spending and the mining and biotechnology sectors.

Despite the positive contribution from mining companies held within the portfolio, the Company’s underweight exposure to this sector detracted from performance in the year. Other detractors from performance included the overweight portfolio exposure to general retailers and an exposure to certain individual companies supplying the housing sector. More details of the various contributors to performance can be found in the Investment Manager’s Report.

1.    Percentages in sterling terms without income reinvested unless otherwise specified.
2.    Excluding investment trusts.


Performance to 28 February 2017 
1 Year 
change % 
3 Years 
change % 
5 Years 
change % 
10 Years 
change % 
NAV per share 25.7  26.4  101.4  173.9 
Benchmark 20.4  5.2  46.9  28.4 
NAV per share (with income reinvested) 27.9  32.5  117.7  218.0 
Benchmark (with income reinvested) 23.6  14.1  67.5  65.8 
Share price (with income reinvested) 25.4  23.2  130.2  221.8 

Since the financial year end, and up to 27 April 2017, the Company’s NAV has increased by 9.5%, against an increase in the benchmark of 5.9%, and the share price has risen by 8.1%. Over the longer term the Company’s performance has substantially exceeded its benchmark, as shown in the table above.

The progression of the Company's total return performance (with income reinvested) over the last ten years is shown in the chart on page 4 of the Annual Report and Financial Statements.

EARNINGS AND DIVIDENDS

The Company’s revenue return per share for the year ended 28 February 2017 increased by 9.2%, to 22.47 pence per share compared with 20.57 pence per share for the previous year.

Regular dividends from portfolio companies also rose by 11%, while special dividends received were 21% lower than in the previous year.

In October 2016 the Board declared an interim dividend of 8.00p per share (2016: 7.00p per share). The Directors are pleased to recommend the payment of a final dividend of 13.00p per share (2016: 10.50p per share), making a total for the year of 21.00p, an increase of 20.0% over the total dividend of 17.50p paid in the previous year. Subject to shareholder approval, the final dividend will be paid on 19 June 2017 to shareholders on the register on 19 May 2017; the ex-dividend date is 18 May 2017.

The compound annual increase in dividends paid over the past five years has been 20% per annum.

Your Company has now increased its dividends every year for each of the last fourteen years. The Board is very conscious of the importance of income to many investors, and while the objective of the Company remains long term capital growth, it is clear that investing in smaller companies can also result in substantial income growth over the long term.

The profile of growth in dividends paid by the Company over the last ten years is shown in the graph on page 5 of the Annual Report and Financial Statements.

GEARING AND SOURCES OF FINANCE

The Company has a range of borrowings and facilities in place to provide balance between longer term and short term maturities and between fixed and floating rates of interest.

As well as the Company’s existing £15 million debenture, the Company has a £35 million three year revolving loan facility with Scotia Bank (Ireland) Limited and an uncommitted overdraft facility of £10 million.

The Company has recently agreed to issue £25 million senior unsecured fixed rate private placement notes (the “Notes”) at a coupon of 2.74% with a 20 year bullet maturity. This transaction will provide fixed rate, long dated, Sterling financing on terms that the Company considers highly attractive.

It is the Board’s intention that gearing will not exceed 15% of the net assets of the Company at the time of the drawdown of the relevant borrowings. Under normal operating conditions it is envisaged that gearing will be within a range of 0%-15% of net assets. Gearing levels and sources of funding are reviewed regularly and the Board continues to believe that moderate gearing is in the long term interests of shareholders. At the year end, the Company’s gearing was 8.5% of net assets.

DISCOUNT

During the year the share price traded at an average discount of 15.4% to NAV. The discount ranged between 9.5% and 20.0% and ended the year at 14.4% (all measured against NAV with debt at fair value). The discount has since widened slightly to 15.5% as at 27 April 2017.

CHANGE IN INVESTMENT POLICY

The Board, in conjunction with the Manager and the Company’s stockbroker, has conducted a review of the validity of the AIM limit of 40%.

In recent years, some of the Company’s AIM holdings have performed very well and this has resulted in an increase in the portfolio’s aggregate exposure to AIM to about 39% of the total portfolio. The Investment Manager is reluctant to sell some of these AIM stocks just because the exceptional performance has brought total AIM holdings close to the current 40% AIM limit. This limit could also preclude the Investment Manager from taking part in IPOs or placings of companies that are regarded as attractive investment propositions.

Apart from the IPOs offered on AIM, the Investment Manager believes that in general the quality of AIM constituents has improved compared with several years ago. The Investment Manager’s investment process involves looking for companies entirely on their own merits. Whether such a company is AIM listed or fully listed should, we believe, be a secondary consideration; it is important that the Investment Manager should have access to a full range of investment opportunities.

Consequently the Board announced on 4 April 2017 that the limit on the percentage of the portfolio in AIM-listed investments would be raised from 40% to 50% with immediate effect.

ANNUAL GENERAL MEETING

The AGM of the Company will be held at the offices of BlackRock at 12 Throgmorton Avenue, London EC2N 2DL on 8 June 2017 at 11.30 a.m. Mike Prentis, the Portfolio Manager, will be making a presentation to shareholders on the Company’s performance and the outlook for equity markets. The Directors and representatives of the Manager look forward to meeting shareholders informally after the meeting and I hope that as many shareholders as possible will choose to attend.

OUTLOOK

The anticipated changes to economic policies following the US election are expected, over time, to support an acceleration of US spending and an increase in US GDP growth.  In the UK consumer and business confidence is holding up well despite BREXIT concerns; European and Chinese economic data is also encouraging.

The Company’s portfolio continues to be well diversified by stock, sector and geographic exposure. The focus remains on high quality, well run UK companies which have strong balance sheets and are cash generative. Your Board is confident that the portfolio is constructed to continue to produce rewarding results for shareholders.

NICHOLAS FRY
Chairman

2 May 2017
 

INVESTMENT MANAGER’S REPORT

MARKET REVIEW AND OVERALL INVESTMENT PERFORMANCE

UK stock markets have recovered well following the sharp setback at the time of the EU referendum last June, helped in part by stronger than expected UK GDP growth. In the US, the Trump victory has been taken well by stock markets as he seems determined to take measures to accelerate US GDP growth. In China, data has tended to suggest growth is holding up well, again probably better than expected. The political uncertainties in Europe have so far taken second place to generally improving economic data. The direction of interest rates has started to point upwards, most obviously in the US.

PERFORMANCE REVIEW

The Company’s NAV per share increased by 25.7% to 1,247.03p. This compares to an increase in the benchmark index of 20.4% and the FTSE100 of 19.1% (all calculations without income reinvested).

Outperformance was largely driven by stock selection and gearing. The stocks contributing most positively to outperformance were Fevertree Drinks, 4imprint Group, MaxCyte, Keywords Studios, KAZ Minerals and Tharisa, each of which contributed at least 0.5% to relative performance. With the exception of 4imprint Group, one of our largest holdings, share prices in each of the others comfortably doubled.

Fevertree Drinks continues to grow strongly, with 73% organic sales growth in 2016, helped by a focus on new product development and good international distribution. The company is competing effectively in a large global market in which it still has a small share for its superior premium mixers. 4imprint Group generates virtually all of its profits in the US and should be helped by a stronger US economy. Revenues increased by 14% in 2016 on a like for like basis. MaxCyte is a developer and supplier of cell engineering products and technologies to biopharmaceuticals firms. Revenues, although still quite modest, grew by more than 30% in 2016 and look set to continue growing strongly. Keywords Studios is a leading international technical services provider to the global video games industry. It is seeing further strong organic growth and geographic expansion complemented by suitable acquisitions. The growth of virtual and augmented reality platforms is increasing the complexity of video games and providing more opportunities, enabling them to deliver better than expected profit growth. KAZ Minerals is executing well as it ramps up production at its two large mines in Eastern Kazakhstan. The increase in the copper price is timely and should help it achieve significant improvement in cash flow in 2017. Tharisa is a producer of platinum group metals and chrome from a shallow and large scale, long life open pit. Chrome prices rose sharply in late 2016 adding significantly to Tharisa’s margins and cash flows. Management are very positive about the prospects for 2017.

The only holding which detracted more than 0.5% from relative performance was Topps Tiles, the UK’s leading retailer of ceramic tiles, which saw weakening like for like sales post the EU referendum; we reduced the Company’s position. However, not holding a number of strongly performing stocks in the benchmark also detracted from relative performance, notably mining stocks such as Evraz and Vedanta. The portfolio was underweight the mining sector for most of the year and this detracted 1.0% from relative performance. The overweight sector position in general retailers also materially detracted from relative performance.

Gearing was on average 7.8% during the year, and this contributed 2.0% to relative performance.

ACTIVITY

We reduced exposure to the UK economy during the second half of 2016 cutting holdings in a number of retailers, challenger banks, wealth managers and software companies. We continued to sell positions in other holdings where we were less confident about growth prospects. A few holdings were bid for, notably Lavendon and e2v Technologies. These were examples of overseas buyers seeing good value in UK listed stocks.

We have continued to invest selectively in IPOs. In the first half we invested in Joules, the retailer of good value, colourful country wear. In the second half the IPOs we invested in included Premier Asset Management, Warpaint and Xafinity. Premier Asset Management is a fast-growing and profitable UK retail asset management group with a particular focus on multi-asset and income investment management. Warpaint is a colour cosmetics business. Their own-brand division consists primarily of the Group’s flagship brand, W7 – a creative, design-focused cosmetic brand proposition with a focus on the 16-30 age range, delivering high-quality cosmetics at affordable prices. W7 is sold in more than 40 countries. Xafinity is a UK specialist in pensions actuarial, consulting and administration, providing advisory and compliance services to more than 550 pension scheme clients. Xafinity’s revenues are very dependable because it typically works closely with trustees on pension schemes over the long term.

We added a number of other holdings to the portfolio, some acquired in placings, including Countryside Properties, Ferrexpo and Hurricane Energy. Countryside Properties builds houses both on land owned or controlled by itself, and also on land owned by public bodies including local authorities. The latter approach avoids the need to buy land in these situations and helps the company generate good returns on investment on such long term developments, and also provides visibility of revenues. We believe the company looks set for good earnings growth. Ferrexpo mines, processes and sells high quality iron ore pellets to the global steel industry, and has been doing so for 35 years. It owns the largest iron ore deposit in Europe with 20 billion tonnes of resources located in the Poltava region of Ukraine. Hurricane Energy is an oil and gas exploration company which owns 100% of one the largest undeveloped fields offshore UK which it is in the process of proving up.

PORTFOLIO POSITIONING

The Company’s benchmark is rebalanced annually at the start of each calendar year. Relative to the benchmark index the portfolio is currently most overweight in media, industrial engineering, household goods and retailers. Our media stocks include 4imprint Group and Next Fifteen which are both heavily US and business to business focussed. Our engineering holdings include Hill & Smith, Avon Rubber, Bodycote, Gooch & Housego and Trifast. All these companies are very internationally focussed and generally supplying attractive vertical markets. The portfolio’s mining holdings include Centamin, a gold producer, and KAZ Minerals; both are low cost, well run operations. About half of the revenues of the portfolio originate in the UK and these include defensive consumer companies such as CVS Group, a large supplier of veterinary services, and Cineworld. More cyclical consumer companies include JD Sports and Headlam Group, but both of these continue to trade well. The portfolio is also overweight in the construction sector with holdings having a more infrastructure and public housing focus, including Morgan Sindall, Marshalls and Costain.

The portfolio is underweight in food producers, technology hardware and challenger banks.

INVESTMENT SIZE AS AT 28 FEBRUARY 2017

Number of Investments % of portfolio
£0m to £1m 13 0.8
£1m to £2m 27 6.4
£2m to £3m 39 15.2
£3m to £4m 24 13
£4m to £5m 21 14.3
£5m to £6m 10 8.6
£6m to £7m 11 11.3
£7m to £8m 7 8.1
£8m to £9m 5 6.6
£9m to £10m 4 5.8
£10m to £11m 2 3.3
£13m to £14m 1 2
£14m to £15m 1 2.2
£15m to £16m 1 2.4

Source: BlackRock.
 

MARKET CAPITALISATION OF OUR PORTFOLIO COMPANIES AS AT 28 FEBRUARY 2017

% of portfolio
£0m to £100m 5
£100m to £400m 43
£400m to £1bn 31
£1bn+ 21

Source: BlackRock.


OUTLOOK

Markets have taken the outcome of the US election well so far with hopes that this will see an acceleration of US spending and an increase in US GDP growth. The UK now faces a General Election which takes place against a backdrop of stronger than expected GDP growth. A greater Conservative majority and a new five year mandate will give the Government a stronger negotiating hand in BREXIT discussions and will probably be taken well by markets. Within Europe there are some signs of improving growth trends, and investors appear more focused on these rather than possible electoral upsets. Chinese GDP growth also looks to be better than feared.

Our portfolio continues to be well diversified by stock, end markets and geography. Many of our holdings are long term winners and others are relatively defensive. Most importantly we have considerable confidence in the management teams running our holdings and their ability to adjust and cope in the face of uncertainty.

MIKE PRENTIS
BlackRock Investment Management (UK) Limited

2 May 2017


SUMMARY OF THE TEN LARGEST INVESTMENTS AS AT 28 FEBRUARY 2017

Set out below is a brief description by the Investment Manager of the Company’s ten largest investments.

CVS GROUP: 2.4% (2016: 2.3%) is one of the leading veterinary services providers in the UK and owns more than 380 veterinary surgeries throughout the UK and in the Netherlands. The services provided by the group include preventative health care through the Healthy Pet Club, their own night services and their own pet crematoria and cemeteries. CVS Group has grown organically and by way of a number of bolt on acquisitions to accelerate national coverage. Earnings growth has been strong for several years and we expect this to continue.

4IMPRINT GROUP: 2.2% (2016: 2.0%) is a leading supplier of promotional products operating almost wholly in the US market. It sells an extensive range of products to businesses and organisations of all sizes, typically customised with the customers’ brand or logo. Its growth is underpinned by a range of data-driven traditional and online marketing. In 2016, the company grew revenues organically by 13% and earnings per share by 12%. It continues to have excellent growth prospects not least because of the strength of the US economy but also its market share of about 5% in a highly fragmented market.

DECHRA PHARMACEUTICALS: 2.0% (2016: 1.8%) is an international specialist veterinary pharmaceutical products business. Their expertise is in the development, manufacture, marketing and sales of a range of predominantly pharmaceutical products. Sales of its main products are long life and growing well and the company has a good pipeline of prospective products in development.

AVON RUBBER: 1.7% (2016: 1.4%) is an engineering company which is focused on two core markets, protection & defence and dairy. The protection & defence business is the global leader in advanced chemical, biological, radiological and nuclear respiratory protection solutions for use by the military, national security and emergency services. The company’s principal products are a range of respiratory masks and replacement filters. There is scope to grow considerably in its core US market as well as overseas. The dairy business manufactures and supplies dairy liners and tubing both to OEM manufacturers of milking parlour systems and directly to farms under its market leading Milkrite brand. Growth has been strong in both divisions and looks well set.

JD SPORTS FASHION: 1.6% (2016: 1.8%) is a retailer of sports fashion and outdoor brands operating in the UK and Europe. It has excellent relationships with some of the biggest global sports brands with whom it works closely as it expands its footprint.

HEADLAM GROUP: 1.5% (2016: 1.5%) is the UK’s leading distributor of a wide range of products sourced from floorcovering suppliers across the world. These are sold to a customer base which mainly comprises independent floorcovering retailers and contractors. The company is well invested and should continue to grow earnings as market conditions improve.

HILL & SMITH: 1.5% (2016: 1.2%) has three main business segments: Infrastructure Products - Roads, supplying products and services such as permanent and temporary road safety barriers, hostile vehicle mitigation products, street lighting columns, bridge parapets, variable road messaging solutions and traffic data collection systems. Infrastructure Products - Utilities, supplying products and services such as pipe supports for the power and liquid natural gas markets, energy grid components, flood prevention barriers and security fencing. Galvanizing Services which provides zinc and other coatings for a wide range of products including fencing, lighting columns, structural steel work and for the infrastructure and construction markets. Hill & Smith operates mainly in the US, UK and France. It is a clear beneficiary of increased spending on infrastructure in the UK and US especially on roads.

WORKSPACE GROUP: 1.4% (2016: 1.6%) is a provider of office premises tailored to the needs of new and growing businesses across London. It owns more than 100 properties in London providing 5.2 million square feet of space which is home to some 4,000 businesses employing more than 30,000 people. The company provides the right properties to attract and retain customers giving them the flexibility to adjust the space they need to help them grow. Occupancy levels have continued to increase as have rents per square foot. The company has also supplemented core operational income and capital values by redeveloping certain property assets. This has enabled the company’s net asset value to grow steadily and we expect this to continue as London thrives and creates more jobs.

BODYCOTE: 1.4% (2016: 1.3%) is a leading provider of thermal processing services worldwide. Thermal processing encompasses a variety of techniques and specialist engineering processes which improve the properties of metals and alloys and extend the life of components. These are a vital part of many manufacturing processes. Through its global network of more than 180 facilities, and the experience and knowledge of its people, Bodycote is well placed to offer a high quality, reliable and cost effective specialist service to manufacturers. It supplies most sectors including aerospace and automotive, and is well placed to benefit from increasing global economic growth.

ADVANCED MEDICAL SOLUTIONS: 1.4% (2016: 1.4%) is a leading developer and manufacturer of innovative and technologically advanced products for the global advanced wound care, surgical and wound closure markets. It manufactures a wide range of products including those marketed under the brands ActivHeal®, LiquiBand® and RESORBA®. The LiquiBand wound closure products have been especially successful winning 23% of the US market by combining good adhesive technology with innovatively designed applicators which are easier for surgeons to use and allow rapid wound closure. There is good scope to gain further market share.

All percentages reflect the value of the holding as a percentage of total investments. For this purpose, where more than one class of securities is held, these have been aggregated. Together, the ten largest investments represent 17.1% of total investments (ten largest investments as at 29 February 2016: 17.5%).

FIFTY LARGEST INVESTMENTS


Company 
Market value 
£’000
% of total 
portfolio 

Business activity
CVS Group 15,419  2.4  Operation of veterinary surgeries
4imprint Group 14,407  2.2  Supply of promotional merchandise in the US
Dechra Pharmaceuticals 13,173  2.0  Development and supply of pharmaceutical and other products focused on the veterinary market
Avon Rubber 10,900  1.7  Production of safety masks and dairy related products
JD Sports Fashion 10,642  1.6  Retail of sports and leisure footwear and clothing
Headlam Group 9,671  1.5  Distribution of carpets and other floor coverings
Hill & Smith 9,557  1.5  Production of infrastructure products and supply of galvanizing services
Workspace Group 9,379  1.4  Supply of flexible workspace to businesses in London
Bodycote 9,368  1.4  Provision of thermal processing services
Advanced Medical Solutions 8,771  1.4  Development and provision of products for global wound care and wound closure markets
Savills 8,493  1.3  Provision of property services
Accesso Technology 8,446  1.3  Development and supply of ticketing and virtual queuing solutions for leisure attractions
Cineworld Group 8,205  1.3  Operation of cinemas
Next Fifteen Communications 8,125  1.3  Provision of digital communications services
Big Yellow 7,890  1.2  Provision of self storage facilities
Centamin 7,719  1.2  Mineral exploration, development and mining
Fevertree Drinks 7,560  1.2  Development and sale of soft drinks and mixers
Scapa 7,424  1.2  Manufacture of bonding solutions and adhesive components for applications in the health care and industrial markets
Gooch & Housego 7,403  1.1  Design and manufacture of precision optical components, subsystems and instruments used to transmit and measure light
Polar Capital Holdings 7,339  1.1  Provision of investment management services
Restore 7,311  1.1  Management of business information in both paper and digital form
Young & Co's Brewery – Non-Voting
Young & Co's Brewery – A Shares
4,083 
2,916 
1.1  Ownership of pubs in the London area
KAZ Minerals 6,967  1.1  Copper mining
Marshalls 6,943  1.1  Manufacture and sale of concrete and stone paving and related products
Sanne 6,886  1.1  Provision of fund and corporate administration services
St. Modwen Properties 6,883  1.1  Investment in, and development of, property
Trifast 6,354  1.0  Manufacturing and distribution of industrial fastenings
Cairn Energy 6,352  1.0  Exploration for oil
Robert Walters 6,334  1.0  Provision of specialist professional recruitment services
Ocean Wilsons 6,168  1.0  Port servicing and related manufacturing
Faroe Petroleum 6,148  0.9  Oil and gas exploration and production
Morgan Sindall 6,135  0.9  Supply of office fit out, construction and urban regeneration services
Hansteen Holdings 5,987  0.9  Ownership of industrial property
Johnson Service Group 5,936  0.9  Provision of textile related services
Keywords Studios 5,906  0.9  Provision of services to the global video games industry
Coats Group 5,863  0.9  Manufacturer of industrial thread
Fuller Smith & Turner - A Shares 5,599  0.9  Ownership of pubs in the London area
Walker Greenbank 5,590  0.9  Design, manufacture and distribution of wallcoverings and furnishing fabrics
Diploma 5,499  0.8  Supply of specialised technical products and services
GB Group 5,312  0.8  Development and supply of identity verification solutions
Quartix 5,101  0.8  Design and supply of vehicle tracking systems
MaxCyte 5,036  0.8  Development and supply of biopharmaceutical products
Xafinity 4,996  0.8  Provision of pensions advisory and compliance services
Cohort 4,950  0.8  Development of technology in defence and security markets
Warpaint London 4,820  0.7  Design and supply of fashion cosmetics
Joules 4,734  0.7  Design and retail of colourful clothing and footwear
Ferrexpo 4,725  0.7  Mining, processing and supply of quality iron ore pellets
First Derivatives 4,623  0.7  Development of software to facilitate the management of data and related services
Tarsus 4,622  0.7  Organisation of exhibitions, mainly in emerging markets
Safestore Holdings 4,616  0.7  Ownership and operation of self storage facilities
 --------   ----- 
50 largest investments 363,286  56.1 
116 remaining investments 284,695  43.9 
 ----------   ----- 
Total 647,981  100.0 
 =======   ==== 

A complete listing of all of the Company’s portfolio holdings as at 28 February 2017 is given on the Company’s website at the following link: blackrock.com/uk/individual/literature/fund-update/brsct-portfolio-disclosure.pdf. At 28 February 2017, the Company did not hold any equity interests comprising more than 3% of any company’s share capital other than as disclosed in the table below:

Company  % owned 
MaxCyte Inc. 4.92 
Brighton Pier Group Plc 4.59 
WLL London Plc 4.43 
Richland Resources Ltd 4.42 
Capital Drilling Ltd 4.32 
BrainJuicer Group Plc 4.32 
Air Partner Plc 4.14 
Walker Greenbank Plc 4.01 
City of London Investment Group Plc 3.94 
Kromek Group Plc 3.86 
Avon Rubber Plc 3.62 
Northbridge Industrial Services Plc 3.17 
Kalibrate Technologies Plc 3.17 
Filta Group Plc 3.15 
4imprint Group Plc 3.13 
Zotefoams Plc 3.01 

COMPARATIVE FOR TEN LARGEST INVESTMENTS

Company 
 
2017 
Market value 
£’000 
2017 
% of total 
portfolio 
2016 
Market value 
£’000 
2016 
% of total 
portfolio 
CVS Group 15,419  2.4  11,583  2.3 
4imprint Group 14,407  2.2  10,322  2.0 
Dechra Pharmaceuticals 13,173  2.0  9,070  1.8 
Avon Rubber 10,900  1.7  7,290  1.4 
JD Sports Fashion 10,642  1.6  9,236  1.8 
Headlam Group 9,671  1.5  7,465  1.5 
Hill & Smith 9,557  1.5  6,268  1.2 
Workspace Group 9,379  1.4  8,327  1.6 
Bodycote 9,368  1.4  6,459  1.3 
Advanced Medical Solutions 8,771  1.4  6,883  1.4 
 --------   --------   --------   -------- 
111,287  17.1  82,903  16.3 
 ======   ======   ======   ====== 

DISTRIBUTION OF INVESTMENTS
 

Sector  % of portfolio 
Oil & Gas Producers  3.9 
------
Oil & Gas  3.9 
------
Chemicals  3.1 
Mining 7.0 
Industrial Metals & Mining 0.7 
------
Basic Materials 10.8 
------
Construction & Materials 6.0 
Aerospace & Defence 2.9 
Electronic & Electrical Equipment 1.7 
General Industrials 1.2 
Industrial Engineering 5.5 
Industrial Transportation 2.2 
Support Services 8.9 
------
Industrials  28.4 
------
Beverages 1.2 
Household Goods & Home Construction 6.1 
Personal Goods 0.7 
Leisure Goods  0.6 
------
Consumer Goods  8.6 
------
Health Care Equipment & Services 3.0 
Pharmaceuticals & Biotechnology 3.7 
------
Health Care 6.7 
------
General Retailers 6.9 
Media 7.6 
Travel & Leisure 5.1 
------
Consumer Services  19.6 
------
Banks 0.2 
Financial Services 7.0 
Nonlife Insurance  0.3 
Real Estate Investment & Services 2.8 
Real Estate Investment Trusts 4.9 
------
Financials 15.2 
------
Software & Computer Services 6.4 
------
Technology 6.4 
------
Gas, Water & Multiutilities 0.4 
------
Utilities 0.4 
------

ANALYSIS OF PORTFOLIO VALUE BY SECTOR

Company Portfolio % Benchmark %
Oil & Gas 3.9 5.4
Basic Materials 10.8 6.3
Industrials 28.4 23.3
Consumer Goods 8.6 10.2
Health Care 6.7 6.1
Consumer Services 19.6 17.6
Financials 15.2 21.5
Technology 6.4 7.9
Utilities 0.4 0.2
Telecommunications 0.0 1.1
Other 0.0 0.4

Source: BlackRock.
 

STRATEGIC REPORT

The Directors present the Strategic Report of the Company for the year ended 28 February 2017. The aim of the Strategic Report is to provide shareholders with the information to assess how the Directors have performed their duty to promote the success of the Company for the collective benefit of shareholders.

PRINCIPAL ACTIVITY

The Company carries on business as an investment trust and its principal activity is portfolio investment. Investment trusts, like unit trusts and OEICs, are pooled investment vehicles which allow exposure to a diversified range of assets through a single investment, thus spreading, although not eliminating investment risk.

OBJECTIVE

The Company’s prime objective is to achieve long term capital growth for shareholders through investment mainly in smaller UK quoted companies.

No material change will be made to the Company’s investment objective without shareholder approval.

STRATEGY, BUSINESS MODEL AND INVESTMENT POLICY

To achieve its investment objective the Company invests predominantly in UK Smaller Companies which are listed on the London Stock Exchange or on the Alternative Investment Market (AIM). The Board has previously indicated that its intention was that the value of AIM listed stocks as a percentage of the Company’s portfolio should not exceed 40%. However, for the reasons set out in the Chairman’s Statement, the Board announced on 16 March that it was undertaking a review of this threshold. After consultation with the Company’s largest shareholders, it was subsequently announced on 4 April 2017 that the Board had decided to increase the AIM limit from 40% to 50% of the portfolio by value. The Manager’s approach in determining the optimal exposure to AIM investments, subject to the parameters set by the Board, is to focus on the merits of the underlying company and to seek value rather than to focus on the exchange on which the holding is listed, and consequently the level of exposure to AIM investments will vary from time to time. The Company may also invest in securities which are listed overseas but have a secondary UK quotation. Although investments are primarily in companies listed on recognised stock exchanges, the Investment Manager may also invest in unquoted securities with the prior approval of the Board. At 28 February 2017 the Company did not hold any unquoted investments in its portfolio.

BUSINESS MODEL

The Company’s business model follows that of an externally managed investment trust. Therefore the Company does not have any employees and outsources its activities to third party service providers including the Manager, who is the principal service provider. The management of the investment portfolio and the administration of the Company have been contractually delegated to the Manager who in turn (with the permission of the Company) has delegated certain investment management and other ancillary services to the Investment Manager. The Manager, operating under guidelines determined by the Board, has direct responsibility for the decisions relating to the day-to-day running of the Company and is accountable to the Board for the investment, financial and operating performance of the Company.

Other service providers include the Depositary, BNYM (who provide both fund accounting and custody services), and the Registrar, Computershare Investor Services PLC (Computershare). Details of the contractual terms with third party service providers are set out in the Directors’ Report.

INVESTMENT POLICY

The Manager has adopted a consistent investment process, focusing on good quality growth companies that are trading well; stock selection is the primary focus but consideration is also given to sector weightings and underlying themes. Whilst there are no set limits on individual sector exposures against the Company’s benchmark, a schedule of sector weightings is presented at each Board meeting for review. In applying the investment objective, the Investment Manager expects the Company to be fully invested and to borrow as and when appropriate. The Company seeks to achieve an appropriate spread of investment risk by investing in a number of holdings across a range of sectors.

The Company may not hold more than 5% of the share capital of any company in which it has an investment. In addition, while the Company may hold shares in other listed investment companies (including investment trusts) the Board has agreed that the Company will not invest more than 15% of its total assets in other UK listed investment companies. The Investment Manager will not deal in derivatives without the prior approval of the Board and derivative instruments, such as options and futures contracts, have not been used during the year.

Performance is measured against an appropriate benchmark, the Numis Smaller Companies plus AIM (excluding Investment Companies) Index.

INVESTMENT PROCESS

An overview of the investment process is set out below.

The Investment Manager seeks to identify companies which it believes have superior long term growth prospects and the management in place to take advantage of these prospects. This is done through monitoring market newsflow carefully, looking for signs of outperformance and by working closely with BlackRock’s network of brokers. Initially, if the Investment Manager is sufficiently impressed with a company’s prospects, it will look to take a small position, usually 0.25% to 0.50% of the Company’s net assets, in a new holding. These holdings will be closely monitored, and members of the portfolio management team will meet with management on a regular basis. If these companies continue to prosper and make the most of opportunities, the Investment Manager will gradually add to the portfolio holding. Where initial expectations are disappointed, the holding will be sold. The anticipation is that each holding will develop into a core holding over time; one that meets BlackRock’s criteria for high quality growth companies. These criteria are shown in the ‘steering wheel’ diagram on page 14 of the Annual Report and Financial Statements.

Valuation is a key consideration; it is important not to overpay for new holdings. However, investment fundamentals are also important and the Investment Manager may be prepared to pay what seems like a high price if it believes that long term growth prospects are very strong. Generally a company will be held within the portfolio as long as it meets the criteria for core holdings; in respect of recent investments, the Investment Manager will consider whether they have the potential to meet these criteria. Holdings will be sold if there are concerns that the investment case has changed in a negative way. Holdings will be reduced where the position size becomes too large and raises concerns about risk and diversification. The general aim is for portfolio holdings not to exceed 3% of the Company’s net assets (excluding cash fund investments held for cash management purposes).

INVESTMENT PHILOSOPHY

The Investment Manager believes that consistent outperformance can be achieved by employing a combination of bottom-up and top-down analysis, based upon strong fundamental research.

In building a robust portfolio the Investment Manager will also consider the macro-economic background, working with strategists, economists and other teams internally and externally to understand this better. It also works closely with BlackRock’s risk team to assess the risks in the structure of the portfolio. Any necessary adjustments will be made to the portfolio to ensure that it is structured in an appropriate way from a macro and risk point of view.

GEARING POLICY

The Board believes that gearing can add value over the long term. The Company currently has £15 million of debenture stock in issue, a £35 million three year revolving loan facility with Scotia Bank (Ireland) Limited and an uncommitted overdraft facility of £10 million with Bank of New York Mellon (International) Limited (BNYM). The benefits of gearing are discussed and the effective level agreed with the Manager regularly. It is intended that gearing will not exceed 15% of the net assets of the Company at the time of the drawdown of the relevant borrowings and at the balance sheet date gearing stood at 8.5% of net assets (with debt at par). Under normal operating circumstances, it is envisaged that gearing will be within a range between 0%-15% of net assets.

Subsequent to 28 February 2017, the Company has agreed to issue £25 million senior unsecured fixed rate private placement notes (the “Notes”) at a coupon of 2.74% with a 20 year bullet maturity. The funding date for the Notes will be 24 May 2017 and the Notes will be due for repayment on 24 May 2037. The semi-annual interest payment dates for the Notes will be May 24 and November 24. Additional information is given in the Chairman’s Statement and in note 15.

PORTFOLIO ANALYSIS

A detailed analysis of the portfolio has been provided under the heading “Fifty Largest Investments” above.

PERFORMANCE

Details of the Company’s performance including the dividend are set out in the Chairman’s Statement. The Chairman’s Statement and the Investment Manager’s Report form part of this Strategic Report and include a review of the main developments during the year, together with information on investment activity within the Company’s portfolio.

RESULTS AND DIVIDENDS

The results for the Company are set out in the Income Statement. The total net profit for the year, after taxation, was £130,875,000 (2016: £25,780,000) of which the revenue return amounted to £10,759,000 (2016: £9,847,000), and the capital return amounted to £120,116,000 (2016: £15,933,000).

The Company’s revenue return amounted to 22.47p per share (2016: 20.57p). The Directors recommend the payment of a final dividend of 13.00p per share as set out in the Chairman’s Statement.

KEY PERFORMANCE INDICATORS

At each Board meeting, the Directors consider a number of performance measures to assess the Company’s success in achieving its objectives. The key performance indicators (KPIs) used to measure the progress and performance of the Company over time and which are comparable to those reported by other investment trusts are set out below.

Key Performance Indicators  2017  2016 
NAV per share (debenture at par) 1,247.03p  992.18p 
NAV per share (debenture at fair value) 1,237.77p  982.59p 
NAV per share (debenture at par value, capital only) 1,232.56p  978.61p 
Share price 1,060.00p  863.00p 
NAV total return performance (debenture at fair value) 28.2%  5.4% 
Discount to NAV with debenture at fair value 14.4%  12.2% 
Revenue return per share 22.47p  20.57p 
Ongoing charges1 0.7%  0.7% 
 --------   -------- 
Ongoing charges ratio (including performance fees) 1.0%  0.9% 
 --------   -------- 

1. Calculated as a percentage of average shareholders’ funds and using expenses, excluding finance costs, performance fees and taxation in accordance with AIC guidelines.

Sources: BlackRock and Datastream


Additionally, the Board regularly reviews a number of indices and ratios to understand the impact on the Company’s relative performance of the various components such as asset allocation and stock selection. The Board also reviews the performance and ongoing charges of the Company against a peer group of UK smaller companies trusts and open ended funds.

The Directors recognise that it is in the long term interests of shareholders that shares do not trade at a significant discount to their prevailing net asset value. During the year the shares traded between a discount of 9.5% and a discount of 20.0%, ending the year at 14.4% (based on NAV with debt at fair value).

The Board believes that the best way of addressing the discount over the long term is to create demand for the shares in the secondary market. To this end the Investment Manager is devoting considerable effort to broadening the awareness of the Company’s outstanding attractions particularly to wealth managers and to the wider retail shareholder market. Over the last six years, the number of shares held by retail shareholders has increased from 20% to nearly 54%.

PRINCIPAL RISKS

The Company is exposed to a variety of risks and uncertainties. As required by the 2014 UK Corporate Governance Code (the UK Code) the Board has in place a robust ongoing process to assess and monitor the principal risks of the Company including those that would threaten its business model, future performance, solvency or liquidity. A core element of this process is the Company’s risk register which identifies the risks facing the Company, the likelihood and potential impact of each risk and the controls established for mitigation. A residual risk rating is calculated for each risk.

The risk register, its method of preparation and the operation of key controls in BlackRock’s and third party service providers’ systems of internal control are reviewed on a regular basis by the Audit Committee. In order to gain a more comprehensive understanding of BlackRock’s and other third party service providers’ risk management processes and how these apply to the Company’s business, BlackRock’s internal audit department provides an annual presentation to the Audit Chairman setting out the results of testing performed in relation to BlackRock’s internal control processes. The Audit Committee also periodically receives presentations from BlackRock’s Risk & Quantitative Analysis team and reviews Service Organisation Control (SOC 1) reports from the Company’s service providers. The current risk register categorises the Company’s main areas of risk as follows:

The principal risks and uncertainties faced by the Company during the financial year, together with the potential effects, controls and mitigating factors, are set out in the following table.
 

Principal Risk  Mitigation/Control 
Investment performance risk
 
Returns achieved are reliant primarily upon the performance of the portfolio.

The Board is responsible for:

- deciding the investment strategy to fulfil the Company’s objective; and
- monitoring the performance of the Investment Manager and the implementation of the investment strategy.

An inappropriate investment strategy may lead to:

- poor performance compared to the Benchmark Index and the Company’s peer group;
a loss of capital; and 
- dissatisfied shareholders.


To manage this risk the Board:

- regularly reviews the Company’s investment mandate and long term strategy;
has set investment restrictions and guidelines which the Investment Manager monitors and regularly reports on; 

- receives from the Investment Manager a regular explanation of stock selection decisions, portfolio exposure, gearing and any changes in gearing and the rationale for the composition of the investment portfolio; 

- monitors the maintenance of an adequate spread of investments in order to minimise the risks associated with factors specific to particular sectors, based on the diversification requirements inherent in the investment policy; and 

- receives reports showing the Company’s performance against the benchmark. 
Market risk
 
Market risk arises from volatility in the prices of the Company’s investments influenced by currency, interest rate or other price movements. It represents the potential loss the Company might suffer through holding market positions in financial instruments in the face of market movements.


The Board considers asset allocation, stock selection and levels of gearing on a regular basis and has set investment restrictions and guidelines which are monitored and reported on by the Investment Manager.

The Board monitors the implementation and results of the investment process with the Investment Manager.
Income/dividend risk

The amount of dividends and future dividend growth will depend on the performance of the Company’s underlying portfolio. In addition, any change in the tax treatment of the dividends or interest received by the Company may reduce the level of dividends received by shareholders.


The Board monitors this risk through the receipt of detailed income forecasts and considers the level of income at each meeting.

The Company has substantial revenue reserves which can be utilised.
Legal & Compliance risk

The Company has been accepted by HM Revenue & Customs as an investment trust, subject to continuing to meet the relevant eligibility conditions and operates as an investment trust in accordance with Chapter 4 of Part 24 of the Corporation Tax Act 2010. As such, the Company is exempt from capital gains tax on the profits realised from the sale of its investments.

Any breach of the relevant eligibility conditions could lead to the Company losing investment trust status and being subject to corporation tax on capital gains realised within the Company’s portfolio. In such event the investment returns of the Company may be adversely affected.

Any serious breach could result in the Company and/or the Directors being fined or the subject of criminal proceedings or the suspension of the Company’s shares which would in turn lead to a breach of the Corporation Tax Act 2010.

The Company is required to comply with the provisions of the Companies Act 2006, the Alternative Investment Fund Managers Directive and the UK Listing Rules and Disclosure & Transparency Rules.

The Investment Manager monitors investment movements and the amount of proposed dividends to ensure that the provisions of Chapter 4 of Part 24 of the Corporation Tax Act 2010 are not breached. The results are reported to the Board at each meeting.

Compliance with the accounting rules affecting investment trusts is also carefully and regularly monitored.

The Company Secretary and the Company’s professional advisers provide regular reports to the Board in respect of compliance with all applicable rules and regulations.
Operational risk

In common with most other investment trust companies, the Company has no employees. The Company therefore relies on the services provided by third parties. Accordingly, it is dependent on the control systems of the Manager, BNY Mellon Trust & Depositary (UK) Limited (the Depositary) and the Bank of New York Mellon (International) Limited (the Fund Accountant), who maintain the Company’s assets, dealing procedures and accounting records.

Failure by any service provider to carry out its obligations to the Company could have a material adverse effect on the Company’s performance. Disruption to the accounting, payment systems or custody records could prevent the accurate reporting and monitoring of the Company’s financial position.

The security of the Company’s assets, dealing procedures, accounting records and adherence to regulatory and legal requirements depend on the effective operation of the systems of these third party service providers.


Due diligence is undertaken before contracts are entered into with third party service providers. Thereafter, the performance of the provider is subject to regular review and reported to the Board.

Most third party service providers produce Service Organisation Control (SOC 1) reports to provide assurance regarding the effective operation of internal controls as reported on by their reporting accountants. These reports are provided to the Audit Committee.

The Company’s assets are subject to a strict liability regime and in the event of a loss of financial assets held in custody, the Depositary must return assets of an identical type or the corresponding amount, unless able to demonstrate the loss was a result of an event beyond its reasonable control.

The Board reviews the overall performance of the Manager, Investment Manager and all other third party service providers and compliance with the Investment Management Agreement on a regular basis.

The Board also considers the business continuity arrangements of the Company’s key service providers.
Financial risk

The Company’s investment activities expose it to a variety of financial risks that include interest rate, credit and liquidity risk.

Further details are disclosed on pages 56 to 63 of the Annual Report and Financial Statements, together with a summary of the policies for managing these risks.


Details of these risks are disclosed in note 16 to the financial statements, together with a summary of the policies for managing these risks.
Marketing risk

Marketing efforts are inadequate, do not comply with relevant regulatory requirements, and fail to communicate adequately with shareholders or reach out to potential new shareholders resulting in reduced demand for the Company’s shares and a widening discount.


The Board focuses significant time on communications with shareholders and reviewing marketing strategy and initiatives. All investment trust marketing documents are subject to appropriate review and authorisation.

VIABILITY STATEMENT

In accordance with provision C.2.2 of the UK Code, the Directors have assessed the prospects of the Company over a longer period than the 12 months referred to by the ‘Going Concern’ guidelines. The Board conducted this review for the period up to the AGM in 2021 being a five year period from the date that this Annual Report will be approved by shareholders. This assessment term has been chosen as it represents a medium term performance period over which investors in the smaller companies sector generally refer to when making investment decisions.

In making this assessment the Board has considered the following factors:

The Board has also considered a number of financial metrics, including:

The Company is an investment company with a relatively liquid portfolio. As at 28 February 2017, the Company held no unquoted investments, and 60.5% of the Company’s portfolio investments were readily realisable and listed on the London Stock Exchange. The remaining 39.5% that were listed on the Alternative Investment Market are also considered to be readily realisable. The Company has largely fixed overheads (excluding performance fees) which comprise a very small percentage of net assets (0.7%). In addition, any performance fees are capped at 0.25% of NAV. Therefore the Board has concluded that even in exceptionally stressed operating conditions, the Company would comfortably be able to meet its ongoing operating costs as they fall due.

However, investment companies may face other challenges, such as a significant decrease in size due to substantial share buy back activity. The Company has in place the authority to buy back up to 14.99% of issued share capital, but under current circumstances the Board do not envisage that this facility will need to be utilised. In making this assessment the Board have considered the Company’s performance which has outstripped the Company’s benchmark for the last fourteen consecutive years; the Company’s share price has outperformed the benchmark index by 2.4% over one year, 11.5% over three years and 63.8% over five years respectively (all performance calculations exclude income reinvestment).

Based on the results of their analysis, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment.

FUTURE PROSPECTS

The Board’s main focus is to achieve long term capital growth. The future performance of the Company is dependent upon the success of the investment strategy and, to a large extent, on the performance of financial markets. The outlook for the Company in the next twelve months is discussed in the Chairman’s Statement and the Investment Manager’s Report.

SOCIAL, COMMUNITY AND HUMAN RIGHTS ISSUES

As an investment trust, the Company has no direct social or community responsibilities. However, the Directors believe that it is in shareholders’ interests to consider human rights issues, environmental, social and governance matters when selecting and retaining investments. Details of the Company’s policy on socially responsible investment are set out on pages 33 and 34 of the Annual Report and Financial Statements.

MODERN SLAVERY ACT

As an investment vehicle the Company does not provide goods or services in the normal course of business, and does not have customers. Accordingly, the Directors consider that the Company is not required to make any slavery or human trafficking statement under the Modern Slavery Act 2015. In any event, the Board considers the Company’s supply chain, dealing predominantly with professional advisers and service providers in the financial services industry, to be low risk in relation to this matter.

DIRECTORS, GENDER REPRESENTATION AND EMPLOYEES

The Directors of the Company on 28 February 2017 are set out in the Directors’ biographies on page 20 of the Annual Report and Financial Statements. The Board consists of three male Directors and two female Directors. The Company’s policy on diversity is set out on page 31 of the Annual Report and Financial Statements. The Company does not have any executive employees.

The Chairman’s Statement together with the Investment Manager’s Report, forms part of the Strategic Report. The Strategic Report was approved by the Board at its meeting on 2 May 2017.

BY ORDER OF THE BOARD
SARAH BEYNSBERGER
FOR AND ON BEHALF OF
BLACKROCK INVESTMENT MANAGEMENT (UK) LIMITED
Company Secretary

2 May 2017
 

RELATED PARTY TRANSACTIONS

The Manager was appointed as the Company’s Alternative Investment Fund Manager (AIFM) with effect from 2 July 2014. The Manager has (with the Company’s consent) delegated certain portfolio and risk management services, and other ancillary services, to the Investment Manager. Details of the fees payable to the Manager are set out in note 4.

The investment management fee due to the Manager for the year ended 28 February 2017 amounted to £2,943,000 (2016: £2,722,000). A performance fee accrued for the year ended 28 February 2017 amounted to £1,444,000 (2016: £1,258,000). At the year end, £808,000 was outstanding in respect of the management fee (2016: £1,341,000) and £1,444,000 (2016: £1,258,000) in respect of the performance fee.

In addition to the above services, BlackRock provided the Company with marketing services. The total fees paid or payable for these services for the year ended 28 February 2017 amounted to £134,000 including VAT (2016: 164,000). Marketing fees of £206,000 (2016: £229,000) was outstanding at year end.

Disclosures of the Directors’ interests in the Ordinary Shares of the Company and fees and expenses payable to the Directors are set out in the Directors’ Remuneration Report contained in the Annual Report and Financial Statements.

The Board currently consists of five non-executive Directors, all of whom are considered to be independent by the Board.   For the year ended 28 February 2017, the Chairman received an annual fee of £38,500, the Audit Committee Chairman received £28,750 per annum and the other Directors received £25,750 per annum. Following a review on 16 March 2017 and with effect from 1 March 2017, the Chairman will receive an annual fee of £40,000, the Audit Committee Chairman will receive £30,000 per annum and the other Directors will each receive £26,750 per annum. Additional information regarding the basis for determining Directors’ remuneration is set out in the policy report included in the Annual Report and Financial Statements.

The interests of the Directors in the ordinary shares of the Company are set out in the table below. The Company does not have a share option scheme therefore none of the Directors has an interest in share options. All of the Directors in the table below, with the exception of Susan Platts-Martin, held office throughout the year under review. Gillian Nott was a Director at the start of the year and retired on 9 June 2016.

28 February 2017  29 February 2016 
Nicholas Fry (Chairman) 40,000  40,000 
Caroline Burton 5,500  4,500 
Michael Peacock 1,000  1,000 
Robert Robertson 91,062  80,062 
Susan Platts-Martin 2,000  n/a 

All of the holdings of the Directors are beneficial. No changes to these holdings had been notified up to the date of this report.  Susan Platts-Martin was appointed on 21 April 2016.

STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND FINANCIAL STATEMENTS

The Directors are responsible for preparing the Annual Report and Financial Statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company as at the end of each financial year and of the profit or loss of the Company for that year.

In preparing those financial statements, the Directors are required to:

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements and the Directors’ Remuneration Report comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are also responsible for preparing the Strategic Report, Directors’ Report, the Directors’ Remuneration Report, the Corporate Governance Statement and the Report of the Audit Committee in accordance with the Companies Act 2006 and applicable regulations, including the requirements of the Listing Rules and the Disclosure and Transparency Rules. The Directors have delegated responsibility to the Manager for the maintenance and integrity of the Company’s corporate and financial information included on BlackRock’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Each of the Directors, whose names are listed on page 19 confirm that, to the best of their knowledge:

The UK Code also requires Directors to ensure that the Annual Report and Financial Statements are fair, balanced and understandable. In order to reach a conclusion on this matter, the Board has requested that the Audit Committee advise on whether it considers that the Annual Report and Financial Statements fulfils these requirements. The process by which the Committee has reached these conclusions is set out in the Audit Committee’s report on pages 35 to 37 of the Annual Report and Financial Statements. As a result, the Board has concluded that the Annual Report and Financial Statements for the year ended 28 February 2017, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company’s position, performance, business model and strategy.

FOR AND ON BEHALF OF THE BOARD
NICHOLAS FRY
Chairman

2 May 2017

INCOME STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2017



Notes 
2017 
Revenue 
£’000 
2017
Capital 
£’000 
2017
Total 
£’000 
2016 
Revenue 
£’000 
2016
Capital 
£’000 
2016
Total 
£’000 
Gains on investments held at fair value through profit or loss  – 124,817 124,817  – 20,409 20,409
Gains/(losses) on foreign exchange 2 2 (4) (4)
Income from investments held at fair value through profit or loss 12,531  167 12,698 11,550  53 11,603
Other income 2 2  24  –  24
    --------   --------   --------   --------   --------   -------- 
Total income 12,533  124,986 137,519  11,574 20,458 32,032
    --------   --------   --------   --------   --------   -------- 
Expenses
Investment management and performance fees (736) (3,651) (4,387) (681) (3,299) (3,980)
Operating expenses (601) (17) (618) (630) (20) (650)
    --------   --------   --------   --------   --------   -------- 
Total operating expenses (1,337) (3,668) (5,005) (1,311) (3,319) (4,630)
    --------   --------   --------   --------   --------   -------- 
Net profit on ordinary activities before finance costs and taxation 11,196 121,318 132,514 10,263 17,139 27,402
Finance costs (401) (1,202) (1,603) (402) (1,206) (1,608)
    --------   --------   --------   --------   --------   -------- 
Net profit on ordinary activities before taxation 10,795 120,116 130,911 9,861 15,933 25,794
Taxation (36)  – (36) (14)  – (14)
    --------   --------   --------   --------   --------   -------- 
Net profit on ordinary activities after taxation 10,759 120,116 130,875 9,847 15,933 25,780
 ========   ========   ========   ========   ========   ======== 
Revenue return per ordinary share 22.47p 250.87p 273.34p 20.57p 33.27p 53.84p
    ========   ========   ========   ========   ========   ======== 


The total column of this statement represents the Profit and Loss Account of the Company.

The supplementary revenue and capital columns are both prepared under guidance published by the Association of Investment Companies (“AIC”). All items in the above statement derive from continuing operations and no operations were acquired or discontinued during the year. All income is attributable to the equity holders of the Company.

The net profit for the period disclosed above represents the Company’s total comprehensive income.


STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 28 FEBRUARY 2017





Note 

Called up 
share 
capital 
£’000

Share 
premium 
account 
£’000

Capital 
redemption 
reserve 
£’000


Capital 
reserves 
£’000


Revenue 
reserve 
£’000



Total 
£’000 
For the year ended 28 February 2017
At 29 February 2016 12,498  38,952  1,982  405,323  16,300  475,055 
Total comprehensive income:
Profit for the year  –   –   –  120,116  10,759  130,875 
Transactions with owners, recorded directly to equity:
Dividends paid(a) –  –   –   –  (8,857) (8,857)
    --------   --------   --------   --------   --------   -------- 
At 28 February 2017 12,498  38,952  1,982  525,439  18,202  597,073 
    --------   --------   --------   --------   --------   -------- 
For the year ended 29 February 2016
At 28 February 2015 12,498  38,952  1,982  389,390  14,114  456,936 
Total comprehensive income:
Profit for the year –  –  –  15,933  9,847  25,780 
Transactions with owners, recorded directly to equity:
Dividends paid(b) –  –  –  –  (7,661) (7,661)
    --------   --------   --------   --------   --------   -------- 
At 29 February 2016 12,498  38,952  1,982  405,323  16,300  475,055 
    --------   --------   --------   --------   --------   -------- 


(a) Interim dividend paid in respect of the year ended 28 February 2017 of 8.00p was declared on 25 October 2016 and paid on 30 November 2016. Final dividend paid in respect of the year ended 29 February 2016 of 10.50p was declared on 25 April 2016 and paid on 20 June 2016.
(b) Interim dividend paid in respect of the year ended 29 February 2016 of 7.00p was declared on 26 October 2015 and paid on 30 November 2015. Final dividend paid in respect of the year ended 28 February 2015 of 9.00p was declared on 27 April 2015 and paid on 25 June 2015.

BALANCE SHEET AS AT 28 FEBRUARY 2017


Notes
2017 
£’000 
2016 
£’000 
Fixed assets
Investments held at fair value through profit or loss 647,981  506,588 
 --------   -------- 
Current assets
Debtors 1,823  1,254 
Cash and cash equivalents 29  11,988 
 --------   -------- 
1,852  13,242 
 --------   -------- 
Creditors – amounts falling due within one year (2,839) (4,868)
 --------   -------- 
Net current (liabilities)/assets (987) 8,374 
 --------   -------- 
Total assets less current (liabilities)/assets 646,994  514,962 
Creditors - amounts falling due after more than one year (49,921) (39,907)
 --------   -------- 
Net assets 597,073  475,055 
    --------   -------- 
Capital and reserves
Called up share capital 10  12,498  12,498 
Share premium account  38,952  38,952 
Capital redemption reserve  1,982  1,982 
Capital reserves  525,439  405,323 
Revenue reserve  18,202  16,300 
    --------   -------- 
Total shareholders’ funds 597,073  475,055 
    ========   ======== 
Net asset value per ordinary share (debenture at par value) 1,247.03p  992.18p 
    ========   ======== 
Net asset value per ordinary share (debenture at fair value) 1,237.77p  982.59p 
    ========   ======== 


The financial statements on pages 44 to 63 of the Annual Report and Financial Statements were approved and authorised for issue by the Board of Directors on 2 May 2017 and signed on its behalf by Nicholas Fry, Chairman, and Michael Peacock, Director and Audit Committee Chairman.

BlackRock Smaller Companies Trust plc
Registered in Scotland, No. 6176

STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 28 FEBRUARY 2017


Note
2017 
£’000 
2016 
£’000 
Operating activities
Net profit before taxation* 130,911  25,794 
Add back finance costs 1,603  1,608 
Gains on investments held at fair value through profit or loss (124,984) (20,409)
Net movement on foreign exchange (2)
Sales of investments held at fair value through profit or loss 195,444  205,660 
Purchases of investments held at fair value through profit or loss (214,179) (193,747)
Decrease/(increase) in debtors 81  (70)
(Decrease)/increase in creditors (356)
Taxation on investment income (36) (14)
    --------   -------- 
Net cash (used)/generated from operating activities (11,518) 18,832 
    ======   ====== 
Financing activities
Net drawdown of loan 10,000  – 
Interest paid (1,586) (1,593)
Dividends paid (8,857) (7,661)
    --------   -------- 
Net cash used in financing activities (443) (9,254)
    --------   -------- 
(Decrease)/increase in cash and cash equivalents (11,961) 9,578 
    --------   -------- 
Cash and cash equivalents at start of the year 11,988  2,414 
Effect of foreign exchange rate changes (4)
    --------   -------- 
Cash and cash equivalents at end of the year 29  11,988 
    --------   -------- 
Comprised of:
Cash at bank 29  2,241 
BlackRock’s Institutional Cash Series plc - Sterling Liquidity Fund –  9,747 
    --------   -------- 
29  11,988 
    --------   -------- 

* Dividends and interest received in the year amounted to £12,565,000 and £32,000 (2016: £11,473,000 and £25,000) respectively. 

NOTES TO THE FINANCIAL STATEMENTS

1. PRINCIPAL ACTIVITY

The principal activity of the Company is that of an investment trust company within the meaning of section 1158 of the Corporation Tax Act 2010.

2. ACCOUNTING POLICIES

(a) Basis of preparation

The financial statements have been prepared on a going concern basis in accordance with FRS 102 and the revised Statement of Recommended Practice – ‘Financial Statements of Investment Trust Companies and Venture Capital Trusts’ (SORP) issued by the Association of Investment Companies (AIC) in November 2014 and the provisions of the Companies Act 2006.

The principal accounting policies adopted by the Company are set out below. Unless specified otherwise, the policies have been applied consistently throughout the year and are consistent with those applied in the preceding year. All of the Company’s operations are of a continuing nature.

The Company’s financial statements are presented in sterling, which is the currency of the primary economic environment in which the Company operates. All values are rounded to the nearest thousand pounds (£’000) except where otherwise stated.

(b) Presentation of Income Statement

In order to reflect better the activities of an investment trust company and in accordance with guidance issued by the AIC, supplementary information which analyses the Income Statement between items of a revenue and a capital nature has been presented alongside the Income Statement.

(c) Segmental reporting

The Directors are of the opinion that the Company is engaged in a single segment of business being investment business.

(d) Income

Dividends receivable on equity shares are treated as revenue for the year on an ex-dividend basis. Where no ex-dividend date is available, dividends receivable on or before the year end are treated as revenue for the year. Provisions are made for dividends not expected to be received. The return on a debt security is recognised on a time apportionment basis.

Special dividends are recognised on an ex-dividend basis and are treated as capital or revenue receipt depending on the facts or circumstances of each dividend.

Dividends are accounted for in accordance with Section 29 of FRS 102 on the basis of income actually receivable, without adjustment for tax credits attaching to the dividend. Dividends from overseas companies continue to be shown gross of withholding tax.

Deposit Interest receivable is accounted for on an accruals basis.

Where the Company has elected to receive its dividends in the form of additional shares rather than in cash, the cash equivalent of the dividend foregone is recognised in the revenue column of the Income Statement. Any excess in the value of the shares over the amount of the cash dividend is recognised in capital reserves.

(e) Expenses

All expenses are accounted for on an accruals basis. Expenses have been treated as revenue except as follows:

(f) Finance costs

Long term borrowings are carried in the Balance Sheet at amortised cost, representing the cumulative amount of net proceeds on issue plus accrued finance costs. Finance costs are accounted for on an accruals basis. Finance costs are allocated, insofar as they relate to the financing of the Company’s investments, 75% to the capital column and 25% to the revenue column of the Income Statement, in line with the Board’s expected long term split of returns, in the form of capital gains and income respectively, from the investment portfolio.

(g) Taxation

The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on the taxable profit for the year. Taxable profit differs from net profit as reported in the Income Statement because it excludes items of income or expenses that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company’s liability for current tax is calculated using tax rates that were applicable at the balance sheet date.

Deferred taxation is recognised in respect of all timing differences at the financial reporting date, where transactions or events that result in an obligation to pay more taxation in the future or right to less taxation in the future have occurred at the balance sheet date. Deferred tax is measured on a non-discounted basis, at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse based on tax rates and laws that have been enacted or substantively enacted by the balance sheet date. This is subject to deferred taxation assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the timing differences can be deducted.

(h) Investments designated as held at fair value through profit or loss

The Company’s investments are classified as held at fair value through profit or loss in accordance with Section 11 and 12 of FRS 102 and are managed and evaluated on a fair value basis in accordance with its investment strategy.

All investments are designated upon initial recognition as held at fair value through profit or loss. Purchases of investments are recognised on a trade date basis. Sales are recognised at the trade date of the disposal. Proceeds will be measured at fair value, which will be regarded as the proceeds of the sale less any transaction costs.

The fair value of the financial investments is based on their quoted bid price at the balance sheet date on the exchange on which the investment is quoted, without deduction for the estimated future selling costs.

Unquoted investments are valued by the Directors at fair value using International Private Equity and Venture Capital Valuation Guidelines. This policy applies to all current and non current asset investments of the Company.

Changes in the value of investments held at fair value through profit or loss and gains and losses on disposal are recognised in the Income Statement as ‘Gains or losses on investments held at fair value through profit or loss’. Also included within this heading are transaction costs in relation to the purchase or sale of investments.

The Company has early adopted the amendments to FRS 102 - ‘Fair value hierarchy disclosures’ effective for annual periods beginning on or after 1 January 2017. These amendments improve consistency of fair value disclosure for financial instruments compared with those required by EU adopted IFRS.

The fair value hierarchy consists of the following three levels:

Level 1 – Quoted market price for identical instruments in active markets

Level 2 – Valuation techniques using observable inputs

Level 3 – Valuation techniques using significant unobservable inputs

(i) Foreign currency translation

In accordance with Section 30 of FRS 102, the Company is required to nominate a functional currency, being the currency in which the Company predominately operates. The functional and reporting currency is Sterling, reflecting the primary economic environment in which the Company operates. Transactions in foreign currencies are translated into Sterling at the rates of exchange ruling on the date of the transaction. Foreign currency monetary assets and liabilities are translated into sterling at the rates of exchange ruling at the Balance Sheet date. Profits and losses thereon are recognised in the capital column of the Income Statement and taken to the capital reserve.

(j) Dividends payable

Under Section 32 of FRS 102 final dividends should not be accrued in the financial statements unless they have been approved by shareholders before the balance sheet date.

Dividends payable to equity shareholders are recognised in the Statement of Changes in Equity when they have been approved by shareholders and have become a liability of the Company. Interim dividends are only recognised in the financial statements in the period in which they are paid.

(k) Shares repurchased and held in Treasury

The full cost of shares repurchased and held in treasury is charged to capital reserves. Where treasury shares are subsequently reissued, any surplus is taken to the share premium account.

(l) Debtors

Debtors include sales for future settlement, other debtors and pre-payments and accrued income in the ordinary course of business. If collection is expected in one year or less they are classified as current assets. If not, they are presented as non-current assets.

(m) Creditors

Creditors include purchases for future settlements, interest payable, share buyback cost and accruals in the ordinary course of business. Creditors are classified as creditors - amounts due within one year if payment is due within one year or less. If not, they are presented as creditors - amounts falling due after more than one year.

(n) Cash and cash equivalents

Cash comprises cash in hand, demand deposits and bank overdrafts repayable on demand. Cash equivalents include short term, highly liquid investments, that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value.

3. INCOME

2017 
£’000 
2016 
£’000 
Investment Income:
UK dividends 9,621  9,370 
UK dividends – scrip 56  25 
UK dividends – special 688  1,035 
Property income dividends 861  384 
Overseas dividends 1,148  736 
Overseas interest income 28  – 
Overseas dividends - special 129  – 
 ------   ------ 
12,531  11,550 
 ------   ------ 
Other Income:
Bank interest
Underwriting commission 17 
 ------   ------ 
24 
 ------   ------ 
Total 12,533  11,574 
 ======   ===== 

Special dividends of £167,000 have been recognised in capital (2016: £53,000).
 

4. INVESTMENT MANAGEMENT AND PERFORMANCE FEES

2017
Revenue 
£’000 
2017
Capital 
£’000 
2017
Total 
£’000 
2016
Revenue 
£’000 
2016
Capital 
£’000 
2016
Total 
£’000 
Investment management fee 736  2,207  2,943  681  2,041  2,722 
Performance fee –  1,444  1,444  –  1,258  1,258 
 -----   -----   -----   -----   -----   ----- 
Total 736  3,651  4,387  681  3,299  3,980 
 ====   =====   =====   =====   =====   ===== 

The investment management fee is calculated based on 0.65% in respect of the first £50 million of the Company’s total assets less current liabilities, reducing to 0.50% thereafter. The fee is calculated quarterly, as one quarter of the amount equal to the fee rate of 0.50% multiplied by total assets (excluding current year income) less the current liabilities of the Company at the relevant quarter end and less the £50 million initial threshold charged at 0.65%, plus one quarter of the amount equal to 0.65% multiplied by the initial threshold of £50 million.

A performance fee is payable at the average rate of 10% of the annualised excess performance over the benchmark in the two previous financial years, applied to the average of the total assets less current liabilities of the Company. This average calculation is based on the total assets (excluding current year income) less the current liabilities of the Company at the start of the year and at the year end date added together and divided by two. The fee is payable annually in April and is capped at 0.25% of the average of the total assets less current liabilities of the Company.

The annualised excess performance against the Company’s benchmark for the two years ended 28 February 2017 was 7.0% (2016: 6.7%). The fee was restricted by the 0.25% cap and £1,444,000 has been accrued for the year ended 28 February 2017 (2016: £1,258,000).

Performance fees have been wholly allocated to capital reserves as the performance has been predominately generated through capital returns of the investment portfolio.

5. OPERATING EXPENSES

2017 
£’000 
2016 
£’000 
Taken from Revenue:
Custody fees
Depositary fees 70  67 
Auditor’s remuneration:
– audit services 25  25 
– non audit services1
Registrar’s fee 28  33 
Directors’ emoluments (excluding expenses) 148  141 
Marketing fees 134  164 
Other administration costs 188  185 
 ----   ---- 
601  630 
Taken from Capital:
Transaction charges - capital 17  20 
 ----   ---- 
618  650 
 ====   ==== 
The Company’s ongoing charges - calculated as a percentage of average shareholders’ funds and using operating expenses, excluding performance fees, finance costs, and taxation were: 0.7%  0.7% 
 ----   ---- 
The Company’s ongoing charges - calculated as a percentage of average shareholders’ funds and using operating expenses, including performance fees, and excluding finance costs and taxation were: 1.0%  0.9% 
 -----   ---- 


1. The 2017 non audit services relate to the debenture compliance work carried out by PricewaterhouseCoopers. The 2016 non audit services relate to the review of the interim financial statements for the six months to 31 August 2015, carried out by Scott Moncrieff, and the debenture compliance work carried out by PricewaterhouseCoopers.

6. DIVIDENDS


Dividends paid on equity shares: 

Record date 

Payment date 
2017 
£’000 
2016 
£’000 
2015 final of 9.00p 22 May 2015  25 June 2015  –  4,309 
2016 interim of 7.00p 6 November 2015  30 November 2015  –  3,352 
2016 final of 10.50p 20 May 2016  20 June 2016  5,027  – 
2017 interim of 8.00p 4 November 2016  30 November 2016  3,830  – 
 ------   ----- 
8,857  7,661 
 =====   ==== 

The Directors have proposed a final dividend of 13.00p per share in respect of the year ended 28 February 2017. The proposed dividend will be paid, subject to shareholders’ approval on 19 June 2017 to shareholders on the Company’s register on 19 May 2017. The final dividend has not been included as a liability in these financial statements as proposed dividends are only recognised in the financial statements when they have been approved by shareholders, or in the case of special dividends are not recognised until they are paid.

The total dividends payable in respect of the year which form the basis of determining retained income for the purposes of section 1158 of the Corporation Tax Act 2010 and section 833 of the Companies Act 2006, and the amounts proposed for the year ended 28 February 2017 meet the relevant requirements as set out in this legislation.


Dividends paid or proposed on equity shares: 
2017 
£’000 
2016 
£’000 
Interim paid 8.00p (2016: 7.00p) 3,830  3,352 
Final proposed of 13.00p per share (2016: 10.50p)* 6,224  5,027 
 ------   ----- 
10,054  8,379 
 =====   ==== 

* Based upon 47,879,792 ordinary shares (excluding treasury shares) in issue on 2 May 2017. 

All dividends paid or payable are distributed from the Company’s revenue profits.

7. REVENUE RETURN AND NET ASSET VALUE PER ORDINARY SHARE

Revenue and capital earnings per share are shown below and have been calculated using the following:

2017  2016 
Net revenue profit attributable to ordinary shareholders (£'000) 10,759  9,847 
Net capital profit attributable to ordinary shareholders (£'000) 120,116  15,933 
 --------   -------- 
Total profit attributable to ordinary shareholders (£’000) 130,875  25,780 
 --------   -------- 
Total shareholders’ funds (£’000) 597,073  475,055 
 --------   -------- 
The weighted average number of ordinary shares in issue during each year on which the earnings per ordinary share was calculated was: 47,879,792  47,879,792 
 --------   -------- 
The actual number of ordinary shares in issue at the end of the year on which the net asset value was calculated was: 47,879,792  47,879,792 
 ========   ======== 

   

2017
Revenue 
2017
Capital 
2017
Total 
2016
Revenue 
2016
Capital 
2016
Total 
Earnings per share
Calculated on weighted average number of ordinary shares 22.47  250.87  273.34  20.57  33.27  53.84 
Calculated on actual number of ordinary shares 22.47  250.87  273.34  20.57  33.27  53.84 
 --------   --------   --------   --------   --------   -------- 
Net asset value per share (debenture at par value) –  –  1,247.03  –  –  992.18 
Net asset value per share (debenture at fair value) –  –  1,237.77  –  –  982.59 
 --------   --------   --------   --------   --------   -------- 
Net asset value per ordinary share (with debenture at par value, capital only) –  –  1,232.55p  –  –  978.61p 
 --------   --------   --------   --------   --------   -------- 
Ordinary share price –  –  1,060.00p  –  –  863.00p 
 ========   ========   ========   ========   ========   ======== 

8. CREDITORS – AMOUNTS FALLING DUE WITHIN ONE YEAR

2017 
£’000 
2016 
£’000 
Purchases for future settlement 71  1,747 
Other payables 2,768  3,121 
 ------   ------ 
2,839  4,868 
 =====   ===== 

9. CREDITORS – AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR

2017 
£’000 
2016 
£’000 
7.75% debenture stock 2022* 15,000  15,000 
Unamortised debenture stock issue expenses (79) (93)
 --------   -------- 
14,921  14,907 
 --------   -------- 
Scotia Bank loan 35,000  25,000 
 --------   -------- 
49,921  39,907 
 --------   -------- 


* The fair value of the 7.75% debenture stock using the last available quoted offer price from the London Stock Exchange as at 28 February 2017 was 129.00p per debenture, a total of £19,350,000. (2016: 130.00p, a total of £19,500,000.)

The £15 million debenture stock was issued on 8 July 1997. Interest on the stock is payable in equal half yearly instalments on 31 July and 31 January in each year. The stock is secured by a first floating charge over the whole of the assets of the Company and is redeemable at par on 31 July 2022.

At 28 February 2017, all of the £35 million facility was utilised (2016: £35 million facility, £25 million utilised). Under the agreement the termination date of this facility is the third anniversary of the effective date being 29 May 2018. Interest on this facility is reset every three months and is currently charged at the rate of 1.30588 % (2016: 1.53938%).

10. CALLED UP SHARE CAPITAL

Ordinary 
shares 
in issue 
number 

Treasury 
shares 
number 

Total 
shares 
number 

Nominal 
value 
£’000 
Allotted, called up and fully paid share capital comprised:
 --------   --------   --------   -------- 
Ordinary shares of 25p each:
At 1 March 2016 47,879,792  2,113,731  49,993,523  12,498 
 --------   --------   --------   -------- 
At 28 February 2017 47,879,792  2,113,731  49,993,523  12,498 
 ========   ========   ========   ======== 

During the year no ordinary shares were purchased for cancellation or placed in or cancelled out of treasury (2016: nil).

The ordinary shares (excluding any shares held in treasury) carry the right to receive any dividends and have one voting right per ordinary share. There are no restrictions on the voting rights of the ordinary shares or on the transfer of ordinary shares.

11.  VALUATION OF FINANCIAL INSTRUMENTS

The Company has early adopted the amendments to FRS 102 ‘Fair value Hierarchy disclosures’ effective for the annual periods beginning on or after 1 January 2017. These amendments improve the consistency of fair value disclosures from financial instruments with those required by EU adopted IFRS.

Financial assets and financial liabilities are either carried in the Balance Sheet at their fair value (investments) or at an amount which is a reasonable approximation of fair value (due from brokers, dividends and interest receivable, due to brokers, accruals, cash at bank and bank overdrafts). Section 11 of FRS 102 requires the Company to classify fair value measurements using a fair value hierarchy that reflects the significance of inputs used in making the measurements. The valuation techniques used by the Company are explained in the accounting policies note to the Financial Statements on page 49 of the Annual Report and Financial Statements.

Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant asset.

The fair value hierarchy has the following levels:

Level 1 – Quoted market price for identical instruments in active markets

A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The Company does not adjust the quoted price for these instruments.

Level 2 – Valuation techniques using observable inputs

This category includes instruments valued using: quoted prices in active markets for similar instruments; quoted prices for similar instruments in markets that are considered less than active; or other valuation techniques where all significant inputs are directly or indirectly observable from market data.

Level 3 – Valuation techniques using significant unobservable inputs

This category includes all instruments where the valuation technique includes inputs not based on observable data and the unobservable inputs could have a significant impact on the instrument’s valuation.

This category also includes instruments that are valued based on quoted prices for similar instruments where significant entity determined adjustments or assumptions are required to reflect differences between the instruments and instruments for which there is no active market. The Investment Manager considers observable data to be that market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.

The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement. For this purpose, the significance of an input is assessed against the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a Level 3 measurement.

Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability.

The table below sets out fair value measurements using FRS 102 fair value hierarchy.


Financial assets at fair value through profit or loss at 28 February 2017 
Level 1 
£’000 
Level 2 
£’000 
Level 3 
£’000 
Total 
£’000 
Equity investments 647,981  –  –  647,981 
 -------   ------   ------   ------- 
Total 647,981  –  –  647,981 
 ======   =====   =====   ====== 

   


Financial assets at fair value through profit or loss at 29 February 2016 
Level 1 
£’000 
Level 2 
£’000 
Level 3 
£’000 
Total 
£’000 
Equity investments 506,588  –  –  506,588 
 -------   ------   ------   ------- 
Total 506,588  –  –  506,588 
 ======   =====   =====   ====== 

There were no transfers between levels for financial assets during the year recorded at fair value as at 28 February 2017 and 29 February 2016. The Company did not hold any level 3 securities throughout the financial year or as at 28 February 2017 (2016: nil).

12. TRANSACTIONS WITH THE MANAGER AND THE INVESTMENT MANAGER

The Manager was appointed as the Company’s Alternative Investment Fund Manager (AIFM) with effect from 2 July 2014. The Manager has (with the Company’s consent) delegated certain portfolio and risk management services, and other ancillary services, to the Investment Manager. Details of the fees payable to the Manager are set out in note 4.

The investment management fee due to the Manager for the year ended 28 February 2017 amounted to £2,943,000 (2016: £2,722,000). A performance fee accrued for the year ended 28 February 2017 amounted to £1,444,000 (2016: £1,258,000). At the year end, £808,000 was outstanding in respect of the management fee (2016: £1,341,000) and £1,444,000 (2016: £1,258,000) in respect of the performance fee.

In addition to the above services, BlackRock provided the Company with marketing services. The total fees paid or payable for these services for the year ended 28 February 2017 amounted to £134,000 including VAT (2016: £164,000). Marketing fees of £206,000 (2016: £229,000) was outstanding at year end.

13. RELATED PARTIES DISCLOSURES AND TRANSACTIONS WITH DIRECTORS

Disclosures of the Directors’ interests in the Ordinary Shares of the Company and fees and expenses payable to the Directors are set out in the Directors’ Remuneration Report on pages 27 to 30 of the Annual Report and Financial Statements.

14. CONTINGENT LIABILITIES

There were no contingent liabilities at 28 February 2017 (2016: nil).

15. POST BALANCE SHEET EVENT DISCLOSURE

Subsequent to the year end date (28 February 2017), the Company has agreed to issue £25 million senior unsecured fixed rate private placement notes (‘Notes’) at a coupon of 2.74% with a bullet 20 year maturity. The funding date for the Notes will be 24 May 2017 and the Notes will be due for repayment on 24 May 2037. The semi-annual interest payment dates for the Notes will be 24 May and 24 November.

16. PUBLICATION OF NON-STATUTORY ACCOUNTS

The financial information contained in this announcement does not constitute statutory accounts as defined in section 435 of the Companies Act 2006.

The figures set out above have been reported upon by the auditors.  The comparative figures are extracts from the audited financial statements of BlackRock Smaller Companies Trust plc for the year ended 29 February 2016, which have been filed with the Registrar of Companies.  The report of the auditors for the years ended 29 February 2016 and 28 February 2017 contain no qualification or statement under section 498(2) or (3) of the Companies Act 2006. The 2017 Annual Report and Financial Statements will be filed with the Registrar of Companies after the Annual General Meeting.

17. ANNUAL REPORT AND FINANCIAL STATEMENTS

Copies of the Annual Report and Financial Statements will be sent to members shortly and will be available from The Company Secretary, BlackRock Smaller Companies Trust plc, 12 Throgmorton Avenue, London EC2N 2DL. 

18. ANNUAL GENERAL MEETING

The Annual General Meeting of the Company will be held at 12 Throgmorton Avenue, London EC2N 2DL on 8 June 2017 at 11:30 a.m.

ENDS

The Annual Report and Financial Statements will also be available on the BlackRock Investment Management website at http://www.blackrock.co.uk/brsc.  Neither the contents of the Manager's website nor the contents of any website accessible from hyperlinks on the Manager's website (or any other website) is incorporated into, or forms part of, this announcement.

For further information, please contact:

Simon White, Managing Director, Closed End Funds, BlackRock Investment Management (UK) Limited
Tel: 020 7743 5284

Mike Prentis, BlackRock Investment Management (UK) Limited
Tel: 020 7743 2312

Press enquiries:
Lucy Horne, Lansons Communications – Tel:  020 7294 3689
E-mail:  lucyh@lansons.com

2 May 2017


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Final Results - RNS