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Annual Financial Report

Released 14:32 27-Apr-2018

Annual Financial Report

BlackRock Smaller Companies Trust plc

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

Annual results announcement for the year ended 28 February 2018

FINANCIAL HIGHLIGHTS


Attributable to ordinary shareholders 
28 February 
2018 
28 February 
2017 
Change 
Performance
Net asset value per share (debt at par value) 1,506.78p  1,247.03p  +20.8 
Net asset value per share (debt at par value, capital only)1 1,487.48p  1,232.56p  +20.7 
Net asset value per share (debt at fair value)2 1,500.04p  1,237.77p  +21.2 
Numis Smaller Companies plus AIM (excluding Investment Companies) Index3  5,700.84   5,265.38  +8.3 
Ordinary share price 1,325.00p  1,060.00p  +25.0 

   

Year ended 
28 February 
2018 
Year ended 
28 February 
2017 

Change 
Revenue and dividends
Revenue return per share 29.30p 22.47p +30.4
Interim dividend per share  10.00p 8.00p +25.0
Proposed final dividend per share 16.00p 13.00p +23.1
 --------   --------   -------- 
Total dividends paid and payable 26.00p 21.00p +23.8
 --------   --------   -------- 
Assets
Total assets less current liabilities (£’000)  796,112   646,994  +23.0 
Equity shareholders’ funds (£’000)  721,442   597,073  +20.8 
Ongoing charges ratio4 0.7%  0.7% 
Ongoing charges ratio (including performance fees) 1.0%  1.0% 
Dividend yield 2.0%  2.0% 
Gearing 9.8%  8.5% 

1.  The capital only NAV is calculated without income for the year to 28 February 2018 and 28 February 2017 respectively, net of dividends paid in respect of the relevant financial years. More detail is given in the Glossary in the Company’s 2018 Annual Report and Financial Statements.
2.  The basis of calculation for the fair value of the debt is disclosed in note 9.
3.  Excludes income reinvested.
4.  Ongoing charges ratio calculated as a percentage of average shareholders’ funds and using operating expenses, excluding performance fees, finance costs and taxation, in accordance with AIC guidelines.

Sources: BlackRock and Datastream.

CHAIRMAN’S STATEMENT

Your Company has a remarkable record. For fifteen consecutive years it has outperformed its benchmark and increased its dividend. Over that period, the NAV has grown more than thirteen-fold whereas the benchmark has increased less than five-fold. The compound annual increase in dividends paid over the past nine years has been 20% per annum.

PERFORMANCE
During the year to 28 February 2018, the Company’s net asset value (“NAV”) increased by 20.8% to 1,506.78 pence per share, compared with its benchmark, the Numis Smaller Companies plus AIM (excluding Investment Companies) Index, which increased by 8.3%1. During the financial year, your Company’s share price increased by 25%1 to 1,325.00p per share (and reached an all-time high of 1,430.00p per share in April 2018).

In the same period, small capitalisation stocks outperformed mid and large capitalisation stocks; the FTSE AIM All Share Index1 rose by 14.5% compared with the FTSE 250 Index1 which increased by 4.9% and the FTSE 100 Index1 which fell by 0.4%.

The year under review saw economic growth and improving corporate earnings driving global equity markets higher, with the UK economy performing unexpectedly well in the shadow of Brexit, albeit at a reduced growth rate.   After a prolonged period of low volatility, 2018 saw equity market volatility move higher.

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 the pharmaceuticals and biotechnology sectors and from financial and support services stocks.

Detractors from relative performance came mainly from companies in the benchmark that were not in the portfolio and which performed strongly in the year.    Companies with exposure to the retail sector struggled, with the largest single stock detractor during the period (UP Global Sourcing) seeing a sharp fall in its share price after a profit warning.   More details of the contributors to performance can be found in the Investment Manager’s Report below.

Since the financial year end, and up to 25 April 2018, the Company’s NAV has increased by 3.0%1, against an increase in the benchmark of 2.2%1, and the share price has risen by 5.7%1. Over the longer term the Company’s performance has substantially exceeded its benchmark, as shown in the tables below.


Performance to 
28 February 2018 
1 Year 
change 
3 Years 
change 
5 Years 
change 
10 Years 
change 
15 Years 
change 
NAV per share 20.8  57.9  109.2  263.5  968.0 
Benchmark 8.3  24.6  41.6  66.9  233.8 
NAV per share (with income reinvested) 22.8  65.8  126.0  324.8  1,255.5 
Benchmark (with income reinvested) 11.1  35.1  61.5  116.5  363.5 
Share price (with income reinvested) 27.3  72.7  130.8  367.5  1,504.7 

15 CONSECUTIVE FINANCIAL YEARS OF OUTPERFORMANCE

% Relative return
Feb 04 +5.9%
Feb 05 +12.6%
Feb 06 +8.9%
Feb 07 +11.4%
Feb 08 +6.5%
Feb 09 +1.9%
Feb 10 +4.9%
Feb 11 +34.2%
Feb 12 +2.1%
Feb 13 +3.1%
Feb 14 +11.4%
Feb 15 +4.2%
Feb 16 +7.0%
Feb 17 +4.6%
Feb 18 +11.6%

BlackRock assumed management on 31 December 2004.
Source: BlackRock.

Outperformance percentages above are based on NAV (debt at par) performance with income reinvested compared to benchmark performance. Prior to 31 August 2007 the Company's benchmark was the FTSE SmallCap Index (excluding Investment Companies); after this date the Company adopted the Numis Smaller Companies plus AIM (excluding Investment Companies) Index as its benchmark.

As shown in the table above, your Company has consistently outperformed the benchmark over the last fifteen years, delivering consistent capital growth over this period. The Company has also provided very impressive growth in income alongside the high capital returns.

The chart on page 5 of the Chairman’s Statement contained within the Company’s 2018 Annual Report illustrates the scope to build up, over the long term, an attractive annual income from an investment in the Company: even if the initial dividend yield at the point of purchase has been unremarkable, the strong underlying growth in dividends over the years can result in a competitive yield on cost when compared with equity income funds.

Specifically, this chart shows that £1,000 invested in the Company on 31 March 2006 would have returned a 378% increase in NAV to 28 February 2018, whereas £1,000 invested into the median  open-ended UK Income Fund would have returned just 107% . The chart also demonstrates that while the Company’s starting yield was much lower than the median open-ended UK Income Fund in 2006, over time the Company’s dividend has grown at a much faster rate than open ended competitors in that sector, going from £15 to £83 (on the initial £1,000 invested), an increase of 446% compared with an increase over the same period of 114% for the median UK Income Fund.  A full copy of the Company’s Annual Report can be found at www.blackrock.co.uk/brsc.

INFORMATION RATIO
The Information Ratio measures the portfolio manager's active return (i.e. the excess return over the benchmark) divided by the amount of risk that the manager takes relative to the benchmark (i.e. the tracking error).  It is an important measure of how successful the active management of a portfolio has been on a risk - adjusted basis.

The Company recorded the highest information ratio of any closed ended equity investment company over the ten year period to 31 December 2017 (a ratio of 1.40) and the second highest ratio in the group for the 5 years ended 31 December 2017 (1.67).3

Generally, the higher the information ratio the better: I am advised that an information ratio in the 0.40-0.60 range is considered to be a good outcome across the industry, although sector averages vary; and that information ratios in excess of 1.00 for long periods of time are rare.  Only two closed ended investment companies in the group exceeded a ratio of 1 over the 10 year period.3 Your Company was one of these.

 RETURNS AND DIVIDENDS
The Company’s revenue return per share for the year ended 28 February 2018 increased by 30.4%, to 29.30 pence per share compared with 22.47 pence per share for the previous year.

Regular dividends from portfolio companies also rose by 30.2%, while special dividends received were 24.2% higher than in the previous year.

In October 2017 the Board declared an interim dividend of 10.00p per share (2017: 8.00p per share). The Directors are pleased to recommend the payment of a final dividend of 16.00p per share (2017: 13.00p per share), making a total for the year of 26.00p, an increase of 23.8% over the total dividend of 21.00p paid in the previous year. Subject to shareholder approval, the final dividend will be paid on 15 June 2018 to shareholders on the register on 18 May 2018; the ex-dividend date is 17 May 2018.

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

Your Company has now increased its dividends every year for each of the last fifteen years. 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 Company’s 2018 Annual Report which may be found at www.blackrock.c.uk/brsc.

PORTFOLIO MANAGEMENT
Roland Arnold has today been appointed co-manager of the portfolio with Mike Prentis. 

Mike has managed the portfolio since September 2002. He moved to BlackRock (then Merrill Lynch Investment Managers) in January 2005 along with the investment management contract for the Company. Mike and Roland have worked closely together as members of the BlackRock UK Small and Mid Cap team since 2005 and the move to a co-manager structure is not expected to have any impact on the investment philosophy and approach.

CHANGE IN MANAGEMENT FEE
As announced on 17 April 2018, the Board has negotiated changes to the management and performance fee payable to the Manager.

With effect from 1 March 2018, the Company will no longer pay a performance fee, and from the same date the management fee will be calculated at a rate of 0.6% on the first £750 million of total assets less current liabilities, and at a rate of 0.5% on amounts above this level.  As at 31 March 2018, the Company’s total assets less total liabilities were £786.7 million.

Prior to the introduction of these new fee arrangements, the Company paid an investment management fee calculated at a rate of 0.65% on the first £50 million of the Company’s total assets less current liabilities, reducing to 0.50% thereafter; and a performance fee based on 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.  The performance fee was payable annually in April and was capped at 0.25% of the average of the total assets less current liabilities of the Company.  The Company’s strong performance since the previous fee arrangements were put in place has resulted in the performance fee being capped each year.

The Board is of the view that these changes are appropriate given the substantial increase in the size of the Company since such fees were last agreed.  In addition, they are consistent with trends in fees which are being seen across much of the investment trust sector and will make the Company even more competitive within the UK Smaller Companies subsector.  The Board also sees merit in the simplicity and transparency of the new fee arrangements.

The Board estimates that if the new fee arrangements had been applied for the year ended 28 February 2018, the total fees payable to the Manager would have been approximately 20% (£1.1 million) lower and the total operating charges ratio (inclusive of performance fees) would have been reduced from 0.93% to 0.77%.

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.

Long term fixed rate funding consists of the Company’s existing £15 million debenture, which matures in 2022, and £25 million senior unsecured fixed rate private placement notes issued in May 2017 at a coupon of 2.74% with a 20 year bullet maturity.

Shorter term variable rate funding consists of a £35 million three-year revolving loan facility with Scotia Bank (Ireland) Limited and an uncommitted overdraft facility of £10 million.

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 9.8% of net assets.

DISCOUNT
During the year the share price traded at an average discount of 13.0% to NAV. The discount ranged between 7.9% and 18.3% and ended the year at 11.7% (all measured against NAV with debt at fair value). The discount has since narrowed to 9.4% as at  25 April 2018.

ANNUAL GENERAL MEETING
The AGM of the Company will be held at the offices of BlackRock at 12 Throgmorton Avenue, London EC2N 2DL on Tuesday, 5 June 2018 at 11.30 a.m. Mike Prentis and Roland Arnold, the Portfolio Managers, 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
After a year of strong performance in 2017, UK markets have this year been characterised by greater uncertainty and higher levels of volatility.  Overall, the global economy remains strong, in contrast with the UK domestic economy. Domestically, increasing inflation and low wage growth are putting the UK consumer under pressure, which will translate into tougher operating conditions for companies exposed to discretionary consumer spending.  

Despite this note of caution, the Company’s  Portfolio Managers believe that many UK small and mid - capitalisation companies have the ability to perform well given the more positive global economic backdrop. The Company’s portfolio is suitably diversified by sector and geography, with a significant portion of revenues from portfolio companies generated through overseas exposure.  The Portfolio Managers focus on well capitalised portfolio holdings with strong management teams that are good cash generators and are therefore well placed for the current environment. Your Board is confident that the portfolio is constructed to continue to produce rewarding results for shareholders.

If shareholders would like to contact me personally please write to me at BlackRock Smaller Companies Trust plc, Exchange Place, 1 Semple Street, Edinburgh EH3 8BL.

NICHOLAS FRY
Chairman
27 April 2018


1.  Percentages in sterling terms without income reinvested.
2.  Excluding investment trusts.
3.  Source: Canaccord Genuity Investment Companies Research 13 February 2018. Canaccord Genuity Limited also act as the Company's broker.

                

INVESTMENT MANAGER’S REPORT

Your Company continues to outperform its benchmark and to deliver its objective of achieving long term capital growth for shareholders, as well as increasing its dividend for fifteen consecutive years.

MARKET REVIEW AND OVERALL INVESTMENT PERFORMANCE
A continued period of economic growth and improving corporate earnings drove global equity markets higher, with the UK market rising strongly over the reporting period. UK GDP growth slowed in 2017, however the impact of the UK Referendum result on economic growth was less than feared. Sterling strengthened and UK small and medium sized companies outperformed larger companies. Global economic growth remained robust and led to further monetary tightening with interest rates rising in both the UK and the US.

PERFORMANCE REVIEW

We are pleased to report a continuation of our long-term record of outperformance. We are fortunate to be investing in an attractive investment universe regularly refreshed by some interesting IPOs. Our good performance is of course ultimately down to the success of the companies we invest in, and the quality of their management and staff. To them we remain very grateful.

During the year, the  Company’s NAV per share increased by 22.8% (on a total return basis with income reinvested). This compares to an increase in the benchmark index of 11.1% and the FTSE 100 of 3.4%.

Outperformance during the financial year has been driven by positive stock selection, with a number of our core holdings, across a broad range of industries, delivering good trading updates. Gearing also added to performance while sector allocation has been a modest detractor. The largest stock contributors during the period were Dechra Pharmaceuticals, Keywords Studios, Robert Walters, and Premier Asset Management, each contributing between 0.6% and 0.9% to relative performance.

Veterinary pharmaceuticals company Dechra Pharmaceuticals was the largest positive contributor during the year. The company continued to deliver strong organic growth and also benefitted from synergies from acquisitions. These led to further earnings upgrades. Keywords Studios, the leading international services provider to the global video games industry has seen its share price more than double during the period. In its February trading update for the year ended 31 December 2017 Keywords indicated that it expects revenues and profit before tax to be no less than €150m and €22.5m respectively, comfortably ahead of market expectations. This performance was driven by continued strong organic growth and better than expected contributions from acquisitions made during the year. The company has been taking advantage of the significant market fragmentation and the shift of the big games companies to outsource more of their requirements to reliable highly skilled suppliers, and continues to expand its capabilities and geographical presence through acquisitions. Shares in recruiter Robert Walters rose as the company has continued to deliver positive trading updates during the period. Net fee income has seen strong broad-based growth across all geographies within both permanent and contract hires. Shares in Premier Asset Management performed well with the company being a beneficiary of strong market returns whilst also seeing consistent inflows into its multi-asset products where it has first quartile performance.

Detractors during the period were limited, with the largest relative detractors to performance coming from strong share price movements in companies in the benchmark index that we do not own in our portfolio. Only one of the 5 largest relative detractors to performance was held in the Company's portfolio. The largest single stock detractor during the period was UP Global Sourcing which fell sharply after the company issued a trading statement warning of a tougher outlook as their retailer customers exercise caution with non-food buying. We sold our holding which detracted 0.5% from relative performance during the year. Safestyle, a company engaged in the sale and manufacture of PVCu windows and doors, suffered against  the weaker consumer backdrop and greater competition. Again, we sold our holding.

Gearing was on average 9.3% during the period, which contributed positively to relative performance.

ACTIVITY
As discussed in previous reports, our caution around the outlook for the UK economy and in particular those companies exposed to UK consumer spending, led us to reduce our exposure to companies that generate a significant part of their earnings in the UK. We have continued to increase our exposure to more internationally exposed holdings such as Robert Walters and Central Asia Metals.

We have also used strong share price performance to take some profits in a number of long term holdings which have performed well and where valuations are now quite high. Our view on many of these companies remains unchanged and we would add to many of these on any setback. Veterinary surgeries group CVS, is an example of a core holding which we added to on the back of share price weakness. We feel growth prospects remain good over the long term.

We purchased a new holding in Stock Spirits following a second positive meeting with the management team. Stock Spirits is an international spirits company with profits mainly generated in Poland and the Czech Republic. We invested in Superdry, the distinctive fashion retailer, a former holding. The company designs and sells premium clothing and accessories, which appeals to a broad range of customers of all ages, at an affordable price through stores and online. There is a clear strategy for continued growth of the e-commerce business while also growing the business overseas. We also purchased a new holding in RWS Holdings, also a former holding. RWS is the world leader in translation and localisation, intellectual property support solutions and life sciences language services; we took part in a placing to help fund a major acquisition.

We continue to take advantage of opportunities in the IPO market. Most recently we took part in the IPO of IntegraFin, which owns the fast growing Transact investments platform, where we have strong conviction in the growth prospects for the company.

PORTFOLIO POSITIONING
There has been little change to the overall positioning of the portfolio, and many of our core holdings remain unchanged reflecting the conviction we have in these companies. Relative to our benchmark index we are overweight industrial market engineers, financial services companies and media companies. Our industrial holdings include Hill & Smith, Trifast, Bodycote and Gooch & Housego. All these companies are very internationally focused and generally supplying specialist products and services to attractive vertical markets. Within the financial services sector our holdings having more of a focus on alternatives, equities or services where there has been an ongoing shift in outsourcing, including Premier Asset Management, Polar Capital, Liontrust, Xafinity and IntegraFin. Our media stocks include 4imprint, XLMedia and Next Fifteen which are heavily US and business to business focused.

We remain underweight food producers, technology hardware, challenger banks and travel and leisure companies.

Just over half of the revenues of our portfolio originates overseas. Our UK exposure is very deliberate, either to more defensive businesses, or to those benefiting from positive structural or cyclical trends, for instance Ibstock and Countryside Properties which are exposed to the building of affordable housing.

MARKET CAPITALISATION OF OUR PORTFOLIO COMPANIES AS AT 28 FEBRUARY 2018

% of portfolio
£0m to £200m (micro caps) 4.0
£200m to £600m (small caps) 35.4
£600m to £1500m (smaller midcaps) 36.8
£1500m+ (larger midcaps) 23.8

Source: BlackRock.

OUTLOOK
Following  strong gains in equities in 2017, with low levels of volatility, 2018 so far has been much more volatile. Fears about trade wars and other political disagreements have exacerbated this volatility. Our current view is that the global economy is in good health.

The UK domestic economy remains weaker than other major developed economies, and in the face of political uncertainty we see the possibility of weakness continuing for some time. We are cautious of those areas exposed to discretionary consumer spending. This is a view that we have held for some time and a number of profit warnings from consumer related companies have reinforced our view.

While we are wary on the outlook for the UK economy, we are positive on the prospects for many UK small and midcap companies.

MIKE PRENTIS
BLACKROCK INVESTMENT MANAGEMENT (UK) LIMITED

27 April  2018
 

SUMMARY OF THE TEN LARGEST INVESTMENTS AS AT 28 FEBRUARY 2018

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

DECHRA PHARMACEUTICALS: 2.2% (2017: 2.0%) is an international specialist veterinary 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.

ROBERT WALTERS: 1.9% (2017: 1.0%) is a global specialist professional recruitment consultancy. The company operates across 28 countries and employs over 3,700 people, providing services across permanent, interim and contract work placements.  The company is seeing good growth in most territories helped by recent contract wins in its resource solutions business.

CENTRAL ASIA METALS: 1.8% (2017: 0.7%) is a base metals producer with copper assets in Kazakhstan and zinc and lead assets in Macedonia. The company is one of the lowest cost producers in the industry, and the strong balance sheet and cash generation has seen the group historically return cash to shareholders.

CVS GROUP: 1.6% (2017: 2.4%) is one of the leading veterinary services providers in the UK and owns more than 450 veterinary surgeries throughout the UK and in the Netherlands. The services provided by the group include preventative health care through the Healthy Pet Club, 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: 1.6% (2017: 2.2%) 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 personalised with the customers’ brand or logo. Its growth is underpinned by a range of data-driven traditional and online marketing. In 2017, the company grew revenues organically by 12% and pre-tax profits by 11%. It continues to have good 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.

AVON RUBBER: 1.6% (2017: 1.7%) 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 consumables and provides management systems. Growth has been strong in both divisions and looks well set.

IBSTOCK: 1.5% (2017: 0.5%) is a leading manufacturer of clay bricks and concrete products, operating predominantly in the UK and also in the United States. Products include clay bricks and concrete roof tiles. Ibstock is the largest brick manufacturer by volume of bricks sold in the UK where approximately 80% of new build houses use brick in their construction, and the company should be well set as a beneficiary of the building of affordable housing in the UK.

BIG YELLOW: 1.5% (2017: 1.2%) provide self storage solutions for both individuals and businesses in the highly visible and accessible locations. it is focussed on London and the South East. The company has a market leading brand, protected by high barriers to entry in terms of limited land availability and planning restrictions, and has generated strong operating cash flows over the long term.

ADVANCED MEDICAL SOLUTIONS: 1.4% (2017: 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.

HILL & SMITH: 1.4% (2016: 1.5%) has three main business segments: Infrastructure Products - Roads, supplying products and services such as permanent and temporary road safety barriers and , hostile vehicle mitigation products. Infrastructure Products - Utilities, supplying products and services such as pipe supports for the power and liquid natural gas markets. 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 in the US, UK and France. It is a clear beneficiary of increased spending on infrastructure in the UK and US especially on roads.

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 16.5% of total investments (ten largest investments as at 28 February 2017: 14.6%).

FIFTY LARGEST INVESTMENTS


Company 
Market 
value 
£’000 
% of total 
portfolio 

Business activity 
Dechra Pharmaceuticals  17,131   2.2  Development and supply of pharmaceutical and other products for the veterinary market
Robert Walters  15,003   1.9  Provision of specialist professional recruitment services
Central Asia Metals  14,267   1.8  Copper and zinc mining
CVS Group  13,069   1.6  Operation of veterinary surgeries
4imprint Group  12,873   1.6  Supply of promotional merchandise in the US
Avon Rubber  12,499   1.6  Design and manufacture of specialist products and systems used for personal protection, and within the dairy industry
Ibstock  12,146   1.5  Manufacture of clay bricks and concrete products
Big Yellow  11,864   1.5  Provision of self storage facilities
Advanced Medical Solutions  11,425   1.4  Development and supply of products for global wound care and wound closure markets
Hill & Smith  11,364   1.4  Production of infrastructure products and supply of galvanizing services
Accesso Technology  11,358   1.4  Development and supply of ticketing and virtual queuing solutions for leisure attractions
Bodycote  11,106   1.4  Provision of thermal processing services
Trifast  10,884   1.4  Manufacture and distribution of industrial fastenings
Premier Asset Management Group  10,859   1.4  Investment management
Johnson Service Group  10,042   1.3  Provision of textile related services
Liontrust Asset Management  9,812   1.2  Investment management
Coats Group  9,784   1.2  Manufacture of industrial thread
Polar Capital Holdings  9,651   1.2  Provision of investment management services
Headlam Group  9,128   1.2  Distribution of carpets and other floor coverings
Restore  8,874   1.1  Management of business documentation in both paper and digital form
Savills  8,831   1.1  Provision of property services
Morgan Sindall  8,713   1.1  Supply of office fit out, construction and urban regeneration services
Vesuvius  8,684   1.1  Provider of metal flow engineering services and solutions to the steel and foundry industries
Gooch & Housego  8,596   1.1  Design and manufacture of precision optical components, subsystems and instruments used to transmit and measure light
XLMedia  8,343   1.1  Provider of digital marketing services used by customers to generate online and mobile traffic
YouGov  8,334   1.1  Provision of research and consultancy services
Stock Spirits Group  8,132   1.0  Development and manufacture of branded spirits mainly in Eastern Europe
Xafinity  7,979   1.0  Provision of pensions advisory and compliance services
KAZ Minerals  7,922   1.0  Large scale copper mining in harsh environments
Next Fifteen Communications  7,881   1.0  Provision of digital communications services
Fevertree Drinks  7,644   1.0  Development and sale of premium mixers
Marshalls  7,501   1.0  Manufacture and sale of concrete and stone paving and related products
Workspace Group  7,456   0.9  Supply of flexible workspace to businesses in London
Ocean Wilsons  7,247   0.9  Ownership and management of ports and related vessels in Brazil
Treatt  7,223   0.9  Development and manufacture of ingredients for the flavour and fragrance industry
Keywords Studios  7,166   0.9  Provision of services to the global video games industry
Warpaint London  7,083   0.9  Design and supply of fashion cosmetics
Young & Co's Brewery – Non-Voting  4,594  }           0.9  Ownership of pubs in the London area
Young & Co's Brewery – A Shares  2,367 
Scapa  6,898   0.9  Manufacture of bonding solutions and adhesive components for applications in the health care and industrial markets
RWS Holdings  6,875   0.9  Provision of translation and localisation, intellectual property support solutions and life sciences language services
GB Group  6,748   0.9  Development and supply of identity verification solutions
Faroe Petroleum  6,548   0.8  Oil and gas exploration and production
St. Modwen Properties  6,353   0.8  Investment in, and development of property
Zotefoams  6,329   0.8  Manufacture of lightweight cross-linked polyolefin block foams and microcellular materials technology
Countryside Properties  5,903   0.8  Housebuilding and urban regeneration
Joules  5,896   0.7  Design and retail of colourful clothing and footwear
Sanne  5,784   0.7  Provision of fund and corporate administration services
Fuller Smith & Turner – A Shares  5,732   0.7  Ownership of and management of pubs in the London area
First Derivatives  5,624   0.7  Development of software to facilitate the management of data and related services
XP Power  5,351   0.7  Design and manufacture of products used to supply, regulate and distribute electrical power
 --------   -------- 
50 largest investments  448,876   56.7 
Remaining investments  343,184   43.3 
 --------   -------- 
Total  792,060   100.0 
 ======   ===== 

A complete listing of all of the Company’s most up to date portfolio holdings as at 31 December 2017 is given on the Company’s website at the following link: https://www.blackrock.com/uk/individual/literature/policies/brsct-portfolio-disclosure.pdf. At 28 February 2018, 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 
Capital Drilling Ltd 4.39 
Nexus Infrastructure Plc 4.32 
ULS Technology Plc 4.31 
Premier Asset Management Group Plc 4.26 
Warpaint London Plc 4.15 
Cloudcall Group Plc 4.08 
D4T4 Solutions Plc 4.04 
City of London Investment Group Plc 3.87 
Miton Group Plc 3.82 
Walker Greenbank Plc 3.80 
Liontrust Asset Management Plc 3.61 
Maxcyte Inc 3.52 
Trifast Plc 3.48 
Air Partner Plc 3.44 
Avon Rubber Plc 3.43 
Northbridge Industrial Services Plc 3.26 
Renold Plc 3.26 
Tatton Asset Management Plc 3.19 
Filta Group Holdings Plc 3.13 
Anpario Plc 3.04 
Treatt Plc 3.03 

COMPARATIVES FOR TEN LARGEST INVESTMENTS

Company  2018 
Market 
value 
£’000 

2018 
% of total 
portfolio 
2017 
Market 
value 
£'000

2017 
% of total 
portfolio 
Dechra Pharmaceuticals  17,131   2.2   13,173   2.0 
Robert Walters  15,003   1.9   6,334   1.0 
Central Asia Metals  14,267   1.8   4,461   0.7 
CVS Group  13,069   1.6   15,419   2.4 
4imprint Group  12,873   1.6   14,407   2.2 
Avon Rubber  12,499   1.6   10,900   1.7 
Ibstock  12,146   1.5   3,262   0.5 
Big Yellow  11,864   1.5   7,890   1.2 
Advanced Medical Solutions  11,425   1.4   8,771   1.4 
Hill & Smith  11,364   1.4   9,557   1.5 
 --------   --------   --------   -------- 
 131,641   16.5   94,174   14.6 
 ======   ====   =====  ==== 

DISTRIBUTION OF INVESTMENTS

Sector  % of portfolio 
Oil & Gas Producers  2.9 
Oil & Gas  2.9 
Chemicals  3.2 
Mining  4.3 
Industrial Metals & Mining  0.5 
Basic Materials  8.0 
Construction & Materials  6.9 
Aerospace & Defence  2.7 
Electronic & Electrical Equipment  3.0 
General Industrials  2.3 
Industrial Engineering  6.5 
Industrial Transportation  2.5 
Support Services  9.5 
Industrials  33.4 
Beverages  2.0 
Household Goods & Home Construction  4.2 
Personal Goods  1.8 
Leisure Goods  0.9 
Consumer Goods  8.9 
Health Care Equipment & Services  3.3 
Pharmaceuticals & Biotechnology  4.8 
Health Care  8.1 
General Retailers  2.8 
Media  6.7 
Travel & Leisure  3.6 
Consumer Services  13.1 
Financial Services  11.8 
Nonlife Insurance  0.4 
Real Estate Investment & Services  2.2 
Real Estate Investment Trusts  2.8 
Financials  17.2 
Software & Computer Services  8.0 
Technology  8.0 
Gas, Water & Multiutilities  0.4 
Utilities  0.4 

ANALYSIS OF PORTFOLIO BY SECTOR





Company
%
Benchmark
(Numis Smaller Companies plus AIM (ex Investment Companies) Index)
%
Oil & Gas 2.9 5.1
Basic Materials 8.0 5.4
Industrials 33.4 24.5
Consumer Goods 8.9 9.4
Health Care 8.1 5.1
Consumer Services 13.1 17.2
Financials 17.2 21.9
Technology 8.0 8.3
Utilities 0.4 0.5
Telecommunications 0.0 1.7
Other 0.0 0.9

Source: BlackRock

STRATEGIC REPORT

The Directors present the Strategic Report of the Company for the year ended 28 February 2018. 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), with a limit on the level of AIM investments that may be held within the portfolio of 50% of the portfolio by value. 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 2018 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, The Bank of New York Mellon (International) Limited. Prior to 1 November 2017, the entity appointed as the Company’s Depository was BNY Mellon Trust & Depositary (UK) Limited. The Company also delegates fund accounting services to BIM (UK), which in turn sub-delegates these services to BNYM. Details of the contractual terms with the Manager, the Depositary and the custodian are set out in the Directors’ Report contained within the 2018 Annual Report and Financial Statements.

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 the Investment Manager’s criteria for high quality growth companies. These criteria are shown in the ‘steering wheel’ diagram on page 16 of the 2018 Annual Report and Financial Statements.

CRITERIA FOR HIGH QUALITY GROWTH COMPANIES
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 if 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. In May 2017, the Company issued £25 million senior unsecured fixed rate private placement notes (the “Notes”) at a coupon of 2.74% with a 20 year bullet maturity. This is in addition to the Company’s £15 million of debenture maturing in 2022. Variable rate financing available to the Company consists of a £35 million three-year revolving loan facility with Scotia Bank (Ireland) Limited and an uncommitted overdraft facility of £10 million with The Bank of New York Mellon (International) Limited.

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 9.8% 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.

PORTFOLIO ANALYSIS
A detailed analysis of the portfolio has been provided 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 £135,381,000 (2017: £130,875,000) of which the revenue return amounted to £14,029,000 (2017: profit of £10,759,000), and the capital return amounted to £121,352,000 (2017: £120,116,000).

The Company’s revenue return amounted to 29.30p per share (2017: 22.47p). The Directors recommend the payment of a final dividend of 16.00p 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  2018  2017 
NAV per share (debt at par value) 1,506.78p  1,247.03p 
NAV per share (debt at fair value) 1,500.04p  1,237.77p 
NAV per share (debt at par value, capital only) 1,487.48p  1,232.56p 
Share price 1,325.00p  1,060.00p 
NAV total return performance (debt at fair value) 23.2%  28.2% 
Discount to NAV with debt at fair value 11.7%  14.4% 
Revenue return per share 29.30p  22.47p 
 --------   -------- 
Ongoing charges ratio1,2 0.7%  0.7% 
 --------   -------- 
Ongoing charges ratio (including performance fees)2 1.0%  1.0% 
 --------   -------- 
  1. Calculated as a percentage of average shareholders’ funds and using operating expenses, excluding performance fees, finance costs and taxation in accordance with AIC guidelines.
  2. With effect from 1 March 2018 the Company’s management fee and performance fee arrangements have changed. The new fee basis is set out in note 4, and the performance fee has been removed. This will impact the Ongoing Charges ratio for the Company. The Ongoing Charges Ratio (both including and excluding any Performance Fee) for the year to 28 February 2018 had the new fee arrangements been in place for the full year is estimated to be 0.77%.

Sources: BlackRock and Datastream.

Additionally, the Board regularly reviews many 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 7.9% and a discount of 18.3%, ending the year at 11.7% (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 33.8% to 58.5%.

PRINCIPAL RISKS
The Company is exposed to a variety of risks and uncertainties. As required by the 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 Committee 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 implementiaton 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.

Amongst other relevant laws and regulations, the Company is required to comply with the provisions of the Companies Act 2006, the Alternative Investment Fund Managers Directive, the UK Listing Rules and Disclosure & Transparency Rules and the Market Abuse Regulations.

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 and BNY Mellon (International) Limited (the Depositary and Fund Accountant) who maintain the
Company’s assets, dealing procedures and accounting records.

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

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.
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.

The Board reviews on a regular basis an assessment of the fraud risks that the Company could potentially be exposed to, and also a summary of the controls put in place by the Manager, the Depositary, the custodian, the Fund Accountants and the Registrar designed specifically to mitigate these risks.

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 61 to 68 of the Company’s 2018 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 2023 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 2018, the Company held no unquoted investments and 57% of the Company’s portfolio investments were readily realisable and listed on the London Stock Exchange. The remaining 43% that were listed on the Alternative Investment Market are also considered to be readily realisable. The Company has largely fixed overheads  which comprise a very small percentage of net assets. 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  fifteen consecutive years; the Company’s share price has outperformed the benchmark index by 16.7% over one year, 38.6% over three years and 70% 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 in the Corporate governance statement in the Company’s Annual Report and Financial Statements 2018.

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 2018 are set out in the Directors’ biographies in the Company’s 2018 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 in the Corporate Governance statement in the Company’s 2018 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 26 April 2018.

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

27 April 2018

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 2018 amounted to £3,884,000 (2017: £2,943,000). A performance fee accrued for the year ended 28 February 2018 amounted to £1,794,000 (2017: £1,444,000). At the year end, £1,965,000 was outstanding in respect of the management fee (2017: £808,000) and £1,794,000 (2017: £1,444,000) 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 2018 amounted to £168,000 including VAT (2017: 134,000). Marketing fees of £189,000 (2017: £206,000) were outstanding at the year end.

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 2018, the Chairman received an annual fee of £40,000, the Audit Committee Chairman received £30,000 per annum and the other Directors received £26,750 per annum.

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 held office throughout the year under review.

28 February 2018 28 February 2017
Nicholas Fry (Chairman) 40,000 40,000
Caroline Burton 5,500 5,500
Michael Peacock 1,000 1,000
Susan Platts-Martin 2,000 2,000
Robert Robertson 91,062 91,062

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 in the Governance structure section in the Company’s 2018 Annual Report and Financial Statements 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 in the Company’s 2018 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 2018, 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

27 April 2018

INCOME STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2018

2018 2017

Notes 
Revenue 
£’000 
Capital 
£’000 
Total 
£’000 
Revenue 
£’000 
Capital 
£’000 
Total 
£’000 
Gains on investments held at fair value through profit or loss  –  127,657  127,657  –  124,817 124,817
(Losses)/gains on foreign exchange  – (8) (8)  –  2 2
Income from investments held at fair value through profit or loss 16,250  21  16,271 12,531  167 12,698
Other income 1  –  1 2  –  2
    --------   --------   --------   --------   --------   -------- 
Total income 16,251 127,670  143,921  12,533 124,986 137,519
    --------   --------   --------   --------   --------   -------- 
Expenses
Investment management and performance fees (971) (4,707) (5,678) (736) (3,651) (4,387)
Operating expenses (625) (22) (647) (601) (17) (618)
    --------   --------   --------   --------   --------   -------- 
Total operating expenses (1,596) (4,729) (6,325) (1,337) (3,668) (5,005)
    --------   --------   --------   --------   --------   -------- 
Net profit on ordinary activities before finance costs and taxation 14,655 122,941 137,596 11,196 121,318 132,514
Finance costs (530) (1,589) (2,119) (401) (1,202) (1,603)
    --------   --------   --------   --------   --------   -------- 
Net profit on ordinary activities before taxation 14,125 121,352 135,477 10,795 120,116 130,911
Taxation (96)  – (96) (36)  – (36)
    --------   --------   --------   --------   --------   -------- 
Net profit on ordinary activities after taxation 14,029 121,352 135,381 10,759 120,116 130,875
    =====   =====   =====   =====   =====   ===== 
Revenue return per ordinary share (pence)  29.30  253.45  282.75  22.47  250.87  273.34
    =====   =====   =====   =====   =====   ===== 


The total column of this statement represents the Company’s profit and loss account.

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. 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 2018




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 2018
At 28 February 2017 12,498  38,952  1,982  525,439  18,202  597,073 
Total comprehensive income:
Profit for the year  –   –   –  121,352  14,029  135,381 
Transactions with owners, recorded directly to equity:
Dividends paid1  –   –   –   –  (11,012) (11,012)
    --------   --------   --------   --------   --------   -------- 
At 28 February 2018 12,498  38,952  1,982  646,791  21,219  721,442 
    --------   --------   --------   --------   --------   -------- 
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 paid2  –   –   –   –  (8,857) (8,857)
    --------   --------   --------   --------   --------   -------- 
At 28 February 2017 12,498  38,952  1,982  525,439  18,202  597,073 
    --------   --------   --------   --------   --------   -------- 

1.  Interim dividend paid in respect of the year ended 28 February 2018 of 10.00p was declared on 30 October 2017 and paid on 15 December 2017. Final dividend paid in respect of the year ended 28 February 2017 of 13.00p was declared on 2 May 2017 and paid on 19 June 2017.
2.  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.

BALANCE SHEET AS AT 28 FEBRUARY 2018

Notes  2018 
£’000 
2017 
£’000 
Fixed assets
Investments held at fair value through profit or loss 792,060  647,981 
    --------   -------- 
Current assets
Debtors 2,680  1,823 
Cash and cash equivalents 13,792  29 
    --------   -------- 
16,472  1,852 
    --------   -------- 
Creditors – amounts falling due within one year (12,420) (2,839)
    --------   -------- 
Net current assets/(liabilities) 4,052  (987)
    --------   -------- 
Total assets less current liabilities 796,112  646,994 
Creditors – amounts falling due after more than one year (74,670) (49,921)
    --------   -------- 
Net assets 721,442  597,073 
    --------   -------- 
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  646,791  525,439 
Revenue reserve  21,219   18,202 
    --------   -------- 
Total shareholders’ funds 721,442  597,073 
    ========   ======== 
Net asset value per ordinary share (debt at par value) (pence) 1,506.78  1,247.03 
    ========   ======== 
Net asset value per ordinary share (debt at fair value) (pence) 1,500.04  1,237.77 
    ========   ======== 

STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 28 FEBRUARY 2018

2018 
£’000 
2017 
£’000 
Operating activities
Net profit before taxation 135,477  130,911 
Add back finance costs 2,119  1,603 
Gains on investments held at fair value through profit or loss (127,678) (124,984)
Net movement in foreign exchange (2)
Sales of investments held at fair value through profit or loss 273,726  195,444 
Purchases of investments held at fair value through profit or loss (282,890) (214,179)
(Increase)/decrease in debtors (183) 81 
Increase/(decrease) in creditors 1,486  (356)
Taxation on investment income (96) (36)
 --------   -------- 
Net cash generated/(used) from/(in) operating activities 1,969  (11,518)
 ========   ======== 
Financing activities
Proceeds from loan note issue 25,000  – 
Issue costs of loan note (278) – 
Net (repayment)/drawdown of Scotia Bank revolving credit facility –  10,000 
Interest paid (1,908) (1,586)
Dividends paid (11,012) (8,857)
 --------   -------- 
Net cash generated/(used) from/(in) financing activities 11,802  (443)
 --------   -------- 
Increase/(decrease) in cash and cash equivalents 13,771  (11,961)
 --------   -------- 
Cash and cash equivalents at beginning of the year 29  11,988 
Effect of foreign exchange rate changes (8)
 --------   -------- 
Cash and cash equivalents at end of the year 13,792  29 
 --------   -------- 
Comprised of:
Cash at bank 3,813  29 
BlackRock Institutional Cash Series plc – Sterling Liquidity Fund 9,979  – 
 --------   -------- 
13,792  29 
 ========   ======== 

The financial statements were approved and authorised for issue by the Board of Directors on 27 April 2018 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

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
The principal accounting policies adopted by the Company are set out below.

(a) Basis of preparation

The Company presents its results and positions under FRS 102, ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’ (FRS 102), which forms part of the revised Generally Accepted Accounting Practice (New UK GAAP) issued by the Financial Reporting Council (FRC) in 2013.
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 better reflect 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 on the face of 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. 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 effective yield method and 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 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 of assets 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 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) 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 recognised in the financial statements in the period in which they are paid.

(j) 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.

(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 costs 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 (or in the normal operating cycle of the business if longer). 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 and on 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

2018 
£’000 
2017 
£’000 
Investment Income:
UK listed dividends 11,654  9,621 
UK listed scrip dividends 144  56 
UK listed special dividends 591  688 
Property income dividends 879  861 
Overseas listed dividends 2,473  1,148 
Overseas listed scrip dividends 70  – 
Overseas interest income 15  28 
Overseas listed special dividends 424  129 
 --------   -------- 
16,250  12,531 
 --------   -------- 
Other Income:
Bank interest
Other income – 
 --------   -------- 
 =====   ===== 
Total 16,251  12,533 
 =====   ===== 

Special dividends of £21,000 have been recognised in capital (2017: £167,000) and deducted from investment cost.

Dividends and interest received in the period amounted to £15,829,000 and £15,000 (2017: £12,565,000 and £32,000) respectively.

4. INVESTMENT MANAGEMENT AND PERFORMANCE FEES

2018 2017
Revenue 
£’000 
Capital 
£’000 
Total 
£’000 
Revenue 
£’000 
Capital 
£’000 
Total 
£’000 
Investment management fee 971  2,913  3,884  736  2,207  2,943 
Performance fee –  1,794  1,794  –  1,444  1,444 
 --------   --------   --------   --------   --------   -------- 
Total 971  4,707  5,678  736  3,651  4,387 
 =====   =====   ====   ====   =====   ==== 

Fees for the year ended 28 February 2018 and 28 February 2017 were as follows:

The investment management fee was based on a rate of 0.65% of the first £50 million of the Company’s assets, reducing to 0.50% above this level. The fee rate was applied to an asset amount calculated as total assets (excluding current year income) less the current liabilities of the Company (the “Fee Asset Amount”).

The fee was calculated at the rate of one quarter of 0.65% of the Fee Asset Amount up to the initial threshold of £50 million, and one quarter of the fee rate of 0.50% multiplied by the Fee Asset Amount in excess thereof at the end of each quarter. The investment management fee was allocated 75% to the capital column and 25% to the revenue column of the income statement.

A performance fee was calculated at the rate of 10% of the annualised excess performance over the benchmark for the two years preceding the current financial year end, applied to the Average Assets of the Company. Average Assets were defined as the Fee Asset Amount at the start of the year and at the year end date added together and divided by two. The fee was payable annually in April and was capped at 0.25% of Average Assets.

The annualised excess performance against the Company’s benchmark for the two years ended 28 February 2018 was 9.0% (2017: 7.0%). The fee was restricted by the 0.25% cap and £1,794,000 has been accrued for the year ended 28 February 2018 (2017: £1,444,000).

Performance fees have been wholly allocated to capital column of the income statement as the performance has been predominantly generated through capital returns of the investment portfolio.

With effect from 1 March 2018, the Company is no longer being charged a performance fee and, from the same date, the investment management fee is based on a rate of 0.6% of the first £750 million of the Fee Asset Amount, reducing to 0.5% above this level.

The fee is calculated at the rate of one quarter of 0.6% of the Fee Asset Amount up to the initial threshold of £750 million, and one quarter of 0.5% of the Fee Asset Amount in excess thereof, at the end of each quarter. The investment management fee is allocated 75% to the capital column and 25% to the revenue column of the income statement.

5. OTHER OPERATING EXPENSES

2018 
£’000 
2017 
£’000 
Taken to Revenue:
Custody fees
Depositary fees 94  70 
Auditor’s remuneration:
– audit services 27  25 
– non audit services1
Registrar’s fee 26  28 
Directors’ emoluments 150  148 
Marketing fees 155  134 
Other administrative costs 165  188 
 --------   -------- 
625  601 
 =====   ===== 
Taken to Capital:
Transaction charges 22  17 
 --------   -------- 
647  618 
 =====   ===== 
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% 


1.0% 
 --------   -------- 

1.  The 2018 and 2017 non audit services relate to the debenture compliance work carried out by PricewaterhouseCoopers LLP.

6. DIVIDENDS


Dividends paid on equity shares: 

Record date 

Payment date 
2018 
£’000 
2017 
£’000 
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 
2017 Final of 13.00p 19 May 2017  19 June 2017  6,224  – 
2018 Interim of 10.00p 10 November 2017  15 December 2017  4,788  – 
 --------   -------- 
11,012  8,857 
 =====   ===== 

The Directors have proposed a final dividend of 16.00p per share in respect of the year ended 28 February 2018. The proposed dividend will be paid, subject to shareholders’ approval, on 15 June 2018 to shareholders on the Company’s register on 18 May 2018. The proposed final dividend has not been included as a liability in these financial statements, as final dividends are only recognised in the financial statements when they have been approved by shareholders.

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 2018 meet the relevant requirements as set out in this legislation.


Dividends paid or proposed on equity shares: 
2018 
£’000 
2017 
£’000 
Interim dividend paid 10.00p (2017: 8.00p) 4,788  3,830 
Final dividend proposed of 16.00p per share* (2017: 13.00p) 7,661  6,224 
 --------   -------- 
12,449  10,054 
 --------   -------- 

*    Based upon 47,879,792 ordinary shares (excluding treasury shares) in issue on 27 April 2018.

All dividends paid or payable are distributed from the Company’s distributable reserves.

7. RETURNS AND NET ASSET VALUE PER SHARE
Revenue and capital returns per share are shown below and have been calculated using the following:

Year ended
28 February 2018 
Year ended
28 February 2017 
Revenue return attributable to ordinary shareholders (£’000) 14,029  10,759 
Capital return attributable to ordinary shareholders (£’000) 121,352  120,116 
 --------   -------- 
Total profit attributable to ordinary shareholders (£’000) 135,381  130,875 
 --------   -------- 
Equity shareholders’ funds (£’000) 721,442  597,073 
 --------   -------- 
The weighted average number of ordinary shares in issue during each year on which the basic return 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 undiluted net asset value was calculated was: 47,879,792  47,879,792 
Revenue return per share 29.30 22.47
Capital return per share 253.45 250.87
Total return per share 282.75 273.34
 ========  ======== 
As at
28 February 2018
As at
28 February 2017
Net asset value per ordinary share (debt at par value) 1,506.78p 1,247.03p
Net asset value per ordinary share (debt at fair value) 1,500.04p 1,237.77p
Net asset value per ordinary share (debt at par value, capital only) 1,487.48p 1,232,56p
Ordinary share price 1,325.00p 1,060.00p

8. CREDITORS – AMOUNTS FALLING DUE WITHIN ONE YEAR

2018 
£’000 
2017 
£’000 
Purchases for future settlement 7,982  71 
Interest payable 309  125 
Accrued expenditure 4,129  2,643 
 --------   -------- 
12,420  2,839 
 =====   ===== 

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

2018 
£’000 
2017 
£’000 
7.75% debenture stock 2022 15,000  15,000 
Unamortised debenture stock issue expenses (64) (79)
 --------   -------- 
14,936  14,921 
 --------   -------- 
2.74% loan note 2037 25,000  – 
Unamortised loan note issue expenses (266) – 
 --------   -------- 
24,734  – 
 --------   -------- 
Revolving loan facility – Scotia Bank 35,000  35,000 
 --------   -------- 
Total 74,670  49,921 
 --------   -------- 

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 2018 was 127p per debenture (2017: 129p), a total of £19,050,000 (2017: £19,350,000). The fair value of the 2.74% loan note has been determined based on a comparative yield for UK Gilts for similar duration maturity and spreads, and as at 28 February 2018 equated to a valuation of 95.38p per note, a total of £23,845,000 (2017: £nil).

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.

The £25 million loan note was issued on 24 May 2017. Interest on the note is payable in equal half yearly instalments on 24 May and 24 November in each year. The loan note is unsecured and is redeemable at par on 24 May 2037.

The Company has in place a £35 million three year multi-currency revolving loan facility with Scotia Bank (Ireland) Limited. As at 28 February 2018, £35 million of the facility had been utilised (2017: £35 million). Under the amended agreement the termination date of this facility is the third anniversary of the effective date being May 2021. Interest on this facility is reset every three months and is currently charged at the rate of 1.47% (2017: 1.31%).

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 28 February 2017 47,879,792  2,113,731  49,993,523  12,498 
 -------------   -------------   -------------   ---------- 
At 28 February 2018 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 (2017: 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 adopted the amendments to FRS 102 ‘Fair value hierachy 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 (note 2).

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 judgement, 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 2018 
Level 1 
£’000 
Level 2 
£’000 
Level 3 
£’000 
Total 
£’000 
Equity investments 792,060  –  –  792,060 
 --------   --------   --------   -------- 
Total 792,060  –  –  792,060 
 ========   ========   ========   ======== 

   

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 
 ========   ========   ========   ======== 

There were no transfers between levels for financial assets during the year recorded at fair value as at 28 February 2018 and 28 February 2017. The Company did not hold any level 3 securities throughout the financial year or as at 28 February 2018 (2017: 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 2018 amounted to £3,884,000 (2017: £2,943,000). A performance fee accrued for the year ended 28 February 2018 amounted to £1,794,000 (2017: £1,444,000). At the year end, £1,965,000 was outstanding in respect of the management fee (2017: £808,000) and £1,794,000 (2017: £1,444,000) 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 2018 amounted to £168,000 including VAT (2017: 134,000). Marketing fees of £189,000 (2017: £206,000) were 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 contained within the Company’s Annual Report which can be found at www.blackrock.co.uk/brsc. . At 28 February 2018, an amount of £13,000 (2017: £12,000) was outstanding in respect of Directors’ fees.

14. CONTINGENT LIABILITIES
There were no contingent liabilities at 28 February 2018 (2017: nil).

15. SUBSEQUENT EVENTS

On 17 April 2018, the Company announced a change in the management and performance fee structure. With effect from 1 March 2018, the base management fee rate changed such that a rate of 0.6% per annum is now applied to the Company’s total assets less current liabilities up to a threshold of £750,000,000. A rate of 0.5% is applied to any balances in excess of this threshold. In addition, and with effect from the same date a performance fee will no longer be charged. Additional details are given in the Chairman’s Statement  and in note 4.

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 28 February 2017, which have been filed with the Registrar of Companies. The report of the auditors for the years ended 28 February 2017 and 28 February 2018 contain no qualification or statement under section 498(2) or (3) of the Companies Act 2006. The 2018 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 5 June 2018 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

27 April 2018

IMPORTANT INFORMATION

This announcement contains Inside Information as defined under the Market Abuse Regulation (EU) No. 596/2014.


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Annual Financial Report - RNS