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RNS

Annual Financial Report

Released 07:00 22-Dec-2017

RNS Number : 1386A
Dunedin Smaller Cos Inv Tst PLC
22 December 2017
 

DUNEDIN SMALLER COMPANIES INVESTMENT TRUST PLC

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 OCTOBER 2017

LEI: 213800CI43OQT8KBKE03

 

 

COMPANY OVERVIEW

 

The Company

Dunedin Smaller Companies Investment Trust PLC ("the Company") is an investment company with its Ordinary shares listed on the premium segment of the London Stock Exchange. The Company is an investment trust and aims to attract long term private and institutional investors wanting to benefit from the growth prospects of UK smaller companies by investment in a relatively risk averse investment trust.

 

Investment Objective

The Company's investment objective is to achieve long term growth from a portfolio of smaller companies in the United Kingdom.

 

Benchmark

The Company's benchmark index is the FTSE SmallCap Index (excluding Investment Companies).

 

Management

The investment management of the Company has been delegated by Aberdeen Fund Managers Limited ("AFML", the "AIFM" or the "Manager") to Aberdeen Asset Managers Limited ("AAML" or the "Investment Manager"). Both companies are wholly owned subsidiaries of Aberdeen Asset Management PLC (the "Aberdeen Group") which merged with Standard Life plc on 14 August 2017 to form Standard Life Aberdeen plc.

 

Website

Up-to-date information can be found on the Company's website: www.dunedinsmaller.co.uk

 

 

FINANCIAL HIGHLIGHTS

 

Net asset value total returnA



Share price total returnA

2017

+32.8


2017

+28.8%

2016

+7.0%


2016

+4.1%




FTSE SmallCap Index (ex Investment Companies) total return


Revenue return per share

2017

+21.9%


2017

5.42p

2016

+6.7%


2016

5.98p





Dividends per shareB



Total assets (million)

2017

6.39p


2017

£157.6

2016

6.15p


2016

£122.6



A            Alternative Performance Measure (see note 20)

B           Dividends declared for the year in which they were earned.

 

 

For further information, please contact:

 

Andrew Leigh

Aberdeen Asset Managers Limited            0207 463 6312



COMPANY OVERVIEW - CHAIRMAN'S STATEMENT

 

Overview

I am pleased to report a year of strong absolute and relative returns for your Company. The net asset value ("NAV") total return for the year ended 31 October 2017 was 32.8%, a significant outperformance of the benchmark, the FTSE SmallCap Index (ex Investment Companies), which delivered a total return of 21.9%.  The share price total return for the year was 28.8%. The discount of the share price to the NAV per share at the year-end was 20.7%, which compared to 17.8% at the beginning of the year. The Board monitors the discount level on an ongoing basis. While the discount at the year end was disappointing, I am glad to report that it has narrowed to 15% at the time of writing.  

 

The Company has continued to benefit from many of the factors highlighted in the Half Yearly Report. Notwithstanding the uncertainties caused by the Brexit vote and the triggering of Article 50 in March, markets rose as a result of increasing global growth and rising investor appetite for risk. In addition, the share prices of those companies with earnings derived from overseas benefited from the boost to corporate profitability caused by the depreciation in Sterling following the Brexit vote in 2016. Smaller companies have also benefited from a recognition that they had been trading at a valuation discount to their larger counterparts. This gap narrowed over the year as the earnings boost that benefited some larger companies that are exposed to recovering commodity prices worked its way through the system to smaller companies.

 

The positive performance was broadly spread across the portfolio. Areas deserving of special mention include the very strong performance from power converter business XP Power, and specialist electronic design and manufacturer Acal. The Household Goods sector was another area that delivered a material contribution to performance and it is pleasing to note that recent introductions, Cairn Homes and Victoria, both performed particularly strongly.  Your Investment Manager seeks to invest for the long term and Dechra Pharmaceuticals is a company that has been in the portfolio for 14 years.  It has featured as a significant contributor to performance in previous periods and has done so again this year. Another more recent introduction to the portfolio is litigation finance company Burford Capital. It has had an exceptional year, combining a material acquisition with strong underlying performance and outstanding performance from one asset in particular. 

 

Real Estate is an area of the market that has suffered in the post-Brexit environment. However, the portfolio's exposure to this segment of the market is largely through companies that, whilst cyclical, are less exposed to office and retail markets which have been most severely affected. Consequently, the Company has benefited from being both underweight the sector relative to the benchmark and from its holdings performing more strongly than the benchmark.

 

More detailed information on performance for the year, including details on changes within the portfolio, is included within the Investment Manager's Review.

 

The outperformance during the year resulted in the payment of a performance fee to the Manager, details of which are contained in note 4 to the financial statements.

 

Earnings and Dividends

Revenue earnings per share for the year were 5.42p, compared to 5.98p for the previous year. The primary reasons for this decline were dividend cuts announced by Interserve and Fenner, and the non-recurrence of the special dividend that was paid by Stock Spirits in the prior year.

 

An interim dividend of 2.15p per share was paid on 28 July 2017. The Board proposes a final dividend of 4.24p per share (2016 - 4.00p) which, subject to approval at the Annual General Meeting, will be paid on 16 February 2018 to shareholders on the register on 19 January 2018.

 

When combined with the interim dividend, the total dividend for the year will amount to 6.39p (2016 - 6.15p), an increase of 3.9% for the year and in line with the rate of inflation. This is equivalent to a yield of 2.5% based on the year end share price of 253.0p.

 

As stated in previous Reports, whilst the Company's objective is to achieve long term growth, the Board recognises the importance of income to shareholders and, in order to grow or maintain the dividend in future years, the Board intends, if necessary, to use the Company's substantial revenue and capital reserves to support any portion of the dividend not covered by the year's earnings. Following the payment of the final dividend, revenue reserves per share will amount to 5.11p (2016 - 6.08p), representing 80.0% of the current annual dividend cost.

 

In addition to the revenue reserve, the Company also has the ability to fund dividend payments from its realised capital reserves which amounted to £80.7 million at the year-end.

 

Share Buy Backs

The Company did not purchase any of its own Ordinary shares during the period under review. As stated above, the discount at the year-end was 20.7%. The Directors monitor the Company's discount on an ongoing basis, compared to the Company's peer group and also the investment trust sector as a whole, and may use its share buyback powers, subject to market conditions, if it feels this to be appropriate. A resolution to renew the Company's share buy-back authority will be put to shareholders at the Annual General Meeting.

 

Gearing

The Company finished the year with net debt of £1.3 million representing a de minimis level of gearing. At the year end it had a £5 million revolving credit facility as well as a three year term loan facility of £5 million which was more than offset by cash balances held.

 

The loan facilities matured on 24 November 2017 and the Company has replaced them with new facility agreements entered into with Scotiabank Europe PLC (the "New Facilities"). The New Facilities are for a five year period to 24 November 2022 and, as with the previous facilities, comprise a £5 million fixed rate term loan and a £5 million revolving credit facility. The £5 million term loan has been fully drawn down at an all-in interest rate of 2.78% per annum. The revolving credit facility is currently undrawn but the Investment Manager will look to invest this as and when it considers it appropriate.

 

Board Composition

Having served as a Director since 1998 I will retire from the Board at the Annual General Meeting in 2019. The Board will seek to recruit two new independent Directors over the next two years.

 

Manager

The Board notes the recent completion of the merger between Aberdeen Asset Management PLC ("Aberdeen"), which is the parent company of the Manager, and Standard Life PLC whereby Aberdeen has become the wholly owned subsidiary of Standard Life Aberdeen plc. The Board will continue to monitor developments closely to ensure that satisfactory arrangements are in place for the continued effective management of the Company.

 

Annual General Meeting

The Annual General Meeting will be held at the offices of Aberdeen Asset Management PLC, 40 Princes Street, Edinburgh EH2 2BY on Thursday 8 February 2018 at 12 noon. In addition to the formal business of the meeting, our portfolio manager, Ed Beal, will provide a presentation on performance for the year and the outlook for smaller companies, and there will also be an opportunity for shareholders to meet informally with the Directors and representatives from the management team at the conclusion of the meeting. An invitation to the meeting is included with the Annual Report and shareholders are requested to complete and return this to the Company Secretary.

 

Outlook

The outlook for the UK economy is likely to continue to be impacted by the continuing uncertainties around the outcome of the Brexit negotiations. With the recent downgrading of growth forecasts and the expected reduction in inflation as the impact of the depreciation of Sterling works its way through the system, the prospects for further interest rate increases in the near term seem limited. The outlook for the global economy, however, remains reasonably positive and it appears likely that the major central banks will seek to tighten monetary conditions and reduce either the rate or absolute size of their stimulus packages.   

 

With increasing earnings derived from abroad, many smaller companies in the UK are protected from the domestic economic uncertainties. However, following a strong period of performance for equity markets, valuations, particularly those of good quality companies, remain elevated. Although valuations are not stretched by historic standards, this could justify a degree of caution in the event of any form of economic disappointment. 

 

The Investment Manager has continued with its focus of investing in good quality companies run by strong management teams. Notwithstanding any shorter term uncertainties, the Board believes that this approach will be beneficial over the long term and that smaller companies will continue to provide good long terms opportunities for shareholders.

 

 

N M Yarrow

Chairman

21 December 2017

 

 



STRATEGIC REPORT - OVERVIEW OF STRATEGY

 

Business Model

The business of the Company is that of an investment company which qualifies as an investment trust for tax purposes.  The Directors do not envisage any change in this activity in the foreseeable future.

 

Investment Objective

The Company's investment objective is to achieve long term growth from a portfolio of smaller companies in the United Kingdom.

 

Investment Policy

The Company invests primarily in the equity securities of UK smaller companies, with an emphasis on investing in quality companies with good management, strong cash flow, a sound balance sheet and the prospect of dividend growth.

 

The Company does not typically acquire securities that are unquoted or unlisted at the time of investment (with the exception of securities which are about to be listed or traded on a stock exchange). However, the Company may continue to hold securities that cease to be quoted or listed if the Investment Manager considers this to be appropriate.

 

The Directors measure the performance of the portfolio relative to the FTSE SmallCap Index (ex Investment Companies) but the Company is unconstrained as to the market sectors in which it may invest.  As a result the portfolio is likely to diverge, sometimes significantly, from the benchmark.

 

Risk Diversification

The Company maintains a diversified portfolio of investments, typically comprising in the region of 40 to 75 holdings (but without restricting the Company from holding a more or less concentrated portfolio from time to time). It is the policy of the Company to invest no more than 15% of its gross assets in any one company and no more than 15% of its gross assets in other listed investment companies (including listed investment trusts).

 

Gearing

The Directors are responsible for determining the gearing strategy of the Company.  Gearing is used with the intention of enhancing long-term returns and is subject to a maximum level of 20% of gross assets at the time the gearing is incurred.  Any borrowing, except for short-term liquidity purposes, is used for investment purposes. 

 

Delivering the Investment Policy

The Directors are responsible for determining the investment objective and the investment policy of the Company. Day-to-day management of the Company's assets has been delegated, via the AIFM, to the Investment Manager.

 

Investment Process

The Investment Manager believes that, over the long term, share prices reflect underlying business fundamentals. A bottom-up investment process is followed, which is based on a disciplined evaluation of companies that includes visits by its fund managers. Company selection is the major source of added value. New investments are not made without the fund managers having first met management of the investee company, undertaken further analysis and written detailed notes to outline the underlying investment merits. A company's value is estimated in two stages: quality then price. Quality is defined with reference to management, business focus, balance sheet and corporate governance. Price is calculated relative to key financial ratios and business prospects.

 

The Investment Manager's portfolio construction relies upon diversification rather than formal controls guiding stock and sector weightings. The Investment Manager's portfolios are generally run conservatively, with an emphasis on traditional buy-and-hold, top-slicing/topping up being preferred to outright trading and this approach results in low turnover within portfolios. Typically, investee companies have a higher return on equity/assets and lower debt to equity than the market averages.

 

Benchmark

The Company's benchmark is the FTSE SmallCap Index (excluding Investment Companies).

 

Key Performance Indicators ("KPIs")

The Board uses a number of financial performance measures to assess the Company's success in achieving its objective and determining the progress of the Company in pursuing its investment policy.  The main KPIs identified by the Board in relation to the Company, which are considered at each Board meeting, are shown in the following table:

 

KPI

Description

Performance of net asset value ("NAV")

The Board considers the Company's NAV total return to be the best indicator of performance over time and is therefore the main indicator of performance used by the Directors.

Performance against benchmark index and  competitor investment trusts

The Board measures performance against the benchmark index - the FTSE SmallCap Index (excluding Investment Companies). The Board also monitors performance relative to competitor investment trusts over a range of time periods, taking into consideration the differing investment policies and objectives employed by those companies.

Revenue return per Ordinary share

The Board monitors the Company's net revenue return.

Share price performance

The Board monitors the performance of the Company's share price on a total return basis.

Discount/premium to NAV

The discount/premium of the share price relative to the NAV per share is closely monitored by the Board.

Ongoing charges

The Board monitors the Company's operating costs carefully.

 

Principal Risks and Uncertainties

There are a number of risks which, if realised, could have a material adverse effect on the Company and its financial condition, performance and prospects. The risks and uncertainties faced by the Company are reviewed by the Audit Committee in the form of a risk matrix and heat map, and the principal risks and uncertainties facing the Company at the current time, together with a description of the mitigating actions the Board has taken, are set out in the table below. The Board has carried out a robust assessment of these risks, which include those that would threaten its business model, future performance, solvency or liquidity. The principal risks associated with an investment in the Company's shares are published monthly on the Company's factsheet and they can be found in the pre-investment disclosure document ("PIDD") published by the Manager, both of which are on the Company's website.

 

Description

Mitigating Action

Investment strategy and objectives - the setting of an unattractive strategic proposition to the market and the failure to adapt to changes in investor demand may lead to the Company becoming unattractive to investors, a decreased demand for its shares and a widening discount.

The Board keeps the level of discount at which the Company's shares trade, as well as the investment objective and policy, under review and holds an annual strategy meeting where it reviews investor relations reports and updates from the Investment Manager and the Company's broker.

 

The Directors are updated at each Board meeting on the composition of, and any movements in, the shareholder register. 

 

Investment management - investing outside of the investment restrictions and guidelines set by the Board could result in poor performance and an inability to meet the Company's objectives, as well as a widening discount.

The Board meets the Manager on a regular basis and keeps investment performance under close review. Representatives of the Investment Manager attend all Board meetings and a detailed formal appraisal of the Aberdeen Group is carried out annually by the Management Engagement Committee.

 

The Board sets and monitors the investment restrictions and guidelines, and receives regular reports which include performance reporting on the implementation of the investment policy, the investment process and application of the guidelines. The Board also monitors the Company's share price relative to the NAV per share.

Income/dividends - the level of the Company's dividends and future dividend growth will depend on the performance of the underlying portfolio. Any change in the tax treatment of dividends or interest received by the Company may reduce the level of net income available for the payment of dividends to shareholders.

 

The Directors review detailed income forecasts at each Board meeting. The Company has built up significant revenue reserves which can be drawn upon if required should there be a shortfall in revenue returns.

 

 

Financial obligations - the financial risks associated with the portfolio could result in losses to the Company.

The financial risks associated with the Company include market risk, liquidity risk and credit risk, all of which are mitigated by the Investment Manager. Further details of the steps taken to mitigate the financial risks associated with the portfolio are set out in note 16 to the financial statements.

Gearing - a fall in the value of the Company's investment portfolio could be exacerbated by the impact of gearing. It could also results in a breach of loan covenants. 

 

The Board sets the gearing limits within which the Investment Manager can operate. Gearing levels and compliance with loan covenants are monitored on an ongoing basis by the Manager and at Board meetings. In the event of a possible impending covenant breach, appropriate action would be taken to reduce borrowing levels.

 

In addition, AFML, as alternative investment fund manager, has set overall leverage limits.

 

Regulatory - failure to comply with relevant laws and regulations could result in fines, loss of reputation and potentially loss of an advantageous tax regime.

The Board and Manager monitor changes in government policy and legislation which may have an impact on the Company, and the Audit Committee monitors compliance with regulations by reviewing internal controls reports from the Manager. From time to time the Board employs external advisers to advise on specific matters.

Operational - the Company is dependent on third parties for the provision of all systems and services (in particular, those of the Aberdeen Group) and any control failures and gaps in their systems and services could result in a loss or damage to the Company.

Written agreements are in place with all third party service providers. The Board receives reports from the Manager on its internal controls and risk management throughout the year and receives assurances from all its other significant service providers on at least an annual basis.

 

The Manager monitors closely the control environments, including controls relating to cyber security, and quality of services provided by third parties, which include the depositary and custodian, through service level agreements, regular meetings and key performance indicators.

 

 

Promoting the Company

The Board recognises the importance of promoting the Company to prospective investors both for improving liquidity and enhancing the value and rating of the Company's shares. The Board believes an effective way to achieve this is through subscription to and participation in the promotional programme run by the Aberdeen Group on behalf of a number of investment trusts under its management. The Company's financial contribution to the programme is matched by the Aberdeen Group.  The Aberdeen Group Head of Brand reports quarterly to the Board giving analysis of the promotional activities as well as updates on the shareholder register and any changes in the make up of that register.

 

The purpose of the programme is both to communicate effectively with existing shareholders and to gain new shareholders with the aim of improving liquidity and enhancing the value and rating of the Company's shares. Communicating the long-term attractions of the Company is key and therefore the Company also supports the Aberdeen Group's investor relations programme which involves regional roadshows, promotional and public relations campaigns. 

 

Board Diversity

The Board recognises the importance of having a range of skilled, experienced individuals with relevant knowledge in order to allow it to fulfill its obligations. The Board also recognises the benefits, and is supportive, of the principle of diversity in its recruitment of new Board members. However, in making new appointments, the Board's overriding priority is to appoint the most appropriate candidates, regardless of gender or other forms of diversity. The Board has not therefore set any measurable objectives in relation to its diversity. 

 

At 31 October 2017, there were three male Directors and one female Director on the Board.

 

Employee, Social and Human Rights Issues

The Company has no employees as the Board has delegated day-to-day management and administrative functions to the Manager. There are therefore no disclosures to be made in respect of employees. The Company's socially responsible investment policy is set out below.

 

Socially Responsible Investment Policy

The Directors, through the Manager, encourage companies in which investments are made to adhere to best practice in the area of corporate governance and socially responsible investing. They believe that this can best be achieved by entering into a dialogue with company management to encourage them, where necessary, to improve their policies in both areas.

 

The Manager's ultimate objective, however, is to deliver superior investment returns for its clients. Accordingly, whilst the Manager will seek to favour companies which pursue best practice in these areas, this must not be to the detriment of the return on the investment portfolio.

 

UK Stewardship Code and Proxy Voting as an Institutional Shareholder

Responsibility for actively monitoring the activities of portfolio companies has been delegated by the Board to the Manager which has sub-delegated that authority to the Investment Manager.

 

The full text of the Company's response to the Stewardship Code may be found on its website.

 

Modern Slavery Act

Due to the nature of the Company's business, being a company that does not offer goods and services to customers, the Board considers that it is not within the scope of the Modern Slavery Act 2015 because it has no turnover. The Company is therefore not required to make a slavery and human trafficking statement. In any event, the Board considers the Company's supply chains, dealing predominantly with professional advisers and service providers in the financial services industry, to be low risk in relation to this matter.

 

Global Greenhouse Gas Emissions

The Company has no greenhouse gas emissions to report from the operations of its business, nor does it have responsibility for any other emissions producing sources under the Companies Act 2006 (Strategic Report and Directors' Reports) Regulations 2013.

 

Viability Statement

The Board considers the Company, with no fixed life, to be a long term investment vehicle but, for the purposes of this viability statement, has decided that three years is an appropriate period over which to report. The Board considers that this period reflects a balance between looking out over a long term horizon and the inherent uncertainties of looking out further than three years.

 

In assessing the viability of the Company over the review period, the Directors have focused upon the following factors:

 

-    The principal risks and uncertainties set out above and the steps taken to mitigate these risks.

-    The ongoing relevance of the Company's investment objective.

-    The fact that the Company's portfolio is invested in listed securities.

-    The level of gearing. This is closely monitored and the financial covenants attached to the Company's borrowings provide for significant headroom.

-    The availability of loan facilities. Borrowings of £10 million are committed to the Company until 24 November 2022.

 

In making its assessment, the Board has considered that there are other matters that could have an impact on the Company's prospects or viability in the future, including a large economic shock, significant stock market volatility, a substantial reduction in the liquidity of the portfolio, and changes in regulation or investor sentiment. In considering these matters the Board has reviewed the impact of stress testing on the portfolio, including the effects of any substantial future fall in markets.

 

Taking into account the Company's current position and the potential impact of its principal risks and uncertainties, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due for a period of three years from the date of approval of this Report.

 

Outlook

The Board's view on the general outlook for the Company can be found in the Chairman's Statement whilst the Investment Manager's views on the outlook for the portfolio are included in its report.

 

On behalf of the Board

N M Yarrow

Chairman

21 December 2017

 

 



STRATEGIC REPORT - RESULTS

 

Financial Highlights

 


31 October 2017

31 October 2016

% change

Total assets less current liabilities (before deducting bank loan)

£157,630,000

£122,618,000

28.6

Equity shareholders' funds (Net Assets)

£152,630,000

£117,618,000

29.8

Market capitalisation

£121,079,000

£96,672,000

25.2

Share price (mid market)

253.00p

202.00p

25.2

Net Asset Value per share

318.93p

245.77p

29.8

FTSE SmallCap Index (ex Investment Companies) (capital gains basis)

5,128.95

4,325.05

18.6





Discount (difference between share price and net asset value)

20.7%

17.8%






Gearing




Net gearing/(cash)A

0.89%

(2.65)%






Dividends and earnings




Total return per shareB

79.31p

16.02p


Revenue return per share

5.42p

5.98p

(9.4)

Dividends per shareC

6.39p

6.15p

3.9

Dividend cover (including proposed final dividend)

0.85

0.97


Revenue reservesD

£4,473,000

£4,823,000






Operating costs




Ongoing charges (excluding performance fee)E

0.77%

0.81%


Ongoing charges (including performance fee)

1.36%

0.83%



A            Calculated in accordance with AIC guidance "Gearing Disclosures post RDR"

B            Measures the total revenue and capital return for the year divided by the weighted average number of Ordinary shares in issue (see Statement of Comprehensive Income).

 

C            The figures for dividends per share reflect the years in which they were earned

D            The revenue reserve figure does not take account of the proposed final dividend amounting to £2,029,000 (2016 - £1,941,000).

E            The ongoing charges ratio has been calculated in accordance with guidance issued by the AIC as the total of investment management fees and administrative expenses divided by the average cum income net asset value throughout the year. 

 

 



STRATEGIC REPORT - RESULTS

 

Performance

 


1 year

3 year

5 year


% return

% return

% return

Capital return




Share price

+25.2

+39.8

+52.4

Net Asset Value per share

+29.8

+46.4

+89.6

FTSE SmallCap Index (ex Investment Companies)

+18.6

+35.3

+90.1





Total return (Capital return plus dividends paid)




Share price

+28.8

+52.5

+75.0

Net Asset Value per share

+32.8

+57.4

+114.1

FTSE SmallCap Index (ex Investment Companies)

+21.9

+47.1

+117.2

 

 

Dividends

 


Rate per share

xd date

Record date

Payment date

Proposed final dividend 2017

4.24p

18 January 2018

19 January 2018

16 February 2018

Interim dividend 2017

2.15p

6 July 2017

7 July 2017

28 July 2017


_______




2017

6.39p





_______




Final dividend 2016

4.00p

12 January 2017

13 January 2017

10 February 2017

Interim dividend 2016

2.15p

7 July 2016

8 July 2016

29 July 2016


_______




2016

6.15p





_______




 

Ten Year Financial Record

 

Year to 31 October

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Revenue available for Ordinary dividends (£'000)

2,517

1,525

1,939

2,556A

2,206

2,599

2,555

2,954

2,862

2,592

Per share (p)











Net revenue return

5.2

3.2

4.1

5.3A

4.6

5.4

5.3

6.2

6.0

5.4

Net dividends paid/proposed

4.50

4.50

4.60

4.85

5.00

5.15

5.25

6.00

6.15

6.39

Revenue reserve after payment of final dividend

7.43

6.15

5.60

6.09

5.70

5.98

6.07

6.25

6.08

5.11

Net asset value

90.1

117.1

154.2

143.0

168.2

226.0

217.9

235.8

245.8

318.9

Total return

(73.6)

31.4

41.7

(6.5)

30.1

62.8

(2.9)

23.2

16.0

79.3


____

____

____

____

____

____

____

_____

_____

_____

Shareholders' funds (£'000)

43,170

56,020

73,809

68,446

80,499

108,153

104,258

112,823

117,618

152,630


____

____

____

____

____

____

____

_____

_____

_____












A               Includes interest on VAT recovered.

 

 



STRATEGIC REPORT - INVESTMENT MANAGER'S REVIEW

 

Market Review

Smaller companies had a very good year for the period ended 31 October 2017, posting gains that were in excess of twice those registered by their larger counterparts and which were very attractive in absolute terms.  The year got off to a slightly weaker start but this was followed by steady progression.

 

The year began with Donald Trump's unexpected victory in the US Presidential elections, which brought with it an expectation of rising growth and inflation and hence a belief that interest rates would be increased further.  This was a significant electoral shock and, coming on the back of the Brexit vote, it raised concerns among investors that there may be further populist disruptions throughout 2017.   As it turned out these fears were largely misplaced.  A number of European elections, most notably the French Presidential one, passed without major upset.

 

In the UK, companies were seeking clarity as to what Brexit was likely to mean.  Although none was forthcoming, it was positive to see that, despite such uncertainty, the economy was performing rather more strongly than had been feared by some.  Indeed, growth expectations for 2016 were increased during the autumn.

 

Corporate profitability and share prices were boosted by the continuing weakness of Sterling, providing a fillip to markets that might otherwise have been rather more concerned.  This effect was evident amongst smaller companies despite much of the associated commentary focussing on the benefits that were accruing to the largest businesses.  A corollary of this was that inflation began to pick up.

 

Markets were very strong as we approached the end of 2016 and it was notable that smaller companies were broadly keeping pace despite their lower exposure to resource stocks which performed well as commodity prices rose on the back of Chinese demand.

 

Entering the new year, as we considered what 2017 might hold, one thought that struck us was that, despite the wide-ranging geopolitical uncertainty, markets had been operating in a state of near perpetual uncertainty for almost a decade.  Changes of government, bank bailouts and even national recapitalisations were not new.  A focus on investing in good quality companies that could weather these changes had stood us well and we believed then, and now, that it would continue to do so.

 

Global growth looked set to pick up during 2017.  Drivers of this included the strengthening labour markets in the US, UK and Europe and the improvements in the Brazilian and Russian economies. Meanwhile, wage growth and a higher oil price were pushing inflation upwards.  Companies were beginning to talk of Europe being the region where they were performing most strongly and tapering began to creep into investors' thoughts.

 

Brexit was to the fore during the spring, with the introduction of the Brexit Bill and the triggering of Article 50.  In reality this told us nothing and companies were unable to say much of significance regarding how they were planning for something that was accompanied by such uncertainty.

 

In March, the Federal Reserve increased US interest rates by 0.25% and markets took this in their stride.  In the UK, inflation exceeded 3%, indeed it would reach 3.7% by early summer.  There was, though, a hope that it would moderate once the impact of currency weakness annualised in the Autumn.  Although the UK economy continued to outperform expectations, some caution was warranted because it was being driven by consumption rather than investment.  This weak level of investment was a clear manifestation of a general lack of corporate confidence.

 

The decision by Theresa May to call a snap general election in June was intended to bring some certainty to the European negotiations.  The result failed to deliver such clarity and indeed there was not even agreement as to whether it increased or decreased the likelihood of a so called hard or soft Brexit.  Markets reacted quite calmly despite the clearly increased risks and equities were again boosted by a weakening of Sterling.

 

Companies reported first quarter trading statements that were generally positive and in line with, or even ahead of, expectations.  Growth was broadly spread with most regions apart from the UK itself performing satisfactorily.   Indeed there was evidence that the growth engines of China and the US were actually doing better than the official data suggested.  In Europe, another milestone was reached as Italy recapitalised two of its most troubled banks without causing further disruption.  In the UK the prognosis was less positive as expectations for future expansion moved firmly into downgrade territory.

 

By June, the Governor of the Bank of England, Mark Carney, had begun to signal that, despite concerns about pressures on the consumer, the timing of an increase in domestic interest rates was moving closer and, by the early autumn, the focus was clearly on the impact of rising inflation and falling unemployment. A change in policy was imminent.

 

In many ways, the year ended much as it started: widespread uncertainty as tensions rose between the US and North Korea, the Catalonians tried to secede from Spain, the UK Government flirted with collapse, and political interference in corporate ownership was touted by both the main political parties. But investors continued to focus on the facts, global growth was sound, corporate profitability was increasing and, despite the fact that valuations were some way from being cheap, there were few alternatives to equities for those who wanted a real return.

 

Portfolio Review

Key contributors to performance during the year included; Burford Capital, Dechra Pharmaceuticals, Smart Metering Systems, XP Power and Robert Walters.

 

Burford, Dechra and Smart Metering Systems were all significant drivers of performance in the prior financial year as well.  Burford Capital has benefited from partial realisations of an asset it holds in the litigation that is ongoing between the Argentinian Government and the prior owners of the nationalised Repsol business. These transactions have indicated that Burford is likely to generate gains on this investment of many multiples of book value. 

 

Dechra Pharmaceuticals has continued to successfully execute its strategy of taking a broader range of both companion and food producing animals' medicines into an increasing number of geographies and to complement this with acquisitions that bring new products and capabilities to add to their portfolio.

 

Smart Metering Systems is the largest independent installer and owner of smart meters for the domestic markets.  This programme is gaining pace and the company has been very successful in winning new contracts which will provide it with a long term and inflation linked portfolio of cash flows.

 

XP Power have invested significantly in developing a suite of new product families in their core power convertor markets.  These products typically operate at higher power levels and with higher levels of efficiency than the previous generations.  The company has had considerable success in winning new design approvals, the mission critical nature of the convertors alongside the fact that they are designed in by the group's customers mean that these wins will provide them with long term and persistent revenues.  The company has a strong balance sheet and is well positioned to make acquisitions that move them into adjacent markets.

 

Robert Walters is a recruitment consultancy.  They have a very strong franchise in Asia and have therefore been benefitting from the growth in employment in many emerging markets.  Additionally they have maintained their presence in European markets throughout the financial crisis.  With these markets now recovering, often strongly, the company is reaping the rewards of its prior investment.  Lastly, they have developed an outsourced human resource solution called Resource Solutions.  They are the only meaningful operator in this market and have been successfully winning a range of blue chip clients.

Among the investments that detracted from performance were; Interserve, Dignity and Ultra Electronics.

 

Interserve  is covered in more detail below.

 

Dignity are the UK's leading provider of funeral and cremation services.  The company's share price has suffered as investors have become concerned that they are losing market share and the impact this may have on their strategy of premium pricing.  However, we can think of no other business that has such certainty of demand.  In addition this is an industry where word of mouth matters more than elsewhere.  In that regard we are comforted that the business has maintained its commitment to the highest levels of service and we believe that there is a demand for these that supports a higher price point than that offered by some of the competition.  Lastly, we note data from the Office for National Statistics that suggests that the death rate will gradually increase over time.  So whilst the company may lose some share it will be in the context of a larger market.

 

Ultra Electronics is a defence company.  The business has had a difficult few years, in common with many of its peers.  Markets have been tough as the Ministry of Defence and, more importantly, the US Department of Defense have curtailed spending.  Consequently the business has failed to deliver any organic growth for some time.  This is understandable but it has coincided with overly optimistic guidance from the company which has meant that the eventual outcome has been frequent disappointment for investors.  Whilst there is no suggestion that the company faces any of the more substantial structural issues that have proven so damaging to some other businesses in the industry, there is no doubt that investor patience has been tested to the limit and scepticism now prevails.  Since the year end, the company has announced that it has parted ways with its CEO.  We believe that it still has highly regarded products in its niche markets and that the US markets at least have recovered to be a more favourably environment.

 

Portfolio Activity

We introduced three new holdings during the year.

 

Victoria is a manufacturer of soft and hard flooring with operations in the UK and Australia.

 

The industry has some interesting and attractive characteristics.  It is highly fragmented, with Victoria the market leader in the UK holding less than 10% share, and number two in Australia with 15%.  The company sells largely to independent retailers, which results in very high brand loyalty and hence pricing power.  As such, during periods of raw material volatility, Victoria has little difficulty in passing on prices.  Because its product is shipped to order, the retailer will benefit from a favourable working capital profile as a result of the deposit they will have secured from the consumer. This cash flows through the supply chain and consequently Victoria have a favourable working capital profile, with a lower level of creditors than would normally be seen at a manufacturer.

 

The business has been growing through acquisition.  As vendors seek an exit, generally through either retirement or a requirement for capital to grow their business, they have few options other than Victoria.  Victoria only acquires well-invested assets and will seek to retain the vendor within the business if possible.  This allows them to grow their business but to pay relatively lowly valuations.  The management are very focussed on return on capital and a minimum of 15% is required. Sales synergies are few, but there are production efficiencies and the opportunity to rebrand acquired products across the existing brand portfolio.

 

The market is less cyclical than might be thought because of the replacement nature of the product and, crucially, the strength of Victoria's brands and service levels.  This has allowed them to take share and continue to grow even when the market itself has struggled.

 

A buy and build strategy is sensible because there are only three significant carpet markets globally with the largest being the US which is dominated by two behemoths.  So whilst acquisitions bring Victoria manufacturing and distribution opportunities they also deliver scale that at some point may be attractive to the larger consolidators in the industry.  In the meantime, the favourable working capital dynamics result in a company that generates significant amounts of cash that will initially be used to fund further growth but will eventually be available to reward shareholders. 

 

Subsequent to the year end, Victoria has made a sizeable acquisition in the Spanish ceramic tile market.  This will provide them with an additional and meaningful market for growth.

 

Patisserie Holdings own and operate a number of casual dining brands.  The concept revolves around the sale of high quality but artisanal cakes and patisserie to the eat-in and takeaway markets.  Casual dining continues to experience structural growth in the UK. The company has a rigid focus on returns rather than store numbers. The products are viewed as a treat by consumers and sales are particularly strong amongst older customers; the 'grey pound' being a market with more resilience than many consumer-exposed industries and also one that is underserved in the casual dining space.  The business is vertically integrated which allows them to retain control of the quality of their produce.  The management are very experienced and the Chairman, Luke Johnson, who founded the company, ran and sold Pizza Express, and Paul May, the CEO, together own 44% of the company which gives us confidence that they will retain their focus on returns.  As and when the brand reaches maturity it will be highly cash generative, the proceeds of which could be returned to investors or used to fund additional brands. 

 

Gresham Technologies is a software company which has built a platform technology called Clareti.  Financial institutions typically have to standardise transaction data into the correct format before inputting it onto the SWIFT system. This requires a lot of manual in-house IT work which in turn creates additional cost and, more importantly, adds an increased risk of human error.  Regulators around the world are pushing financial institutions to have more robust reconciliation and reporting systems.  The Clareti platform is agnostic with regards to the asset class or type of transaction involved and, as such, is well suited to serve the niche but still highly valuable markets that relate to non-standard trades. The company has won accounts with Tier 1 banks in Europe, Australia and, importantly, the US.  These provide vital reference sites as they seek to drive sales of their software.  Whilst nothing is certain, our expectation is that two of the three most significant hurdles to success have been overcome.  Namely, they have successfully deployed their research and development capital to produce a product that works and that solves an existing problem, and they have sold it to a range of serious reference customers.  We are hopeful that this will be followed by a material acceleration in sales wins.

 

We exited five holdings during the year.

 

Exova is a specialist testing company that we had first invested in during 2015 shortly after its Initial Public Offering.  Trading had been tough for some time, especially in its oil and gas exposed operations, though we were content to look through this and focus on an anticipated recovery and future growth.  However, the business was bid for by its peer, Element Materials.  We engaged repeatedly with the company as we sought to maximise the value we would receive for a company that we had hoped to be invested in for the long term.  In the end, the majority shareholder was content to accept the price offered by Element and we had little choice but to recognise that the transaction would proceed.

 

Berendsen is a European provider of workwear and linen for the hospitality industry and facilities services.  The UK business had suffered from under-investment but a sound plan was being enacted by the recently appointed CEO that looked likely to yield a return to growth and solid returns on investment.  The long term prospects for the business were recognised by other industry participants and the company was bid for by French competitor Elis.  We viewed the bid as opportunistic and believed that it undervalued the business.  We engaged with the board and indicated that we would be happy to support them as they executed their stated strategy.  Alternatively, if they felt that a sale was the right thing to do then we would require a better price.  Ultimately, Elis returned with an improved offer comprising both a higher price and a larger proportion being paid in cash.

 

Enquest is a North Sea based oil and gas producer.  The company was hit very hard by the decline in the oil price which came at a particularly unfortunate time, coinciding with an extensive programme of capital expenditure and just prior to an expected increase in production that would have provided cash flow to service the cost base.  The business conducted a rescue rights issue to buy themselves some breathing space as they sought to bring their recently developed Kraken oil field on stream.  We participated in the fundraising alongside the debt holders who also granted them more favourable terms.  Whilst this was successful in easing the immediate pressures, it still left a business whose fortunes were dependent on two factors.  Firstly the oil price probably needed to be sustainably above $60 for there to be long term value for shareholders and, secondly, they needed to execute perfectly with respect to a ramp-up of output from their fields. Our experience is that the nature of this industry means that perfect execution is unusual.  We therefore took the decision to exit the holding.

 

Huntsworth is an international provider of PR services.  The company has been struggling for some time, resulting in a change of Chairman, CEO and Finance Director.  This brought about a new strategy with a much greater focus on costs.  As this improved performance was increasingly recognised by the market the share price responded strongly.  Importantly, this was accompanied by much improved liquidity in the shares of this small company.  We took this opportunity to exit the position.

 

Interserve is a construction and support services company with operations in the UK and the Middle East.  They entered into a series of Energy for Waste construction contracts that lay outwith their traditional areas of competency.   A confluence of events that included their key subcontractor going bankrupt and a very demanding client led to them recognising very significant losses on these projects.  Arguably this situation was manageable, however when their core construction and support services businesses also turned down it became clear that their balance sheet was unacceptably strained and that the strategic options available to them were severely constrained.  In light of this we took the decision to sell the holding, which completed after the year end.

 

Other than the placing conducted by Enquest referred to above, four of our holdings conducted equity raises during the year to help grow their businesses.

 

We participated in a fundraising conducted by life assurer Chesnara to facilitate their acquisition of Legal & General's Dutch business.  This was in line with our expectations of their strategy and should allow them to leverage the platform they acquired with the earlier Waard acquisition.

 

We took part in a placing conducted by Acal, a designer, manufacturer and distributor of specialist electronic components, to help fund their acquisition of Variohm, a designer and manufacturer of switches and sensors.  We were happy to support them with this acquisition as we believe that they have a good opportunity to consolidate a fragmented European market.  The scale this will bring will be supportive for margins and we believe that it is right that we are prepared to provide equity to help our investments grow where the strategy makes sense to us.

 

We also participated in a placing conducted by Assura, a company that develops and owns facilities for general practitioners.  The company is seeing increasing opportunities to both purchase and develop such facilities.  This fundraising will allow them to accelerate the process of building up a portfolio of these assets which provide attractive yields, with growth in rents that are to all intents and purposes government-backed.  It will also allow them to retain a suitably conservative balance sheet. 

 

Lastly, we participated in the placing conducted by Ultra Electronics, a niche supplier to the aerospace and defence markets.  The company raised equity to help fund its acquisition of Sparton Corporation.  Ultra has a joint venture with Sparton for the production of sonobuoys for the US market.  The deal will strengthen the company in an area of core competency, move them closer to an important customer and increase their exposure to an area of defence expenditure that is well set for long term growth.

 

Although not a placing to fund growth we supported Euromoney when their majority shareholder DMGT looked to sell its stake down to less than 50%.  We believe that Euromoney is a high quality business capable of delivering long term growth and above average margins and returns.  Whilst we have no complaints with DMGT's behaviour during their time as a majority shareholder, we believe that the reduction in their stake will give Euromoney greater strategic freedom in the future.

 

Stewardship

We believe that, as long term owners of the businesses in which we are invested, it is not sufficient merely to seek out assets that we believe to be undervalued. It is incumbent upon us to take a proactive approach to our stewardship of these companies.  Therefore we engage extensively with our investee companies.  By their very nature, these discussions often take place with a broader constituency than just the executive management team.  They are frequently sensitive and it would be inappropriate to move beyond generalisations in this report.  However, we believe it is useful to seek to illustrate the depth of our activity in this area.  We have attended a range of meetings with Chairmen, non-executive directors and other stakeholders.  Topics covered have included the board composition, an area where we have again successfully engineered change.  Risk is a very broad subject that is interpreted in varying manners by different companies.  However, by engaging on this subject we secure a deeper understanding of how the boards of our investee companies perceive and seek to manage these issues.  Such interactions also enable us to push for improved disclosure and better management practices and on occasion different decisions where appropriate.  We have had conversations regarding companies' financing choices.  We find that it is always worthwhile communicating our preference for conservatively structured balance sheets that place a company's long term fortunes ahead of possible short term share price gains.  Such activity is by its nature time-consumptive but we regard it as an integral aspect of our role as long term investors.

 

Our endeavours relating to corporate governance are not solely limited to interactions with companies.  For instance, we provided a submission to the UK Business Select Committee's corporate governance inquiry.

 

Outlook

Prospects for the UK may be uncertain but the outlook for the global economy remains reasonably positive.  Global growth is running in the region of 3.6% and is expected to strengthen marginally in 2018.  In the US, the recovery is continuing, leading to an expectation that interest rates will rise again and that the Federal Reserve may begin to reverse some of the stimulus that it has been deploying.  Indeed, the underlying data suggests that both the US and Chinese economies are displaying levels of economic activity consistent with a higher level of growth than that indicated by the current readings for Gross Domestic Product. 

 

The US economy is performing strongly, as illustrated by expectations for a number of further interest rate increases in 2018.  However, the political turmoil that surrounds the Trump Administration is raising the risk profile and the need to further extend the debt ceiling could prove problematic.

 

The Eurozone is increasingly healthy with growth running at its highest level since the start of the financial crisis.  The European Central Bank has announced that it will begin tapering, by reducing its asset purchases to €30 billion per month in January.  The region has come through a number of potentially damaging elections with its prospects intact and, as such, political risk has given the appearance of reducing over the course of the year, though at the time of writing, failure of the German coalition talks have raised the possibility that Angela Merkel's position will be further weakened.

 

In aggregate, emerging markets appear well positioned as they benefit from a synchronised increase  in global growth.  The Chinese economy has grown strongly during 2017 and, although there may be some efforts to curb credit growth, the recent 19th Party Congress suggested that stability and, hence, economic growth remain the priority.

 

In the domestic economy, inflation has reached 3% and the Bank of England raised interest rates for the first time in seven years.  It was notable that the committee remained focussed on the risks to the economy and indicated that further increases were some way off.  It is expected that, as the impact of the depreciation of Sterling works its way through the system, so the currency-induced inflationary pressures will begin to ease.  The recent autumn budget brought with it a disappointing reduction in growth expectations with the economy now expected to expand by just 1.4% per annum over the next five years.  That said, forecasting is implicitly imprecise and the potential ramifications of Brexit, both positive and negative, will almost certainly mean further revisions are necessary.  In the meantime, the Chancellor's statement contained some supportive measures, with housing and infrastructure grabbing the headlines.  In the absence of material interest rate increases, which do look unlikely from here, one might expect these measures to be supportive of growth even if the consumer will suffer a decline in real incomes until at least the end of 2018.

 

It is worth remembering that smaller companies are not just a proxy for the UK economy.  In aggregate, this part of the market has become increasingly internationalised over the last decade.  Although they may lack the breadth of overseas exposure that characterises their larger counterparts, smaller companies do benefit from an increasingly globalised earnings stream.  When we consider the portfolio, we can see that it is overweight companies and sectors with a greater level of overseas exposure.  Examples include the investments in the Biotechnology & Pharmaceuticals sector, where international research and development budgets, the rising levels of protein consumption in developed and emerging markets and the growth of companion animal care in the US are some of the key drivers.  Similarly, when we consider some of the more cyclical industrial areas of the market we hold companies such as BBA Aviation, which is an almost entirely US driven business, or Victrex which derives in excess of 90% of its sales from outside the UK.  Conversely, we are underweight areas of the market with more direct consumer or domestic economic exposure such as Real Estate, Leisure Goods, General Retail and Travel & Leisure.  Businesses in these sectors may be more at risk from a weakening of consumer or business sentiment as a result of an unfavourable Brexit deal. 

 

Although the major central banks are at different points in the interest rate cycle they are generally pointing towards a tightening of monetary conditions and a reduction in either the rate of or absolute size of their stimulus packages.  All of which suggest that policymakers have a broadly favourable view of the outlook.  However, we note that valuations, particularly for good quality companies, remain elevated, and any disappointment in the levels of growth has the potential to result in a de-rating of equity valuations.

 

Ed Beal

Aberdeen Asset Managers Limited

21 December 2017

 



 

GOVERNANCE - DIRECTORS' REPORT (EXTRACT)

 

The Directors present their report and the audited financial statements for the year ended 31 October 2017.

 

Results and Dividends

The financial statements for the year ended 31 October 2017 are contained below.

 

An interim dividend of 2.15p (2016 - 2.15p) per share was paid on 28 July 2017 and the Board recommends that a final dividend of 4.24p (2016 - 4.00p) per share is paid on 16 February 2018 to shareholders on the register on 19 January 2018. The ex-dividend date is 18 January 2018. A resolution in respect of the final dividend will be proposed at the Annual General Meeting.

 

Investment Trust Status

The Company is registered as a public limited company (registered in Scotland No. SC014692) and is an investment company within the meaning of Section 833 of the Companies Act 2006. The Company has been approved by HM Revenue & Customs as an investment trust subject to it continuing to meet the relevant eligibility conditions of Section 1158 of the Corporation Tax Act 2010 and the ongoing requirements of Part 2 Chapter 3 Statutory Instrument 2011/2999 for all financial years commencing on or after 1 November 2012.  The Directors are of the opinion that the Company has conducted its affairs for the year ended 31 October 2017 so as to enable it to comply with the ongoing requirements for investment trust status.

 

Individual Savings Accounts

The Company has conducted its affairs in such a way as to satisfy the requirements as a qualifying security for Individual Savings Accounts. The Directors intend that the Company will continue to conduct its affairs in this manner.

 

Capital Structure

At 31 October 2017, the Company had 47,857,317 fully paid Ordinary shares of 5p each (2016 - 47,857,317 Ordinary shares). There have been no changes in the Company's issued share capital subsequent to the year end and up to the date of this Report. 

 

Voting Rights

Each Ordinary share holds one voting right and shareholders are entitled to vote on all resolutions which are proposed at general meetings of the Company. The Ordinary shares, excluding any treasury shares, carry a right to receive dividends.  On a winding up or other return of capital, after meeting the liabilities of the Company, the surplus assets will be paid to Ordinary shareholders in proportion to their shareholdings.

There are no restrictions on the transfer of Ordinary shares in the Company other than certain restrictions which may be applied from time to time by law.

 

Management Agreement

The Company has appointed Aberdeen Fund Managers Limited ("AFML"), a wholly owned subsidiary of Standard Life Aberdeen plc, as its alternative investment fund manager. AFML has been appointed to provide investment management, risk management, administration and company secretarial services to the Company as well as to carry out promotional activities on the Company's behalf.  The Company's portfolio is managed by Aberdeen Asset Managers Limited ("AAML") by way of a group delegation agreement in place between AFML and AAML.  In addition, AFML has sub-delegated promotional activities to AAML and administrative and secretarial services to Aberdeen Asset Management PLC.

 

Details of the management fee and fees payable for promotional activities are shown in notes 4 and 5 of the financial statements. The management agreement may be terminated by either party on three months' written notice. In the event of termination by the Company on less than the agreed notice period, compensation is payable to the Manager in lieu of the unexpired notice period.

 

Substantial Interests

As at 31 October 2017 the following interests in the issued Ordinary share capital of the Company had been disclosed in accordance with the requirements of the FCA's Disclosure Guidance and Transparency Rules:

 

Shareholder

Number of shares held

% held

Aberdeen Asset Managers Retail PlansA

11,976,480

25.0

Standard Life Aberdeen plc

7,340,334

15.3

Derbyshire County Council

2,819,000

5.9

D C Thomson & Company Ltd

2,030,000

4.2

A Non-beneficial interest

 

The following changes have been notified to the Company since the end of the year:

 

-    Standard Life Aberdeen plc: 6,620,334 shares (13.8%)

-    1607 Capital Partners LLC: 3,985,800 shares (8.3%)

-    Derbyshire County Council: 819,000 shares (1.7%)

 

There have been no other changes notified to the Company as at the date of approval of this Report.

 

Corporate Governance

The Company is committed to high standards of corporate governance. The Board is accountable to the Company's shareholders for good governance and this statement describes how the Company applies the principles identified in the UK Corporate Governance Code (the "UK Code"), as published in April 2016 and effective for financial years commencing on or after 1 June 2016, which is available on the Financial Reporting Council's website: frc.org.uk.

 

The Board has also considered the principles and recommendations of the AIC Code of Corporate Governance as published in July 2016 (the "AIC Code") by reference to the AIC Corporate Governance Guide for investment Companies (the "AIC Guide"). The AIC Code, as explained by the AIC Guide, addresses all the principles set out in the UK Code, as well as setting out additional principles and recommendations on issues that are of specific relevance to investment trusts. The AIC Code and AIC Guide are available on the AIC's website: theaic.co.uk.

 

The Board considers that reporting in accordance with the principles and recommendations of the AIC Code, and by reference to the AIC Guide (which incorporates the UK Code), will provide better information to shareholders.

 

The Board confirms that, during the year, the Company complied with the recommendations of the AIC Code and the relevant provisions of the UK Code, except as set out below.

 

The UK Code includes provisions relating to:

 

-    the role of the chief executive (A.1.2);

-    executive directors' remuneration (D.1.1 and D.1.2); and

-    the need for an internal audit function (C.3.6).

 

For the reasons set out in the AIC Guide, and as explained in the UK Code, the Board considers that these provisions are not relevant to the position of the Company, being an externally managed investment company. In particular, all of the Company's day-to-day management and administrative functions are outsourced to third parties. As a result, the Company has no executive directors, employees or internal operations. The Company has therefore not reported further in respect of these provisions.

 

The full text of the Company's corporate governance statement can be found on its website.

 

Directors' & Officers' Liability Insurance

The Company maintains insurance in respect of Directors' & Officers' liabilities in relation to their acts on behalf of the Company. Furthermore, each Director of the Company is entitled to be indemnified out of the assets of the Company to the extent permitted by law against all costs, charges, losses, expenses and liabilities incurred by them in the actual or purported execution and/or discharge of their duties and/or the exercise or purported exercise of their powers and/or otherwise in relation to or in connection with their duties, powers or office. These rights are included in the Articles of Association of the Company and the Company has granted indemnities to the Directors on this basis.

 

Management of Conflicts of Interest

The Board has a procedure in place to deal with a situation where a Director has a conflict of interest. As part of this process, each Director prepares a list of other positions held and all other conflict situations that may need to be authorised either in relation to the Director concerned or his or her connected persons. The Board considers each Director's situation and decides whether to approve any conflict, taking into consideration what is in the best interests of the Company and whether the Director's ability to act in accordance with his or her wider duties is affected. Each Director is required to notify the Company Secretary of any potential, or actual, conflict situations that will need authorising by the Board. Authorisations given by the Board are reviewed at each Board meeting.

 

No Director has a service contract with the Company although all Directors are issued with letters of appointment. There were no contracts during the year in which any Director was interested.

 

The Board takes a zero-tolerance approach to bribery and has adopted appropriate procedures designed to prevent bribery. The Manager also takes a zero-tolerance approach and has its own detailed policy and procedures in place to prevent bribery and corruption.

 

Going Concern

The Company's assets consist substantially of equity shares in companies traded on the London Stock Exchange which are, in most circumstances, realisable within a short timescale. The Board has set limits for borrowing and regularly reviews actual exposures, cash flow projections and compliance with banking covenants. Borrowings of £10 million are committed to the Company until 24 November 2022. As such, the Directors believe that the Company has adequate financial resources to continue in operational existence for the foreseeable future and at least 12 months from the date of this Report. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

 

Accountability and Audit

Each Director confirms that, so far as they are aware, there is no relevant audit information of which the Company's Auditor is unaware, and they have taken all the steps that they could reasonably be expected to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Company's Auditor is aware of that information. 

 

Independent Auditor

The Company's Auditor, KPMG LLP, has indicated its willingness to remain in office. The Directors will place resolutions before the Annual General Meeting to re-appoint KPMG LLP as Auditor for the ensuing year and to authorise the Directors to determine its remuneration.

 

Relations with Shareholders

The Directors place a great deal of importance on communication with shareholders. Shareholders and investors may obtain up to date information on the Company through its website and the Manager's information service.

 

The Board's policy is to communicate directly with shareholders and their representative bodies without the involvement of the management group (either the Company Secretary or the Manager) in situations where direct communication is required and representatives from the Board meet with major shareholders on at least an annual basis in order to gauge their views.

 

In addition, the Company Secretary only acts on behalf of the Board, not the Manager, and there is no filtering of communication. At each Board meeting the Board receives full details of any communications from shareholders to which the Chairman responds personally as appropriate.

 

The Notice of the Annual General Meeting included within the Annual Report is sent out at least 20 working days in advance of the meeting. All shareholders have the opportunity to put questions at the Company's Annual General Meeting. 

 

Participants in the Aberdeen Investment Trust Share Plan and ISA, whose shares are held in the nominee name of the plan administrator, are given the opportunity to vote at the Annual General Meeting by means of a Letter of Direction enclosed with the Annual Report. When forwarded to the plan administrator, the voting instructions given in the Letter of Direction will in turn be reflected in the proxy votes lodged by the plan administrator.

 

By order of the Board

Aberdeen Asset Management PLC

Company Secretary

40 Princes Street

Edinburgh EH2 2BY

21 December 2017

 



STATEMENT OF DIRECTORS' RESPONSIBILITIES

 

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 the Directors are required to prepare the financial statements in accordance with UK accounting standards, including FRS 102 'The Financial Reporting Standard' applicable in the UK and Republic of Ireland. 

 

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 and of its profit or loss for that period. 

 

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

 

-     select suitable accounting policies and then apply them consistently; 

-     make judgements and estimates that are reasonable and prudent;

-     state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; 

-     assess the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and 

-     use the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so. 

 

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 its financial statements comply with the Companies Act 2006.  They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities. 

 

Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Statement of Corporate Governance that complies with that law and those regulations. 

 

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website, but not for the content of any information included on the website that has been prepared or issued by third parties. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

We confirm that to the best of our knowledge:

 

-     the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

-     the Strategic Report and Directors' Report include a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces. 

 

The Directors consider that the Annual Report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.

 

On behalf of the Board

N M Yarrow

Director

21 December 2017

 

 



STATEMENT OF COMPREHENSIVE INCOME

 

 



Year ended 31 October 2017

Year ended 31 October 2016



Revenue

Capital

Total

Revenue

Capital

Total



return

return

return

return

return

return


Notes

£'000

£'000

£'000

£'000

£'000

£'000

Gains on investments

10

-

36,652

36,652

-

5,278

5,278

Income

3

3,221

-

3,221

3,459

-

3,459

Investment management fee

4

(142)

(1,209)

(1,351)

(116)

(377)

(493)

Administrative expenses

5

(456)

-

(456)

(450)

-

(450)

Currency gains/(losses)


-

12

12

-

(4)

(4)



_____

_____

_____

_____

_____

_____

Net return before finance costs and taxation


2,623

35,455

38,078

2,893

4,897

7,790









Finance costs

6

(31)

(93)

(124)

(31)

(93)

(124)



_____

_____

_____

_____

_____

_____

Net return before taxation


2,592

35,362

37,954

2,862

4,804

7,666









Taxation

7

-

-

-

-

-

-



_____

_____

_____

_____

_____

_____

Net return attributable to equity shareholders


2,592

35,362

37,954

2,862

4,804

7,666



_____

_____

_____

_____

_____

_____









Return per Ordinary share (pence)

9

5.42

73.89

79.31

5.98

10.04

16.02



_____

_____

_____

_____

_____

_____









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

All revenue and capital items in the above statement derive from continuing operations.

The accompanying notes are an integral part of the financial statements.

 

 



STATEMENT OF FINANCIAL POSITION

 

 



As at

As at



31 October

31 October



2017

2016


Notes

£'000

£'000

Non-current assets




Investments at fair value through profit or loss

10

154,803

114,441



_______

_______

Current assets




Debtors and prepayments

11

339

328

Cash and short term deposits


3,747

8,122



_______

_______



4,086

8,450



_______

_______





Creditors: amounts falling due within one year




Bank loan

12,16

(5,000)

-

Other creditors

12

(1,259)

(273)



_______

_______



(6,259)

(273)



_______

_______

Net current (liabilities)/assets


(2,173)

8,177



_______

_______

Total assets less current liabilities


152,630

122,618





Creditors: amounts falling due after more than one year




Bank Loan

12

-

(5,000)



_______

_______

Net assets


152,630

117,618



_______

_______





Capital and reserves




Called-up share capital

13

2,393

2,393

Share premium account


30

30

Capital redemption reserve


2,233

2,233

Capital reserve

14

143,501

108,139

Revenue reserve


4,473

4,823



_______

_______

Equity shareholders' funds


152,630

117,618



_______

_______





Net asset value per Ordinary share (pence)

15

318.93

245.77



_______

_______





The accompanying notes are an integral part of the financial statements.

 



STATEMENT OF CHANGES IN EQUITY

 

 

For the year ended 31 October 2017











Share

Capital






Share

premium

redemption

Capital

Revenue




capital

account

reserve

reserveA

reserve

Total


Notes

£'000

£'000

£'000

£'000

£'000

£'000

Balance at 31 October 2016


2,393

30

2,233

108,139

4,823

117,618

Net return attributable to equity shareholders


-

-

-

35,362

2,592

37,954

Dividends paid

8

-

-

-

-

(2,942)

(2,942)



______

_______

______

______

______

Balance at 31 October 2017


2,393

2,233

143,501

4,473

152,630



______

______

_______

______

______

______









For the year ended 31 October 2016











Share

Capital






Share

premium

redemption

Capital

Revenue




capital

account

reserve

reserveA

reserve

Total


Notes

£'000

£'000

£'000

£'000

£'000

£'000

Balance at 31 October 2015


2,393

30

2,233

103,335

4,832

112,823

Net return attributable to equity shareholders


-

-

-

4,804

2,862

7,666

Dividends paid

8

-

-

-

-

(2,871)

(2,871)



______

_______

______

______

______

Balance at 31 October 2016


2,393

2,233

108,139

4,823

117,618



______

______

_______

______

______

______









A           See note 14 for further details on the capital reserve.


The revenue reserve and the part of the capital reserve represented by realised capital gains represent the amount of the Company's reserves distributable by way of dividend.

The accompanying notes are an integral part of the financial statements.

 

 



STATEMENT OF CASH FLOWS

 

 


Year ended

Year ended


31 October 2017

31 October 2016


£'000

£'000

Operating activities



Net return before finance costs and taxation

38,078

7,790

Adjustment for:



Gains on investments

(36,652)

(5,278)

Currency gains

(12)

-

Scrip dividends included in investment income

(27)

-

Decrease/(increase) in dividend income

68

(27)

Decrease in other debtors

11

4

Increase in creditors

783

16


_______

_______

Net cash flow from operating activities

2,249

2,505




Investing activities



Purchases of investments

(24,040)

(15,754)

Sales of investments

20,470

18,837


_______

_______

Net cash (outflow)/inflow from investing activities

(3,570)

3,083




Financing activities



Interest paid

(124)

(124)

Equity dividends paid

(2,942)

(2,871)


_______

_______

Net cash flow used in financing activities

(3,066)

(2,995)


_______

_______

(Decrease)/increase in cash and cash equivalents

(4,387)

2,593


_______

_______




Analysis of changes in cash and cash equivalents during the period



Opening balance

8,122

5,529

Effect of exchange rate fluctuations on cash held

12

-

(Decrease)/increase in cash above

(4,387)

2,593


_______

_______

Closing balance

3,747

8,122


_______

_______




The accompanying notes are an integral part of the financial statements.

 

 



NOTES TO FINANCIAL STATEMENTS

 

 

For the year ended 31 October 2017

 



1.

Principal activity


The Company is a closed-end investment company, registered in Scotland No SC014692, with its Ordinary shares being listed on the London Stock Exchange.

 

2.

Accounting policies


(a)

Basis of accounting



The financial statements have been prepared in accordance with Financial Reporting Standard 102 and with guidance set out in the Statement of Recommended Practice: 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' issued in November 2014 and updated in January 2017 with consequential amendments. The financial statements are prepared in sterling which is the functional currency of the Company and rounded to the nearest £'000. The have also been prepared on a going concern basis and on the assumption that approval as an investment trust will continue to be granted.






The Directors have, at the time of approving the financial statements, a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements.





(b)

Revenue, expenses and interest payable



Income from equity investments, including taxes deducted at source, is included in revenue by reference to the date on which the investment is quoted ex-dividend. Special dividends are credited to revenue or capital according to the circumstances. Foreign income is converted at the exchange rate applicable at the time of receipt. Interest receivable on short term deposits, expenses and interest payable are accounted for on an accruals basis. Income from underwriting commission is recognised as earned.






Expenses are charged to capital when they are incurred in connection with the maintenance or enhancement of the value of investments. In this respect, the investment management fee and relevant finance costs are allocated between revenue and capital in line with the Board's expectation of returns from the Company's investments over the long term in the form of revenue and capital respectively (see notes 4 and 6). Performance fees are allocated wholly to capital.





(c)

Investments



Investments have been designated upon initial recognition at fair value through profit or loss. Investments are recognised at trade date where a purchase or sale is under contract whose terms require delivery within the timeframe established by the market concerned, and are measured initially at fair value. Subsequent to initial recognition, investments are recognised at fair value through profit or loss. For listed investments, this is deemed to be bid market prices or closing prices for SETS stocks, sourced from the London Stock Exchange. SETS is the London Stock Exchange electronic trading service covering most of the market including all FTSE All-Share and the most liquid AIM constituents. Gains or losses arising from changes in fair value are included in net profit or loss for the period as a capital item in the Statement of Comprehensive Income and are ultimately recognised in the capital reserve.





(d)

Dividends payable



Interim and final dividends are recognised in the period in which they are paid.





(e)

Taxation



The tax expense represents the sum of tax currently payable and deferred tax. Any tax payable is based on the taxable profit for the year. Taxable profit differs from net profit as reported in the Statement of Comprehensive Income because it excludes items of income or expense 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 Statement of Financial Position date.






Deferred taxation is provided on all timing differences that have originated but not reversed at the Statement of Financial Position date where transactions or events that result in an obligation to pay more or a right to pay less tax in the future have occurred at the Statement of Financial Position date measured on an undiscounted basis and based on enacted tax rates. This is subject to deferred tax 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 underlying timing differences can be deducted. Timing differences are differences arising between the Company's taxable profits and its results as stated in the financial statements which are capable of reversal in one or more subsequent periods.






Owing to the Company's status as an investment trust company and the intention to continue meeting the conditions required to obtain approval in the future, the Company has not provided deferred tax on any capital gains and losses arising on the revaluation or disposal of investments.





(f)

Nature and purpose of reserves



Called up share capital



The Ordinary share capital on the Statement of Financial Position relates to the number of shares in issue. Only when the shares are cancelled is a transfer made to the capital redemption reserve.






Share premium account



The balance classified as share premium includes the premium above nominal value from the proceeds on issue of any equity share capital comprising ordinary shares of 5p.






Capital redemption reserve



The capital redemption reserve is used to record the amount equivalent to the nominal value of any of the Company's own shares purchased and cancelled in order to maintain the Company's capital.






Capital reserve



Gains and losses on disposal of investments and changes in fair values of investments are transferred to the capital reserve. The capital element of the management fee and relevant finance costs are charged to this reserve. Any associated tax relief is also credited to this reserve. The part of this reserve represented by realised capital gains is available for distribution by way of dividend.






Revenue reserve



This reflects all income and costs which are recognised in the revenue column of the Statement of Comprehensive Income. The revenue reserve represents the amount of the Company's reserves distributable by way of dividend.





(g)

Cash and cash equivalents



Cash and cash equivalents comprises cash at banks.





(h)

Significant estimates and judgements



Disclosure is required of judgements and estimates made by management in applying the accounting policies that have a significant effect on the financial statements. There are no significant estimates of judgement which impact these financial statements.

 



2017

2016

3.

Income

£'000

£'000


Income from investments




UK dividend income

2,697

2,992


Overseas dividend income

330

349


Property income distributions

155

97


UK scrip dividend income

27

-



_______

_______



3,209

3,438



_______

_______


Other income




Underwriting commission

10

9


Deposit interest

2

12



_______

_______



12

21



_______

_______


Total income

3,221

3,459



_______

_______

 



2017

2016



Revenue

Capital

Total

Revenue

Capital

Total

4.

Management fee

£'000

£'000

£'000

£'000

£'000

£'000


Management fee

142

425

567

116

350

466


Performance fee

-

784

784

-

27

27



_______

_______

_______

_______

_______

_______



142

1,209

1,351

116

377

493



_______

_______

_______

_______

_______

_______










The management fee paid to the Manager is calculated at 0.4% per annum of the gross assets of the Company after deducting liabilities and excluding commonly managed funds. The Company held no commonly managed funds during the year (2016 - same). The sum due to the Manager at the year end was £156,000 (2016 - £131,000). Management fees are allocated 75% to capital and 25% to revenue.




In addition, the Manager is entitled to an annual performance-related fee calculated at a rate of 0.1% per annum (up to a maximum of 0.5% per annum) of the adjusted gross assets, as at 31 October each year, for every 1% by which the Company's net asset value performance outperforms the capital performance of the FTSE SmallCap Index (ex Investment Trusts) over the preceding twelve month period. The sum due to the Manager at the year end was £784,000 (2016 - £nil). Performance fees are allocated 100% to capital.




The management agreement between the Company and the Manager is terminable by either party on three months' notice.

 



2017

2016

5.

Administrative expenses

£'000

£'000


Directors' fees

88

86


Auditor's remuneration - fees payable to the Company's auditor for:




- the audit of the Company's annual accounts

17

16


- the review of the Company's half yearly accounts

6

5


Secretarial fee

103

101


Promotional activities

52

56


Share plan costs

25

30


Registrar's fees

16

14


Advisory fees

43

40


Other expenses

106

102



_______

_______



456

450



_______

_______






A secretarial fee of £103,000 (2016 - £101,000) was paid to the Manager. The sum due to the Manager at the year end was £26,000 (2016 - £25,000).




Expenses of £52,000 (2016 - £56,000) were paid to the Manager in respect of promotional activities for the Company. The sum due to the Manager at the year end was £4,000 (2016 - £18,000).




All of the expenses above, with the exception of Auditor's remuneration, include irrecoverable VAT where applicable. For Auditor's remuneration this amounted to £3,000 (2016 - £4,000).

 



2017

2016



Revenue

Capital

Total

Revenue

Capital

Total

6.

Finance costs

£'000

£'000

£'000

£'000

£'000

£'000


Bank loan interest

31

93

124

31

93

124



_______

_______

_______

_______

_______

_______

 

7.

Taxation


There is no liability to corporation tax for the year (2016 - £nil).




The effective rate of corporation tax was 19.42% (corporation tax rate 20% from 1 November 2016 until 31 March 2017 and then 19% thereafter) (2016 - 20% during the year).





2017

2016



Revenue

Capital

Total

Revenue

Capital

Total


Factors affecting tax charge for the year

£'000

£'000

£'000

£'000

£'000

£'000


Net revenue before taxation

2,592

35,362

37,954

2,862

4,804

7,666



_______

_______

_______

_______

_______

_______


Corporation tax of 19.42% (2016: effective rate of 20%)

503

6,866

7,369

572

961

1,533


Effects of:








Non-taxable UK dividend income

(529)

-

(529)

(598)

-

(598)


Non taxable overseas dividends

(64)

-

(64)

(70)

-

(70)


Gains on investment not taxable

-

(7,117)

(7,117)

-

(1,055)

(1,055)


Currency gains/(losses)

-

(2)

(2)

-

-

-


Excess management expenses not utilised

90

253

343

96

94

190



_______

_______

_______

_______

_______

_______



-

-

-

-

-

-



_______

_______

_______

_______

_______

_______










At the year end, after offset against income taxable on receipt, there is a potential deferred tax asset of £5,589,000 (2016 - £5,289,000) in relation to surplus management expenses. It is unlikely that the Company will generate sufficient taxable profits in future to utilise these amounts and therefore no deferred tax asset has been recognised.

 



2017

2016

8.

Dividends

£'000

£'000


Amounts recognised as distributions to equity holders in the period:




Final dividend for 2016 - 4.00p (2015 - 3.85p)

1,914

1,843


Interim dividend for 2017 - 2.15p (2016 - 2.15p)

1,029

1,029


Return of unclaimed dividends

(1)

(1)



_______

_______


Dividends paid in the year

2,942

2,871



_______

_______






The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements.




The table below sets out the total dividends paid and proposed in respect of the financial year, which is the basis on which the requirements of Sections 1158-1159 Corporation Tax Act 2010 are considered. The revenue available for distribution by way of dividend for the year is £2,592,000 (2016 - £2,862,000).







2017

2016



£'000

£'000


Interim dividend for 2017 - 2.15p (2016 - 2.15p)

1,029

1,029


Proposed final dividend for 2017 - 4.24p (2016 - 4.00p)

2,029

1,914



_______

_______



3,058

2,943



_______

_______

 



2017

2016

9.

Return per Ordinary share

p

p


Revenue return

5.42

5.98


Capital return

73.89

10.04



_______

_______


Total return

79.31

16.02



_______

_______


The figures above are based on the following:





2017

2016



£'000

£'000


Revenue return

2,592

2,862


Capital return

35,362

4,804



_______

_______


Total return

37,954

7,666



_______

_______


Weighted average number of Ordinary shares in issue

47,857,317

47,857,317



_________

_________

 



Listed

Listed



in UK

in UK



2017

2016

10.

Investments

£'000

£'000


Fair value through profit or loss:




Opening fair value

114,441

113,158


Opening fair value gains on investments held

(30,258)

(31,745)



_______

_______


Opening book cost

84,183

81,413


Purchases at cost

24,272

14,842


Sales - proceeds

(20,562)

(18,837)


Sales - gains on sales

4,103

6,765



_______

_______


Closing book cost

91,996

84,183


Closing fair value gains on investments held

62,807

30,258



_______

_______


Closing fair value

154,803

114,441



_______

_______







2017

2016


Gains on investments

£'000

£'000


Gains on sales of equities

4,103

6,765


Movement in fair value gains on investments held

32,549

(1,487)



_______

_______



36,652

5,278



_______

_______






Transaction costs




During the year expenses were incurred in acquiring or disposing of investments classified as fair value through profit or loss. These have been expensed through capital and are included within gains on investments in the Statement of Comprehensive Income. The total costs were as follows:







2017

2016



£'000

£'000


Purchases

98

72


Sales

10

18



_______

_______



108

90



_______

_______

 



2017

2016

11.

Debtors: amounts falling due within one year

£'000

£'000


Net dividends and interest receivable

239

307


Amounts due from brokers

92

-


Other debtors and prepayments

8

21



_______

_______



339

328



_______

_______

 

12.

Creditors: amounts falling due within one year


(a)

Bank loan



At the year end the Company had a £5 million revolving facility agreement in place as well as a three year £5 million term loan facility, both with Scotiabank Europe. The full £5 million was drawn down from the term loan facility at a fixed interest rate of 2.171% until 24 November 2017. The terms of the loan facilities contained covenants that the minimum net assets of the Company are £50 million and the percentage of borrowings against net assets should not be more than 25%.






On 24 November 2017, the Company renewed its £5 million revolving facility agreement as well as agreeing a new five year term loan facility of £5 million with Scotiabank Europe. £5 million is currently drawn down at a fixed interest rate of 2.78% until 24 November 2022. The terms of the loan facility contain covenants that the minimum net assets of the Company are £70 million and the percentage of borrowings against net assets should not be more than 25%.









2017

2016


(b)

Other creditors

£'000

£'000



Management and performance fee

940

131



Amounts due to brokers

205

-



Sundry creditors

114

142




_______

_______




1,259

273




_______

_______

 



2017

2016

13.

Called-up share capital

£'000

£'000


Allotted, called-up and fully paid




47,857,317 Ordinary shares of 5p each (2016 - same)

2,393

2,393



_______

_______

 



2017

2016

14.

Capital reserve

£'000

£'000


At 1 November

108,139

103,335


Gains on realisation of investments at fair value

4,103

6,765


Movement in fair value gains on investments held

32,549

(1,487)


Management and performance fees

(1,209)

(377)


Finance costs

(93)

(93)


Currency gains/(losses)

12

(4)



_______

_______


At 31 October

143,501

108,139



_______

_______






The capital reserve includes investment holding gains amounting to £62,807,000 (2016 - £30,258,000), as disclosed in note 10.

 

15.

Net asset value per share

2017

2016


Equity shareholders' funds

£152,630,000

£117,618,000


Number of Ordinary shares in issue at year end

47,857,317

47,857,317


Equity shareholders' funds per share

318.93p

245.77p

 

16.

Financial instruments


Risk Management


The Company's objective is to achieve long term growth from a portfolio of smaller companies in the United Kingdom.




The impact of security price volatility is reduced by diversification. Diversification is achieved by investment in the stocks and shares of companies in a range of industrial, commercial and financial sectors. The management of the portfolio is conducted according to investment guidelines, established by the Board after discussion with the Manager, which specify the limits within which the Manager is authorised to act.




The Company's financial instruments comprise securities and other investments, cash balances, loans and debtors and creditors that arise directly from its operations; for example, in respect of sales and purchases awaiting settlement, and debtors for accrued income. The Company also has the ability to enter into derivative transactions for the purpose of managing currency and market risks arising from the Company's activities.




The Manager has a dedicated investment management process, which ensures that the investment policy is followed. Stock selection procedures are in place based on the active portfolio management and identification of stocks. The portfolio is reviewed on a periodic basis by a Senior Investment Manager and also by the Manager's Investment Committee.




The Company's Manager has an independent Investment Risk department which reviews the investment risk parameters of the Company's portfolio on a regular basis. The department reports to the Manager's Performance Review Committee which is chaired by the Manager's Chief Investment Officer. The department's responsibility is to review and monitor ex-ante (predicted) portfolio risk and style characteristics using best practice, industry standard multi-factor models.




Additionally, the Manager's Compliance department continually monitors the Company's investment and borrowing powers and reports to the Manager's Risk Management Committee.




The main risks the Company faces from its financial instruments are (i) market price risk (comprising interest rate risk, currency risk and other price risk), (ii) liquidity risk and (iii) credit risk.




The Board regularly reviews and agrees policies for managing each of these risks. The Manager's policies for managing these risks are summarised below and have been applied throughout the year. The numerical disclosures exclude short-term debtors and creditors, other than for currency disclosures.




(i) Market risk


The fair value or future cash flows of a financial instrument held by the Company may fluctuate because of changes in market prices.  This market risk comprises three elements - interest rate risk, currency risk and other price risk. 




Interest rate risk


Interest rate movements may affect:


-     the fair value of the investments in fixed interest rate securities;


-     the level of income receivable on cash deposits;


-     interest payable on the Company's variable rate borrowings.




The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment and borrowing decisions.




It is the Company's policy to increase its exposure to equity market price risk through the judicious use of borrowings.  When borrowed, funds are invested in equities, the effect is to magnify the impact on shareholders' funds of changes - both positive and negative - in the value of the portfolio.




The Company has borrowing facilities by way of a £5 million revolving facility agreement as well as a five year £5 million term loan facility, both with Scotiabank Europe. Details of drawn down borrowings as at 31 October 2017 are shown in note 12.




Interest risk profile


The interest rate risk profile of the portfolio of financial assets and liabilities at the Statement of Financial Position date was as follows:









Weighted






average

Weighted





period for

average





which

interest

Floating

Fixed



rate is fixed

rate

rate

rate


At 31 October 2017

Years

%

£'000

£'000


Assets






Cash deposits

-

-

3,747

-



_______

_______

_______

_______


Total assets

-

-

3,747

-



_______

_______

_______

_______


Liabilities






Bank loans

0.07

2.17

-

(5,000)



_______

_______

_______

_______


Total liabilities

-

-

-

(5,000)



_______

_______

_______

_______









Weighted






average

Weighted





period for

average





which

interest

Floating

Fixed



rate is fixed

rate

rate

rate


At 31 October 2016

Years

%

£'000

£'000


Assets






Cash deposits

-

-

8,122

-



_______

_______

_______

_______


Total assets

-

-

8,122

-



_______

_______

_______

_______


Liabilities






Bank loans

1.07

2.17

-

(5,000)



_______

_______

_______

_______


Total liabilities

-

-

-

(5,000)



_______

_______

_______

_______








The weighted average interest rate is based on the current yield of each asset, weighted by its market value. The weighted average interest rate on bank loans is based on the interest rate payable, weighted by the total value of the loans. The maturity dates of the Company's loans are shown in note 12 to the financial statements.




The floating rate assets consist of cash deposits on call earning interest at prevailing market rates.




The Company's equity portfolio and short-term debtors and creditors (excluding bank loans) have been excluded from the above tables.




All financial liabilities are measured at amortised cost.




Maturity profile

 


The maturity profile of the Company's financial assets and liabilities at the Statement of Financial Position date was as follows:







Within

 More than



1 year

 1 year


At 31 October 2017

£'000

 £'000


Fixed rate




Bank loan

(5,000)

-






Floating rate




Cash

3,747

-



_______

_______


Total

(1,253)

-



_______

_______







Within

More than



1 year

1 year


At 31 October 2016

£'000

 £'000


Fixed rate




Bank loan

-

(5,000)






Floating rate




Cash

8,122

-



_______

_______


Total

8,122

(5,000)



_______

_______






Interest rate sensitivity


The sensitivity analyses below have been determined based on the exposure to interest rates at the Statement of Financial Position date and with the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period in the case of instruments that have floating rates.




If interest rates had been 100 basis points higher or lower and all other variables were held constant, the Company's profit for the year ended 31 October 2017 would increase/decrease by £37,000 (2016 - increase/decrease by £81,000). This is mainly attributable to the Company's exposure to interest rates on its floating rate cash balances.




The Company does not hold any financial instruments that will have an impact on equity reserves.




In the opinion of the Directors, the above sensitivity analyses are not representative of the year as a whole, since the level of exposure changes frequently as part of the interest rate risk management process used to meet the Company's objectives.




Other price risk


Other price risks (i.e. changes in market prices other than those arising from interest rate or currency risk) may affect the value of the quoted investments.




It is the Board's policy to hold an appropriate spread of investments in the portfolio in order to reduce the risk arising from factors specific to a particular sector. The allocation of assets and the stock selection process both act to reduce market risk. The Manager actively monitors market prices throughout the year and reports to the Board, which meets regularly in order to review investment strategy. The investments held by the Company are listed on the London Stock Exchange.




Other price risk sensitivity


If market prices at the Statement of Financial Position date had been 10% higher or lower while all other variables remained constant, the return attributable to Ordinary shareholders for the year ended 31 October 2017 would have increased/decreased by £15,480,000 (2016 - £11,444,000). This is based on the Company's equity portfolio at each year end.




In the opinion of the Directors, the above sensitivity analysis is representative of the year as a whole, since the level of exposure has remained fairly constant as part of the other price risk management process used to meet the Company's objectives.




(ii) Liquidity risk


This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. 




Liquidity risk is not considered to be significant as the Company's assets comprise mainly cash, short term deposits, placements and listed securities, which can be sold or realised to meet funding commitments if necessary.




The Board imposes borrowing limits to ensure gearing levels are appropriate to market conditions, and reviews these on a regular basis. Borrowing facilities comprise a £5 million revolving facility agreement as well as a five year £5 million term loan facility, both with Scotiabank Europe. At the year end the Company had drawn down borrowings of £5 million (see note 12) and this amount is reviewed on an ongoing basis.




Flexibility is achieved through the use of loan and overdraft facilities, details of which can be found in note 12. Under the terms of the loan facilities, the Manager provides the lender with loan covenant reports on a monthly basis, to provide the lender with assurance that the terms of the facilities are not being breached. The Manager will also review the credit rating of a lender on a regular basis. Details of the Board's policy on gearing is shown in the interest rate risk section of this note.




(iii) Credit risk


This is failure of the counter party to a transaction to discharge its obligations under that transaction that could result in the Company suffering a loss.




The risk is managed as follows:


-     investment transactions are carried out with a large number of brokers, whose credit rating is reviewed periodically by the Manager so as to minimise the risk to the Company of default;


-     investment transactions are carried out with a large number of brokers and limits are set on the amount that may be due from any one broker;


-     the risk of counterparty exposure due to failed trades causing a loss to the Company is mitigated by the review of failed trade reports on a daily basis. In addition, both stock and cash reconciliations to the custodians' records are performed on a daily basis to ensure discrepancies are identified and investigated on a timely basis. The Manager's Compliance department carries out periodic reviews of the custodian's operations and reports its finding to the Manager's Risk Management Committee. This review will also include checks on the maintenance and security of investments held;


-     cash is held only with reputable banks with high quality external credit enhancements. The Board has set limits of cash that may be held with any one institution.




None of the Company's financial assets are secured by collateral or other credit enhancements.




Credit risk exposure

 


In summary, the maximum exposure to credit risk at 31 October 2017 was considered to be the same as the carrying amount of the financial assets in the Statement of Financial Position.







2017

2016



£'000

£'000


Non-current assets




Securities at fair value through profit or loss

154,803

114,441


Current assets




Trades and other receivables

100

21


Accrued income

239

307


Cash and cash equivalents

3,747

8,122



_______

_______



158,889

122,891



_______

_______






None of the Company's financial assets are past due or impaired.




Fair values of financial assets and financial liabilities


The book value of cash at bank and bank loans and overdrafts included in these financial statements approximate to fair value because of their short-term maturity. Investments held as dealing investments are valued at fair value. The carrying values of fixed asset investments are stated at their fair values, which have been determined with reference to quoted market prices. For all other short-term debtors and creditors, their book values approximate to fair values because of their short-term maturity.

 

17.

Fair value hierarchy


FRS 102 requires an entity to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following classifications:




Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;


Level 2: inputs other than quoted prices included within Level 1 that are observable for the assets or liabilities, either directly (i.e., as prices) or indirectly (i.e., derived from prices); and


Level 3: inputs for the assets or liabilities that are not based on observable market data (unobservable inputs).




All of the Company's investments are in quoted equities (2016 - same) actively traded on recognised stock exchanges, with their fair value being determined by reference to their quoted bid prices at the reporting date. The total value of the investments as at the year end of £154,803,000 (2016 - £114,441,000) have therefore been deemed as Level 1.




Financial liabilities in the form of short-term borrowings are held at amortised cost. The fair value is considered to approximate the carrying value and is categorised as Level 2.




There have been no transfers of assets or liabilities between levels of the fair value hierarchy during 2017 and 2016.

 

18.

Capital management policies and procedures


The Company's capital management objectives are:


-     to ensure that the Company will be able to continue as a going concern; and


-     to maximise the capital return to its equity shareholders through an appropriate balance of equity capital and debt.




The capital of the Company consists of equity, comprising issued capital, reserves and retained earnings.




The Board monitors and reviews the broad structure of the Company's capital on an ongoing basis. This review includes the nature and planned level of gearing, which takes account of the Manager's views on the market and the extent to which revenue in excess of that which is required to be distributed should be retained. The Company is not subject to any externally imposed capital requirements.

 

19.

Related party transactions and transactions with the Manager


Fees payable during the year to the Directors and their interests in shares of the Company are disclosed within the Directors' Remuneration Report.




The Company has an agreement in place with Aberdeen Fund Managers Limited ('AFML') for the provision of management and administration services, promotional activities and secretarial services. Details of transactions during the year and balances outstanding at the year end are disclosed in notes 4 and 5.

 

20.

Alternative performance measures


Total return is considered to be an alternative performance measure. NAV total return involves investing the same net dividend in the NAV of the Company on the date on which that dividend was earned. Share price total return involves reinvesting the net dividend in the month that the share price goes ex-dividend.




The tables below provide information relating to the NAVs and share prices of the Company on the dividend reinvestment dates during the years ended 31 October 2017 and 31 October 2016.








Dividend


Share



rate

NAV

price


2017

p

p

p


31 October 2016

n/a

245.77

202.00


12 January 2017

4.00

259.73

208.50


6 July 2017

2.15

282.46

233.00


31 October 2017

n/a

318.93

253.00




_______

_______


Total return


32.8%

28.8%




_______

_______








Dividend


Share



rate

NAV

price


2016

p

p

p


31 October 2015

n/a

235.75

200.38


14 January 2016

3.85

228.54

192.50


7 July 2016

2.15

221.09

173.75


31 October 2016

n/a

245.77

202.00




_______

_______


Total return


7.0%

4.1%




_______

_______

 

 

Additional Notes to Annual Financial Report

The Annual Financial Report Announcement is not the Company's statutory accounts. The above results for the year ended 31 October 2017 are an abridged version of the Company's full accounts, which have been approved and audited with an unqualified report. The 2016 and 2017 statutory accounts received unqualified reports from the Company's auditors and did not include any reference to matters to which the auditors drew attention by way of emphasis without qualifying the reports, and did not contain a statement under S498 of the Companies Act 2006. The financial information for 2016 is derived from the statutory accounts for the year ended 31 October 2016 which have been delivered to the Registrar of Companies. The accounts for the year ended 31 October 2017 will be filed with the Registrar of Companies in due course.

 

The Annual General Meeting will be held at 12 noon on 8 February 2018 at 40 Princes Street, Edinburgh EH2 2BY

 

The Annual Report will be posted to shareholders in January 2018 and additional copies will be available from the registered office of the Company and on the Company's website, www.dunedinsmaller.co.uk*.

 

Please note that past performance is not necessarily a guide to the future and that the value of investments and the income from them may fall as well as rise and may be affected by exchange rate movements.  Investors may not get back the amount they originally invested.

 

By order of the Board

Aberdeen Asset Management PLC

Secretary

21 December 2017

 

 

* Neither the Company's website nor the content of any website accessible from hyperlinks on the Company's website (or any other website) is (or is deemed to be) incorporated into, or forms (or is deemed to form) part of this announcement.

 

 

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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Annual Financial Report - RNS