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RNS
Shires Income PLC  -  SHRS   

Annual Financial Report

Released 07:00 30-May-2018

RNS Number : 5870P
Shires Income PLC
30 May 2018
 

SHIRES INCOME PLC

 

ANNUAL FINANCIAL RPORT FOR THE YEAR ENDED 31 MARCH 2018

 

Legal Entity Identifier (LEI): 549300HVCIHNQNZAYA89

 

 

The Company

Shires Income PLC (the "Company") is an investment trust. Its Ordinary shares are listed on the premium segment of the London Stock Exchange.

 

Investment Objective

The Company's investment objective is to provide shareholders with a high level of income, together with the potential for growth of both income and capital from a diversified portfolio substantially invested in UK equities but also in preference shares, convertibles and fixed income securities.

 

Benchmark

FTSE All-Share Index (Total Return).

 

Management

The Company's Manager is Aberdeen Fund Managers Limited ("AFML", the "AIFM" or the "Manager") which has delegated the investment management of the Company to Aberdeen Asset Managers Limited ("AAML" or the "Investment Manager"). Both companies are wholly owned subsidiaries of Standard Life Aberdeen plc, which was formed by the merger of Aberdeen Asset Management PLC and Standard Life plc on 14 August 2017.

 

Website

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

 

 

COMPANY OVERVIEW - FINANCIAL HIGHLIGHTS

 

Net asset total returnAB



Share price total returnAB


2018

+3.3%


2018

+12.2%

2017

+24.5%


2017

+27.5%






Benchmark index total returnB



Earnings per share (revenue)


2018

+1.2%


2018

13.69p

2017

+22.0%


2017

13.08p






Dividend per Ordinary share



Dividend yield


2018

13.00p


2018

5.0%

2017

12.75p


2017

5.2%

 

A           Alternative Performance Measure.

B           Total return represents capital return plus dividends reinvested.

 

 

For further information, please contact:

 

Colin Edge

Aberdeen Asset Managers Limited        0207 463 5881 *

 

* Calls may be monitored and/or recorded to protect both you and us and help with our training. Call charges will vary.

 



 

COMPANY OVERVIEW - CHAIRMAN'S STATEMENT

 

Performance

In my first year as Chairman of your Company, I am pleased to report on another year of positive performance.

 

During the year ended 31 March 2018, the Company's net asset value per share increased by 3.3% on a total return basis, compared to a total return from our benchmark, the FTSE All-Share Index, of 1.2%. The share price total return was 12.2%, following a significant re-rating of the Company's shares which is described in more detail below.

 

The Company's out-performance came mainly from its preference shares, which generated a total return of 12.2%, while the equity portfolio produced a total return of 1.4%. Within the equity portfolio, it was the Company's exposure to smaller companies, through its holding in Aberdeen Smaller Companies Income Trust PLC, that made the most positive contribution to performance.

 

Political events dominated sentiment in the UK during the first part of the financial year, with the loss of the Conservative Party's majority in the General Election in June and the progression of Brexit negotiations. Markets reacted quite calmly during this period with returns from equities muted during the first half of the financial year. Markets then rallied towards the end of 2017, with the FTSE All-Share Index reaching an all-time high in January, driven in part by the announcement of significant reform of tax policy in the US which was warmly received by investors. Smaller companies performed particularly well in 2017. However, there was a sell-off in markets during the final three months of the financial year, with the FTSE All-Share Index falling by 6.9% in total return terms during that period as investors become concerned about the timing of future interest rates rises in the UK, the potential for other Central Banks to start removing the exceptional monetary stimulus which has been in place, and moves by the US to address global trading relationships and in particular the potential for increased tariffs against China, the European Union and other nations.

 

More detail on markets and the Company's performance for the year are covered in the Investment Manager's Review.

 

Preference Shares

The Company's portfolio of preference share holdings represented 27.5% of the portfolio as at 31 March 2018 (2017: 25.7%).

 

Shareholders may be aware that, on 8 March 2018, Aviva plc published its annual results, in which it commented on plans to cancel at par value certain preference shares issued by members of the Aviva group (including the preference shares issued by General Accident held by the Company) as part of a proposed reorganisation of its capital structure. The market reaction to this announcement was very negative, with the news having an adverse effect on the prices of other similar preference share stocks, including those in the Company's portfolio.

 

As a result of significant shareholder, regulatory and industry body responses, including from your Manager, the Board was pleased to note that, on 23 March 2018, Aviva made an announcement that it had decided not to redeem its preference shares at this time.

 

Despite the initial fall in value of the Company's preference share portfolio when Aviva's initial announcement was made, the Board is pleased that there has subsequently been a recovery, with some holdings now being valued at pre announcement levels. As stated above, the Company's preference shares generated a total return of 12.2% for the year. There remains uncertainty over the longer-term future prospects for these securities and the Board and the Manager will keep them closely under review.

 

Earnings

The Company's revenue return for the year was 13.69p per share, compared to 13.08p per share for the previous year. The majority of companies in the portfolio grew their dividends and there were a number of special dividends received during the year, which reflected another year of respectable corporate earnings growth. That said, we were not immune to disappointments, the most notable of these being the cancellation by Pearson of its dividend. The Company subsequently sold this holding. More information on this can be found in the Investment Manager's review.

 

Dividend

The Board is proposing a final dividend of 4.00p per share (2017 - 3.75p), which will be paid on 27 July 2018 to Shareholders on the register on 6 July 2018. This final dividend brings total dividends for the year to 13.00p per share (2017 - 12.75p). Subject to unforeseen circumstances, it is proposed to continue to pay three quarterly interim dividends of 3.00p each and, as in previous years, the Board will decide on next year's final dividend having reviewed the full year results.

 

Discount

As stated above, the share price total return for the year was 12.2%. Prior to 2015, the Company's shares had enjoyed a period of trading around par but since then had traded at a discount. The discount at the start of the year was 8.0% (on an ex-income basis), and the Board was pleased that the recent period of good performance has been recognised by investors, with a significant narrowing of the discount. The shares were trading at just below their net asset value at the end of the year. 

 

Portfolio Profile and Gearing

The Company's gearing level was broadly unchanged during the year, decreasing marginally from 21.1% to 20.8%. The Board continually monitors the level of gearing and, although the absolute level may look high, strategically we take the view that it is deployed notionally into fixed interest securities which bring diversification to the Company's total revenue stream but with lower volatility than would be expected from a 100% equity portfolio. The Board takes the view that the combination of fixed income securities and equities allows for an appropriate level of risk within the portfolio in order to achieve the overall investment objective. 

 

During the course of the year, the Company renewed its £20 million loan facility for a further 3 years, taking advantage of low interest rates by securing £10 million of this facility at a fixed rate of 1.956%. A total of £19 million was drawn down at the year end. Details of the loan facility are set out in note 13 to the financial statements.

 

Management Arrangements

As previously reported,  the merger of Aberdeen Asset Management PLC and Standard Life plc completed in August 2017. Since the year end, the Company has announced that, following  the merger and the subsequent integration of the equity teams of the two businesses, Iain Pyle has been appointed as the lead manager of the Company's investment portfolio. The Board believes that the Company will benefit from the Investment Manager's enlarged UK equity team which, following the merger, now comprises some 15 investment professionals and, in particular, the increased resource of its UK equity income group.  No changes are envisaged to the Company's investment objective or policy as a result of this change, nor to the Investment Manager's investment process.

 

The Board would like to take this opportunity to thank the Company's previous lead manager, Ed Beal, who successfully managed the Company's portfolio for ten years in a diligent and thoughtful manner. Over this period, the Company outperformed its benchmark on a one, three, five and ten year basis. 

 

Annual General Meeting

The Annual General Meeting will be held at 12 noon on Thursday 5 July 2018 at the offices of Standard Life Aberdeen in London.

 

Outlook

Following a period of low volatility and strong performance from equity markets, there is greater uncertainty as to their future direction in the year ahead. With a positive economic backdrop, interest rates are expected to rise again this year across developed markets, however central banks will have to proceed carefully so as not to upset economic growth as they seek to move to a more normalised interest rate environment. However, it must be acknowledged that just as the instigation of unconventional monetary stimulus has had a materially positive effect upon all financial markets since the financial crisis, its removal, albeit gradually, brings some uncertainty over the impact. Markets are also likely to be sensitive to any further restrictions on global trade and, in the UK, the progression of Brexit negotiations. Overall, after pretty strong synchronised global growth through 2017, there are some signs that momentum has lessened in 2018 and how this evolves will be important to the outlook for equity markets. Although equity valuations are not stretched by historic standards, they do now appear more finely balanced following their recent strong performance, and are therefore likely to be more sensitive to unexpected economic or political events.

 

However, as we have stated in previous years, we believe that the portfolio is well diversified in terms of asset class, sector and geographic exposure and that, despite the various uncertainties facing markets at the current time, the Investment Manager's focus on investing in good quality companies with strong fundamentals should benefit the portfolio over the longer term in meeting the Company's investment objective. 

 

Robert Talbut

Chairman

29 May 2018

 



 

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 provide shareholders with a high level of income, together with the potential for growth of both income and capital from a diversified portfolio substantially invested in UK equities but also in preference shares, convertibles and fixed income securities.

 

Investment Policy

In pursuit of its objective, the Company's policy is to invest principally in the ordinary shares of UK quoted companies, and in convertible and preference shares with above average yields.

 

The Company generates income primarily from ordinary shares, convertibles and preference shares. It also achieves income by writing call and put options on shares owned, or shares the Company would like to own. By doing so, the Company generates premium income.

 

Risk Diversification

In order to ensure adequate diversification, the Board sets absolute limits on maximum holdings and exposures in the portfolio from time to time. These limits do not form part of the investment policy and can be changed or over-ridden with Board approval. The current limits are disclosed under the heading "Board Investment Limits" below.  

 

Gearing

The Directors are responsible for determining the gearing strategy of the Company.  Gearing is used with the intention of enhancing long-term returns. Gearing is subject to a maximum equity gearing level of 35% of net assets at the time of draw down.  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 investment policy of the Company, although any significant changes are required to be approved by shareholders at a general meeting. 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 the underlying business fundamentals of companies and hence investments are made based on research undertaken on individual companies. This is known as a "bottom up" investment process. This process involves a disciplined evaluation of potential investments through meeting investee companies. New investments are not made without the Investment Manager having first met the 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 by reference to management, business focus, balance sheet and corporate governance. Price is assessed relative to key financial ratios and business prospects.  Top-down investment factors are secondary in the Investment Manager's portfolio construction, with diversification rather than formal controls guiding stock and sector weights.

 

The Investment Manager's portfolios are generally run conservatively, with an emphasis on traditional buy-and-hold and, when they see anomalous price movements within stock markets, to top-slice or top-up positions.  This approach usually results in low turnover within portfolios. 

 

Portfolios are managed by the Investment Manager on a team basis, with individual fund managers carrying out their own research and analysis.  All ideas are shared via formal committees and common databases, with desk heads ensuring consistency. 

 

Benchmark

In assessing its performance, the Company compares its returns with the returns of the FTSE All-Share Index (total return).

 

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 NAV

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

Performance against benchmark index

The Board measures performance over the medium to long term, on a total return basis against the benchmark index - the FTSE All-Share Index (total return).

Revenue return per Ordinary share

The Board monitors the Company's net revenue return (earnings per share).

Dividend per share

The Board monitors the Company's annual dividends per Ordinary share.

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 relative to the NAV per share represented by the share price 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 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 in the Company's factsheet and they can be found in the pre-investment disclosure document ("PIDD") published by the Manager, both of which are available on the Company's website.

 

Description

Mitigating Action

Investment performance  -

performance of the portfolio when measured against the benchmark.

 

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 Standard Life 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, risk management and application of the guidelines.

 

Investment risk within the portfolio is managed in three ways:

 

-     Adherence by the Investment Manager to the investment process in order to minimise investments in poor quality companies and/or overpaying.

-     Diversification of investment - seeking to invest in a wide variety of companies with strong balance sheets and the earnings power to pay increasing dividends. In addition, investments are diversified by sector in order to reduce the risk of a single large exposure. The Company invests mainly in equities, preference shares and convertibles.

-     Adherence by the Investment Manager to the investment limits set by the Board.

 

Investment in smaller companies

Rather than holding a number of smaller companies' shares, the Company invests indirectly in this part of the equity market through one holding in Aberdeen Smaller Companies Income Trust PLC, which is also managed by the Manager.  The Directors regularly review this holding (currently 9.1% of the Company's portfolio).  All of the directors of Aberdeen Smaller Companies Income Trust PLC are independent of Shires Income PLC. The Manager does not charge any management fee in respect of the amount of the Company's assets attributable to this holding.

 

Investment in preference shares

The Company has longstanding holdings in a number of preference shares with no fixed redemption dates (representing 27.5% of the Company's portfolio). The Directors regularly review these investments, which are held primarily to enhance the income generation of the Company. By their nature, their price movements will be subject to a number of factors and, in normal market conditions, will tend to respond less to pricing movements in equity markets. Issue sizes of these preference shares are normally relatively small and with associated low secondary market liquidity. As explained in the Chairman's Statement, there remains uncertainty over the longer-term future prospects, particularly the duration, for some of these securities and the Board and the Manager will keep them closely under review.

 

Failure to maintain and grow the dividend over the longer term  - the level of the Company's dividends and future dividend growth will depend on the performance of the underlying portfolio.

 

 

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

Widening of discount - a number of factors including the setting of an unattractive strategic proposition, changing investor demand and investment underperformance may lead to a decrease in demand for the Company's shares and a widening of the difference between the share price and the net asset value per share.

 

The Board monitors the Company's share price relative to the net asset value per share and keeps the level of discount at which the Company's shares trade under review. The Board also keeps 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. 

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

 

The financial and economic risks associated with the Company include market risk, liquidity risk and credit risk, all of which the Investment Manager seeks to mitigate. Further details of the steps taken to mitigate the financial risks associated with the portfolio are set out in note 18 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 result 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 regular Board meetings. In the event of a possible impending covenant breach, appropriate action would be taken to reduce borrowing levels. The financial covenants attached to the Company's borrowings currently provide for significant headroom. The maximum equity gearing level is 35% of net assets at the time of draw down, which constrains the amount of gearing that can be invested in equities which are more volatile than the fixed interest part of the portfolio.

 

The Board and the Investment Manager keep under review options available to protect a portion of the portfolio from a sudden decline in markets.

 

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 control 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 Standard Life Aberdeen Group) and any control failures and gaps in their systems and  services could result in a loss or damage to the Company.

 

The Board receives reports from the Manager on its internal controls and risk management and receives assurances from all its other significant service providers on at least an annual basis, including on matters relating to cyber security. Written agreements are in place with all third party service providers.

 

The Manager monitors closely the control environments and quality of services provided by third parties, including those of the Depositary and Custodian, through service level agreements, regular meetings and key performance indicators.

 

 

 

Board Investment Limits

In order to ensure adequate diversification, the Board has set absolute limits on maximum holdings and exposures in the portfolio at the time of acquisition. These can only be over-ridden with Board approval. The current limits include the following:

 

-     Maximum 10% of total assets invested in the equity securities of overseas companies;

-     Maximum 7.5% of total assets invested in the securities of one company (excluding Aberdeen Smaller Companies Income Trust PLC); and

-     Maximum 5% of quoted investee company's ordinary shares (excluding Aberdeen Smaller Companies Income Trust PLC).

 

Preference shares

The Company also invests in preference shares, primarily to enhance the income generation of the Company. The majority of these investments are in large financial institutions. Issue sizes are normally relatively small and associated low volumes of trading could give rise to a lack of liquidity. The maximum holding in preference shares is managed by the first guideline referred to above. In addition, the Company cannot hold more than 10% of any investee company's preference shares.

 

Traded options contracts

The Company enters into traded option contracts, also primarily to enhance the income generation of the Company. The risks associated with these option contracts are managed through the principal guidelines below, which operated in the year under review:

 

-     Call options written to be covered by stock;

-     Put options written to be covered by net current   assets/borrowing facilities;

-     Call options not to be written on more than 100% of a holding of stock;

-     Call options not to be written on more than 30% of the equity portfolio; and

-     Put options not to be written on more than 30% of the equity portfolio.

 

External Agencies

In addition to the services provided to the Company by the Standard Life Aberdeen Group, the Board has contractually delegated to external agencies certain services, including: depositary services (which include the safekeeping of the Company's assets) (BNP Paribas Securities Services, London Branch) and share registration services (Equiniti Limited). Each of these services was entered into after full and proper consideration by the Board of the quality and cost of services offered. In addition, day-to-day accounting and administration services are provided, through delegation by the Manager, by BNP Paribas Securities Services.

 

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 Standard Life 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 Standard Life Aberdeen Group.  The Manager's marketing and investor relations teams report 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 promotional 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 Manager'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 the right knowledge represented on the Board in order to allow it to fulfil its obligations. The Board also recognises the benefits and is supportive of the principle of diversity in its recruitment of new Board members. The Board will not display any bias for age, gender, race, sexual orientation, religion, ethnic or national origins, or disability in considering the appointment of its Directors. In view of its size, the Board will continue to ensure that all appointments are made on the basis of merit against the specification prepared for each appointment and the Board does not therefore consider it appropriate to set measurable objectives in relation to its diversity.   

 

At 31 March 2018, there were three male Directors and one female Director.

 

Environmental, Social and Human Rights Issues

The Company has no employees as the Board has delegated the 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 Investment 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 the Company's shareholders. 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 its operations, 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 a longer term investment horizon and the inherent uncertainties within equity markets. 

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

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

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

-     The liquidity of the Company's portfolio. The majority of the portfolio is invested in readily realisable listed securities.

-     The level of ongoing expenses. The Company's annual expenses, excluding the cost of the dividend, are expected to continue to be more than covered by annual investment income. 

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

 

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, and changes in regulation or investor sentiment.

 

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 statement below.  

 

On behalf of the Board

Robert Talbut

Chairman

29 May 2018

 

 



STRATEGIC REPORT - RESULTS

 

Financial Summary

 


31 March 2018

31 March 2017

% change

Total investments

£96,541,000

£97,826,000

-1.3

Shareholders' funds

£80,465,000

£81,477,000

-1.2

Market capitalisationA

£77,994,000

£72,969,000

+6.9

Net asset value per share

268.24p

271.61p

-1.2

Net asset value per share (ex-income)B

260.52p

264.50p

-1.5

Share price (mid-market on London Stock Exchange)

260.00p

243.25p

+6.9

Discount to NAV (cum-income)

3.1%

10.4%


Discount to NAV (ex-income)

0.2%

8.0%






Gearing




Net gearing

20.8%

21.1%






Dividend and earnings




Revenue return per shareC

13.69p

13.08p

+4.7

Dividend per shareD

13.00p

12.75p

+2.0

Dividend cover

1.05

1.03


Revenue reservesE

£6,795,000

£6,508,000






Operating costs




Ongoing charges ratioF

0.95%

1.04%



A              Represents the number of Ordinary shares in issue in the Company multiplied by the Company's share price.

B              Based on capital only NAV.

C             Measures the revenue earnings for the year divided by the weighted average number of Ordinary shares in issue (see Statement of Comprehensive Income).

D             The figures for dividend per share reflect the years in which they were earned (see note 9).

E              The revenue reserve figure does not take account of the third interim or final dividend amounting to £2,100,000 (2017 - £2,025,000) combined.

F              Considered to be an Alternative Performance Measure. Ongoing charges ratio calculated in accordance with guidance issued by the AIC as the total of the management fee and administrative expenses divided by the average net asset value including income throughout the year (see note 22 for the calculation) .

 

 



PERFORMANCE (TOTAL RETURN)

 


1 year

3 year

5 year


% return

% return

% return

Net asset valueA

+3.3

+19.6

+46.3

Share priceA (based on mid-market)

+12.2

+21.0

+44.7

FTSE All-Share Index

+1.2

+18.6

+37.6

A           Alternative Performance Measure.

All figures are for total return and assume re-investment of net dividends excluding transaction costs.

Source: Aberdeen Fund Managers, Morningstar & Factset

 

 

DIVIDENDS

 


Rate per share

xd date

Record date

Payment date

First interim dividend

3.00p

5 October 2017

6 October 2017

27 October 2017

Second interim dividend

3.00p

4 January 2018

5 January 2018

26 January 2018

Third interim dividend

3.00p

5 April 2018

6 April 2018

27 April 2018

Proposed final dividend

4.00p

5 July 2018

6 July 2018

27 July 2018


_______




2017/18

13.00p





_______




First interim dividend

3.00p

6 October 2016

7 October 2016

28 October 2016

Second interim dividend

3.00p

5 January 2017

6 January 2017

27 January 2017

Third interim dividend

3.00p

6 April 2017

7 April 2017

28 April 2017

Final dividend

3.75p

6 July 2017

7 July 2017

28 July 2017


_______




2016/17

12.75p





_______




 

 

TEN YEAR FINANCIAL RECORD

 

Year to 31 March

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Revenue available for ordinary dividends (£'000)

5,536

3,512

3,292

3,615

3,556

3,789

3,877

3,617

3,925

4,106

Per share (p)











Net revenue earnings

18.8

11.8

11.1

12.2

11.9

12.6

12.9

12.1

13.1

13.7

Net dividends paid/proposed

19.75

12.00

12.00

12.00

12.00

12.00

12.25

12.25

12.75

13.00

Net total earnings

(112.9)

85.3

22.6

7.4

53.5

26.0

23.1

(17.8)

54.5

9.4

Net asset value

118.5

186.8

197.5

192.9

234.4

248.4

259.5

229.4

271.6

268.2

Share price (mid-market)

109.0

184.0

190.0

194.5

233.0

252.3

252.0

202.0

243.3

260.0


____

_____

____

_____

____

____

____

____

____

_____

Shareholders' funds (£m)

35.2

55.5

58.6

57.3

70.3

78.7

77.8

68.8

81.5

80.5


____

_____

____

_____

____

____

____

____

____

_____












The figures for 2011 to 2017 are for the Company only, following the dissolution of the subsidiaries in May 2011.

 

 



CUMULATIVE PERFORMANCE A

Rebased to 100 at 31 March 2006

 

As at 31 March

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Net asset value

100.0

47.2

74.3

78.5

76.7

93.2

98.8

103.2

91.2

108.0

106.7

Net asset value total return{A}

100.0

52.2

92.4

104.1

108.5

140.0

156.2

171.2

159.3

198.3

204.9

Share price performance

100.0

49.5

83.6

86.4

88.4

105.9

114.7

114.5

91.8

110.6

118.2

Share price total return{A}

100.0

55.3

105.5

116.1

127.0

161.4

184.1

193.1

163.3

208.1

233.5

Benchmark performance

100.0

67.8

99.4

104.8

102.6

115.5

121.5

125.2

116.0

136.3

133.0

Benchmark total return{A}

100.0

70.7

107.6

117.0

118.6

138.5

150.7

160.6

154.4

188.2

190.6

NAV figures are based on Company only values following the dissolution of the subsidiaries in May 2011. 

A Total return figures are based on reinvestment of net income. 

 

 



STRATEGIC REPORT - INVESTMENT MANAGER'S REVIEW

 

Highlights

-     Outperformance of benchmark despite a difficult market for income holdings

-     NAV total return of 3.3% compared to the benchmark total return of 1.2%

-     4.7% growth in revenue per share

-     Mixture of UK mid-cap and international equities delivered resilient returns

 

Portfolio Strategy

We take a long term approach to investing, believing that whilst there might be volatility in the short and even medium term, share prices will ultimately reflect the fundamental value of a company. Consequently there has been no change to our approach to the construction of the portfolio during the year under review.

 

The Company's investment portfolio is invested in equities, preference shares and convertible shares. At the year-end 71.9% of the portfolio was invested in equities, 27.5% was invested in preference shares with the remainder in convertibles.

 

Equity Market Review

After strong gains characterised the start of 2017, the market began the period under review with more muted returns, although equities continued to perform well and index performance was reflective of a more normalised level of return. Smaller companies on average performed approximately twice as strongly as the broader market in the first half of the year through to September.

 

Politics has dominated sentiment surrounding the domestic economy throughout the year.  Brexit has been at the forefront of investors' minds and the associated uncertainty was increased by Prime Minister Theresa May's decision to call a snap election in June. The ensuing result saw her party lose their majority, a contrast to the consensus expectation when the poll was called.  Markets, however, reacted quite calmly and sterling weakness provided further support for businesses with significant levels of overseas earnings.

 

Inflation ran at higher levels through the first part of the year, before the initial impact of sterling weakness began to annualise from July onwards. The elevated level of inflation, combined with the low levels of unemployment, led the Bank of England to suggest that interest rates could rise sooner rather than later. In the event, the Monetary Policy Committee increased interest rates for the first time in a decade in November, taking the base rate from 0.25% to 0.5%. 

 

One theme was the clear signs of improvement in the European economies as the region as a whole made progress, with France particularly strong as the market looks ahead to the sustained benefit from President Macron's reforms.  A number of potentially troublesome elections were navigated without the feared populist and anti-EU agenda making significant progress.  In Italy they were able to recapitalise some of the more distressed banks without re-igniting a debt crisis.  In Europe, Spain had to deal with the Catalonian regional Government attempting to declare independence.  Whilst there was commentary about the potential for this to destabilise the European Continent, an uncontrolled departure never seemed particularly likely.

 

The US economy has also prospered throughout the financial year.  Despite some sabre rattling over North Korea and political tensions relating to the 2018 budget and the need to extend the debt ceiling, growth was sufficiently strong to allow the Federal Reserve to increase interest rates in line with expectations. Towards the end of the period, President Trump successfully pushed through tax reform in the US, lowering corporate tax and driving earnings upgrades for US domestic companies. In aggregate, the changes are estimated to deliver 6% upgrades to US company earnings.

 

Geopolitics have also influenced the oil price. Crude started the period in a volatile manner and declined by almost 20% between April and June as demand dipped seasonally before rebounding through the remainder of 2017. In 2018, strong global demand growth and limited supply expansion has pushed Brent oil to above $80 a barrel. The portfolio remains underweight to the oil and gas producers but such significant swings in the commodity's price can have a marked effect on relative performance.

 

Equity markets enjoyed a strong finish to 2017. Overall it was a very good year for equities with smaller companies rising by 18.2% and although larger companies were unable to keep up with this rate of return they delivered a perfectly respectable 12%.  That strength did not carry over into the New Year, however. Despite an initially strong start, markets had a disappointing January with the FTSE All-Share declining by 1.9% in total return terms and small caps doing slightly better registering losses of 0.8%.  The initial stages of the sell-off were in part a result of a belief that interest rates would be raised sooner and perhaps further than had been expected.  Indeed, the Bank of England's February Quarterly Inflation Report highlighted this.  Meanwhile as labour markets continue to tighten there may be three or perhaps four rate increases in the US this year.  As a result the so- called bond proxies such as tobacco and in some instances pharmaceuticals and beverages have been weak at the start of the year. Conversely, mining and banks have been strong.

 

At the start of 2018 we have seen geopolitical tensions increase again, with the risk of sanctions against Iran and Russia increased following actions in Syria and the UK. The appointment of hawkish politicians as Secretary of State and Head of the National Security Agency in the US has increased the perceived risk, although the language from the US towards North Korea has softened markedly. President Trump has now moved on to address global trade, targeting what is described as an unfair trade relationship between China and the US.

 

The possibility of increased tariffs hit equities in the first quarter of 2018, although our view would be that a more moderate solution is likely to be reached and the first quarter of 2018 was the worst one for six years.  Smaller companies performed marginally better. Technology stocks led the market lower as they did in many markets.  A combination of high valuations and a rising popular and political backlash against some of their operating and financial practices gave investors cause for concern.

 

In the UK economy, March brought the Chancellor's Spring statement which saw growth expectations for 2018 revised slightly upwards.  With unemployment at its lowest level since 1975 and productivity again improving, the Bank of England held interest rates flat again at its May meeting. Meanwhile, some further progress was made with the Brexit negotiations and the hope remains that a worst case scenario of a 'no-deal' exit will be avoided.

 

Equities have benefited from strong earnings per share ("EPS") growth though the fourth quarter (15% for the US) and the US tax cuts will boost S&P 500 EPS by approximately 6% this year. In aggregate we expect global EPS to rise about 9% this year, with 3% coming from the US tax cut. Indeed, over the past few months we have seen one of the strongest and broadest upgrades to analyst estimates in recent history. Notably while US multiples are slightly higher year on year, for global markets as a whole the past year's gains have been entirely due to earnings, not price/earnings expansion.

 

The debate over equity valuation continues. Under conditions of low and stable inflation, equity multiples are largely driven by growth, and secondarily by credit spreads. The picture has not yet changed decisively and so the rise in equity markets alongside the rise in treasury yields until February (and the compression of credit spreads) should not have come as a surprise.

 

Investment Performance

In the year to the end of March 2018, the total return on net assets was 3.3%, compared to our benchmark, the FTSE All-Share Index, which returned 1.2%.

 

The largest contributor to performance was again the investment in Aberdeen Smaller Companies Income Trust ("ASCIT"). In the year, the strengthening of sterling combined with rising markets has led to another year of smaller companies outperforming large cap and ASCIT took advantage of these trends.

 

Within the managed equity proportion of the portfolio, the most notable positive sector contributions came from Chemicals, Healthcare and from Financials as well as an underweight position in Utilities. While Utilities offer attractive yields, we remain cautious given the limited growth potential and the heightened risk of regulation.

 

The underweight position in Oil & Gas was a negative sector contribution as oil rallied hard into the year end. Inevitably, the position will cause some underperformance. The overweight position in Tobacco was a drag on performance with stocks struggling as bond yields rose and there were concerns around the growth potential from next generation products. We continue to like the cash generation of these businesses.

 

AVEVA was the most positive contributor of the individual stock positions within the portfolio. The shares rallied on the deal to combine with Schneider, giving the company a process management platform to merge with its leading software offering. With a new CEO in place and positioned to take advantage of any recovery in oil & gas spending, we believe the company is well placed with strong long term prospects.

 

Chesnara performed well, helped by the acquisition and integration of Legal & General Nederland coupled with a strong underlying performance in the rest of the group, where the UK operations generated cash ahead of expectations while Movestic, the company's Swedish division, delivered good growth.

 

Croda International's shares outperformed over the period benefitting from a robust demand environment and self-help which translated into an improvement in sales growth in the company's Personal Care division and margin improvement in the company's Life Sciences business.

 

BHP Billiton was a positive contributor, as it benefitted from strengthening commodity prices. Although we remain underweight the mining sector, BHP's capital discipline and cost focus is resulting in improving free cashflow and reduced net debt.

 

Novo Nordisk, one of the few ex-UK stocks held within the portfolio, rebounded strongly through the period, after concerns around competitive position and pricing were addressed. We continue to like the defensive position in the diabetes market, one that is likely to deliver sustainable growth given the demographic and diet changes we have seen.

 

The portfolio also benefitted from avoiding a number of large cap stocks that under-performed significantly in the year. We held no WPP, which fell 33% as global advertising spend by consumer goods groups slowed. We also held no Reckitt Benckiser, which fell 15% as growth slowed, and no Shire which fell 23%. The last of these has recovered in the New Year due to bid speculation.

 

The main sources of negative performance for the portfolio were concentrated, with two positions detracting a total of 3.4% from performance. The Company runs a concentrated equity portfolio, creating the risk of negative impacts from single investments. We seek to protect against this by investing in quality companies with long term strength and although this year two companies in particular disappointed, this was offset by positive performance elsewhere. 

 

The largest detractor was Provident Financial.  The company's shares significantly underperformed following a profit warning which highlighted deterioration in trading at the company's Home Collected Credit business, an investigation into Vanquis Bank by the Financial Conduct Authority, the decision to cancel the dividend, and the removal of the company's Chief Executive. We were particularly disappointed to discover that due to the FCA investigation the company had stopped selling its highly profitable 'Repayment Option Plan' to new customers in April 2016 but did not deem this worthy of public disclosure.

 

Inmarsat was also a significant under performer. The share price was weak over the period due to underperformance in the company's maritime division, uncertainty around payments from Ligado (an American satellite company), and stress to the balance sheet given the requirement for additional investment in the aviation division where the roll-out of the company's services is taking longer than expected.

 

Gearing and Preference Share Portfolio

Gearing decreased marginally during the year from 21.1% to 20.8%.  The gearing is notionally invested in the preference share portfolio. At the year-end these securities had a value of £26.7 million, materially in excess of net indebtedness which stood at £16.7 million. This part of the portfolio provides a core level of high income and would, in normal conditions, be expected to be more resilient than equities in the event of a fall in the market.

 

The preference share portfolio outperformed the equity portion of the portfolio during the year. However, in March 2018 there was a material fall in the price of preference shares as the asset class reacted negatively to the news that Aviva was considering cancelling at par value certain preference shares issued by members of its group, including the 7.875% General Accident preference shares held by the Company. Aviva subsequently announced that it had decided not to cancel the relevant preference shares in the manner originally proposed at this time, and the preference shares in the Company's portfolio (including those issued by General Accident) have regained their prior valuations. Furthermore, with equity markets pulling back at the start of 2018,  the equity portfolio delivered a 1.4% total return, just ahead of the FTSE All-Share Index. In such a market, the high fixed return of the preference share portfolio proved its value, with a return of 12.2% over the year.

 

Revenue Account

Earnings per share increased by 4.7% over the year to 13.69p. The Company aims to invest in companies with the ability to grow dividends over time and a number of holdings delivered dividend growth during the period. The mining stocks in the portfolio used strong free cashflow to increase dividends, with both BHP Billiton and Rio Tinto delivering increases after cutting their dividends in 2016. Other material increases came from Compass Group and Associated British Foods. Holdings in consumer goods companies such as Unilever and Diageo continued to deliver incremental year-on-year dividend growth, and Standard Chartered reinstated its dividend at the end of the period and we expect it to deliver further increases. In addition, dividends denominated in US dollars or Euros from companies such as Royal Dutch Shell, Vodafone and BP, continued to benefit from the relative strength of those currencies through much of the year. These benefits more than off-set dividend cuts from Pearson and Provident Financial.

 

The following table details the Company's main sources of income over the last five years.

 


2018

2017

2016

2015

2014


%

%

%

%

%

Ordinary dividends

59.1

54.0

53.0

54.6

52.5

Preference dividends

33.0

35.8

37.7

35.0

36.1

Aberdeen Smaller Companies

4.4

4.6

4.8

4.3

4.9

Fixed interest and bank interest

0.1

0.1

0.2

0.2

0.2

Traded option premiums

3.4

5.5

4.3

5.9

6.3


______

______

______

______

______

Total

100.0

100.0

100.0

100.0

100.0


______

______

______

______

______

Total income (£'000s)

4,916

4,695

4,361

4,665

4,534


______

______

______

______

______

 

Portfolio Activity

We introduced twelve new holdings during the period.

 

Unibail is Europe's largest listed commercial property company active in development, investment and operations of shopping centres, offices and convention and exhibition venues.  The business benefits from a portfolio of high quality assets and a strong balance sheet.  The rental streams provide a high level of earnings visibility which manifest themselves in an attractive dividend that has been growing ahead of inflation.

 

Nestle, as the largest food and beverage company in the world, has an unmatched product and brand portfolio and genuine global reach.  This includes 34 brands that generate sales in excess of CHF 1bn each.  85% of sales are into markets where the company is either #1 or #2 and 45% are into emerging markets.  The small value, everyday purchase consumable nature of what they sell results in an attractive and predictable earnings stream. The new CEO has outlined a plan to return the company to mid-single digit levels of organic growth alongside margin expansion and portfolio management to improve returns. The balance sheet is strong, combining low levels of leverage with the value of their 11% stake in L'Oreal.  Although the yield is below the market yield we regard it as very safe.  Additionally, given the prospects outlined above, which could result in a period of double digit earnings growth that persists into the medium term, we believe that there is the potential for a marked pick- up in the rate of dividend growth.

 

Euromoney is a provider of high value data and analytics to the banking, asset management and commodity sectors. With 90% of their content being proprietary they have no direct competitors.  Approximately one third of revenues are derived from emerging markets.  The business has been through a transition that has seen them shed traditional print and advertising based assets and replace them with digital content, sponsorship and events.  As a result they now benefit from high levels of subscriptions which account for 62% of sales and other recurring revenues.  This in turn translates into a business model that benefits from a negative working capital profile resulting in favourable cash conversion dynamics.  Following a period of investment, the company is now well positioned to deliver improving margins and returns. These, allied to a strong balance sheet and solid cash flow, should allow them to grow the dividend at a rate nicely ahead of inflation into the medium term.

 

Nordea is the largest bank in the Nordic region with over 10 million retail customers. Additionally, it is the Number 1 wholesale bank in the Nordics and is also the largest private bank, asset manager and life and pensions provider in the region. Nordea management is highly regarded, led by the Chairman, Bjorn Wahlroos, who has a very strong reputation for shareholder value creation, not only at Nordea but also at Sampo, an insurance company. The company has one of the strongest credit ratings of any international bank and successfully navigated the financial crisis without any government support. The bank's Return on Equity of 18% has actually gone up since 2007 which shows the strength of the business franchise.  This is very different from nearly all their European peers. Additionally despite the increased capital requirements over the last decade the dividend has more than doubled and appears secure with the potential for modest ongoing growth. 

 

GIMA produce packaging machines for tobacco companies.  Their machines are more flexible than the very high volume mainstream packing machines of their competitors.  This allows the tobacco companies to more easily produce variants of both cigarettes and packs.  This capability has become increasingly valuable as developed markets have imposed plain packaging regulation which has in turn forced the tobacco companies to differentiate through alternative means.  A key opportunity for the business lies in the field of next generation products ("NGPs").  They have a 65% share in this market, largely for Philip Morris's IQOS product.  The capabilities around flexibility are a key advantage in this market.  The tobacco companies are directing increasing proportions of their capital expenditure budgets towards NGPs and our conversations with them suggest that they anticipate NGPs becoming very significant revenue generators for them in the medium term.  A negative working capital profile alongside a low requirement for capex means that despite the high levels of anticipated growth, the company is able to pay an attractive dividend yield that is in turn expected to grow well ahead of inflation. 

 

Big Yellow are the UK's leading provider of self-storage facilities.  They operate primarily freehold sites in London and the South East.  Although this is a very fragmented market new supply is constrained by the difficulty of finding suitable sites.  Good quality locations will often have higher alternative uses.  There is significant potential for growth in demand as awareness rises, Big Yellow have the highest level of consumer awareness in the industry.  By way of comparison, the Australian market has 3 times the space per person compared to the UK.  In the US this metric is 12 times.  Rental growth accelerates as occupancy rises and with three quarters of their estate registering occupancy in excess of 70% they are well placed to grow their income.  Demand is correlated with housing transactions as customers use storage when they move house.  There is however no obvious correlation with house prices.  Around one third of space is occupied by businesses with this market being driven by the rise of small scale e-commerce.  The balance sheet is conservative with a loan to value of 26% and the strong earnings growth has resulted in a near 4% yield that has grown at almost 20% over the last three years.

London Metric Properties specialise in owning distribution centres for omni-channel retailing.  The growth of e. tailing drives an increasing need for logistics space because of the requirement to carry deeper stock and importantly to be able to handle returns.  £1 of on-line sales requires roughly 3x the space needed to service £1 of store based sales.  Supply remains constrained because the sites with the most favourable transport logistics are largely already occupied.  Customers are normally very sticky because of the operational risks associated with making changes to their supply chain. The company has low levels of development risk due to its strategy of pre-letting large projects and developing partnerships.  The company's REIT status means that the majority of profits are distributed to shareholders as a dividend, which is currently producing a yield in excess of 4.5%.  The opportunities to both add space and drive up rents should result in growth in excess of inflation, whilst gearing will remain under control with LTV running between 30% and 40%.

 

Telecom Plus is an independent multi-utility supplier based in the UK, operating under the brand name "The Utility Warehouse". Services offered include fixed telephony, mobile telephony, broadband, gas and electricity. The offering is attractive to consumers who appreciate the bundled offering that delivers cost savings, a single point of contact, a highly regarded service culture and a simple single bill.  The business is likely to be a beneficiary of the regulatory changes that are impacting the single variable tariffs structure in the energy industry as these will serve to make their products more price competitive.  An innovative sales model reduces direct costs and provides a welcome flexibility in the cost base.  This, alongside the cash generative nature of the business, results in an attractive and growing dividend yield.

 

Bunzl has been weak as investors have become increasingly concerned that Amazon will become a significant competitor for them.  Our belief is that Bunzl is well positioned to counter this threat.  The products they sell are low value but important to the customer.  There is limited scope for Amazon to compete on price.  In addition, Bunzl have a superior service offering in part supported by their in-house delivery capability which Amazon cannot replicate.  Suppliers, especially the larger ones, favour Bunzl over Amazon because it allows them to retain more control over their pricing architecture. Lastly, Bunzl's highest margin business is selling safety wear and here they have their own brands.  The company has a long track record of steadily compounding returns and we expect that to continue.

 

Rio Tinto, a diversified miner, has been through something of a transformation in recent years as the mining industry has found itself in turmoil.  The company has been through a cost cutting programme the benefits of which are now starting to emerge and which will be further boosted by productivity improvements.  The prospects for their tier 1 assets are improving as the market moves to favour premium grade iron ore for environmental reasons.  The prospects for their aluminium business are much improved, aided by constraints to low cost and polluting Chinese production, structural growth in demand and the location of some of their assets which allows them to benefit from hydro power.  The balance sheet is now much stronger and the yield is set at an attractive level.

 

Relx, formerly known as Reed Elsevier, is a publisher of academic journals and data provider to industries such as reinsurance. Over recent years it has diversified away from its historic weighting to scientific journals, creating a valuable and steadily growing data services business. Meetings with management have demonstrated a strong culture which focuses on incremental margin improvement and stable, long term earnings growth. This had delivered steady dividend growth over time.

 

Kone is a Finnish manufacturer of escalators and elevators with a leading position in Asia. The attraction of the business to us is its exposure to aftermarket servicing of installed products which creates a repeatable, and growing, cashflow stream. The yield at 4% is attractive, with potential for further growth.

 

We exited seven holdings throughout the year.

 

Elementis acquired the personal care business Summit Reheisis.  This is in line with their strategy but the scale of the acquisition will limit the company's dividend paying capability for some time.  Therefore we decided to sell down the position in June.

 

We exited from Pearson in September. The prospects for Pearson's US Higher Education business are increasingly opaque.  Although we believe that they should be able to transition their business to one that encompasses a digital business model the timescale and cost to do so raise significant questions about their ability to deliver growth in their dividend.

 

Capita was exited in November after experiencing difficult trading conditions. Despite the welcome and successful sale of their asset servicing business, the balance sheet remained stretched and we believed that a significant risk remained that the dividend would be cut by the incoming CEO. That proved to be correct, with the dividend being cut, along with a plan for further disposals and cost cutting.  We sold half the holding and wrote calls over the remainder.

 

We exited Essentra, taking the view that the company has a significant turnaround programme ahead of them. Whilst they are demonstrably making progress we believe that the valuation is already pricing in a fair degree of success. 

 

In the case of Inchcape we felt that there were better quality investments available and, as such, the decision to exit was less about the prospects for Inchcape and more about allocating assets to areas that we thought had better medium term prospects. 

 

Wood Group has for some time been one of the ways that we have sought to address the portfolio's underweight position to the oil majors, with our preference for service companies as opposed to producers.  However, the acquisition of Amec Foster Wheeler brings significant contract risk.  Whilst the valuation is cheap if they can successfully integrate this business, our experience has taught us that the downside risk could also be sizable.

 

We also exited Provident Financial. The stock has performed poorly after a series of profit warnings and the decision was taken to exit. More commentary on this stock is provided above in the Investment Performance section.

 

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 also incumbent upon us to take a proactive approach to our stewardship of these companies. Therefore, we engage extensively with our investee companies. We have attended a range of meetings with chairmen, non-executive directors and other stakeholders. Topics covered have included the composition of the board, environmental and social issues, and remuneration. 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 consuming but we regard it as an integral aspect of our role as long term investors.

 

Outlook

Uncertainty in markets remains high in our view, generally robust macro-economic data balanced with concerns that we are entering a late cycle environment and around how the market will react to evolving monetary policy.  Industrial production, as well as broader economic and earnings growth have been strong and were well above trend in the second half of 2017. Indicators suggest that this strength has mostly carried over into 2018, though January data in the US has been softer than expected, reflecting weather distortions. Developed market growth this year is set to be the strongest since 2011 and there are signs that it is becoming more self-sustaining, as capex, labour productivity and hence potential growth have all risen above their post-crisis averages while households have become less cautious.

 

Emerging Markets have been slightly more subdued, with Industrial Production growth slowing, and a sharper than anticipated slowdown in China remains perhaps the largest downside risk to a constructive 2018 outlook. Policymakers have been tightening financial conditions and the country is still carrying large credit and investment imbalances, increasing the chances of a policy mistake. So far, however, the Chinese economy seems to be adjusting as well as can be expected to less accommodative financial conditions. Industrial and thus broader economic growth has slowed, but domestic consumer spending has been resilient, allowing overall growth to slow moderately rather than abruptly.

 

Against this reasonably solid economic backdrop long-term interest rates rose significantly across each of the major developed markets except Japan. And after rallying especially strongly through most of January, a significant equity correction took place in what seems to have been an overbought market, with most markets initially losing all of the year to date gains. Equity volatility naturally increased during this episode and though it has moderated again since early February, it remains well above the levels that prevailed through 2017. This may signal a more persistent shift towards more normal levels of market volatility after an extended period of a low-volatility environment.

 

Furthermore, supply side challenges have not disappeared, trade policy is becoming more restrictive, and there are few places where steps are being taken to lift longer-term growth. Despite tightening labour markets and the pick-up in commodity prices, underlying inflation rates have barely budged outside of the US, with most remaining well below central bank targets. The upshot is that there will be few central banks looking to quickly remove monetary policy accommodation over the next two years, although the expectation should be for bond yields to continue to rise.

 

In the UK specifically, the exit from the EU continues to dominate the political and economic landscape. Our base case remains a modest-moderate Canadian style Free Trade Agreement ("FTA") outcome from negotiations given stated preferences and the political and economic incentives at play. There remains a large amount of uncertaintly. In any case, the impact of the vote is likely to be slower growth in the UK than other OECD markets for some time to come, even if a worst case scenario is unlikely. While we expect to see interest rates rise over time, the economic situation makes it unlikely that we will see increases in rates materially ahead of expectations.

 

The long-term negative correlation between equities and fixed interest securities is likely to continue unless there is an inflation or term premium shock that causes yields to rise but growth expectations to decline. Broker and market commentary has focused on when bond yields are "too high" for equities on the basis of relative valuation. The answer is that growth usually drives the spread between the two, and that ultimately higher rates will impact equities only when the rate cycle delivers, or is expected to deliver, a meaningful economic slowdown or recession. Historically, as long as core inflation has remained within a range of 1%-3%, increases in bond yields have had little impact on equity valuations, and so we don't see conditions as driving a de-rating of equity valuations yet. Having said that, after a persistent rally over the past two years, equity markets are more finely balanced, as shown by marked sell offs in the year to date and any companies disappointing on earnings can expect to be de-rated readily.

 

The broad distribution of revenue streams from both domestic and international markets provides some protection from UK specific risks. We believe that our approach of investing in good quality businesses with balance sheet strength giving management options even through difficult times, means the portfolio is well positioned to weather any corrections and continue to deliver attractive returns.

 

Aberdeen Asset Managers Limited

29 May 2018

 

 



PORTFOLIO - ORDINARY SHARES

AS AT 31 MARCH 2018

 


Valuation

Total

Valuation


2018

portfolio

2017

Company

£'000

%

£'000

Aberdeen Smaller Companies Income Trust

8,769

9.1

6,522

Royal Dutch Shell 'B'

3,028

3.1

3,364

Chesnara

3,007

3.1

2,772

Unilever

2,986

3.1

3,171

British American Tobacco

2,954

3.1

3,562

AstraZeneca

2,864

3.0

2,874

Prudential

2,641

2.7

2,504

GlaxoSmithKline

2,453

2.5

2,921

BP

2,090

2.2

1,995

Vodafone

2,083

2.2

2,232

Ten largest investments

32,875

34.1


BHP Billiton

2,049

2.1

2,147

HSBC Holdings

1,910

2.0

2,881

Compass

1,752

1.8

1,885

Schroders

1,642

1.7

1,994

Close Brothers

1,500

1.6

1,984

Sage Group

1,457

1.5

1,601

Croda International

1,455

1.5

1,136

BBA Aviation

1,371

1.4

1,632

Unibail-Rodamco

1,311

1.4

-

Nordea Bank

1,296

1.3

-

Twenty largest investments

48,618

50.4


Imperial Brands

1,286

1.4

1,353

Weir Group

1,207

1.3

1,150

Rolls Royce

1,203

1.2

1,041

Experian

1,199

1.2

1,270

Rotork

1,166

1.2

998

Standard Chartered

1,158

1.2

1,954

Diageo

1,148

1.2

781

National Grid

1,115

1.2

1,510

Assura

1,101

1.1

375

Londonmetric Property

995

1.0

-

Thirty largest investments

60,196

62.4


Rio Tinto

975

1.0

-

Aveva

965

1.0

872

Novo-Nordisk

886

0.9

699

Inmarsat

828

0.9

1,944

Telecom Plus

739

0.8

-

Big Yellow

639

0.7

-

Ultra Electronic Holdings

593

0.6

808

Nestlé

508

0.5

-

Associated British Foods

473

0.5

495

Gima TT

431

0.4

-

Forty largest investments

67,233

69.7


Euromoney Institutional Investor

428

0.4

-

Hansteen

392

0.4

735

Bunzl

381

0.4

-

Relx

352

0.4

-

KONE

331

0.3

-

Manx Telecom

302

0.3

326

Total Ordinary shares

69,419

71.9


 

 

INVESTMENT PORTFOLIO - OTHER INVESTMENTS

AS AT 31 MARCH 2018

 


Valuation

Total

Valuation


2018

portfolio

2017

Company

£'000

%

£'000

Convertibles




Balfour Beatty Cum Conv 10.75p 01/07/2020

550

0.6

575


______

______


Total Convertibles

550

0.6



______

______


Preference sharesA




Ecclesiastical Insurance Office 8 5/8%

6,233

6.4

5,851

Royal & Sun Alliance 7 3/8%

5,699

5.9

5,481

General Accident 7.875%

4,896

5.1

4,683

Santander 10.375%

4,816

5.0

4,620

Standard Chartered 8.25%

3,842

4.0

3,531

R.E.A. Holdings 9%

1,086

1.1

967


______

______


Total Preference shares

26,572

27.5



______

______


Total Other Investments

27,122

28.1



______


Total Investments

96,541



______





A           None of the preference shares listed have a fixed redemption date.

Purchases and/or sales effected during the year result in 2017 and 2018 values not being directly comparable.

 

 



DISTRIBUTION OF ASSETS AND LIABILITIES

 



Movement during the year



Valuation at



Gains/

Valuation at


31 March 2017

Purchases

Sales

(losses)

31 March 2018


£'000

%

£'000

£'000

£'000

£'000

%

Listed investments








Ordinary shares

72,118

88.5

11,313

(11,727)

(2,285)

69,419

86.2

Convertibles

575

0.7

-

-

(25)

550

0.7

Preference shares

25,133

30.9

-

-

1,439

26,572

33.0

Total investments

97,826

120.1

11,313

(11,727)

(871)

96,541

119.9

Current assets

2,881

3.5




3,197

4.0

Current liabilities

(19,230)

(23.6)




(9,276)

(11.5)

Non current liabilities

-

-




(9,997)

(12.4)


______

______




______

______

Net assets

81,477

100.0




80,465

100.0


______

______




______

______

Net asset value per Ordinary share

271.6p





268.2p



______





______


 

 



DIRECTORS' REPORT (EXTRACT)

 

The Directors present their report and audited financial statements for the year ended 31 March 2018.

 

Results and Dividends

The financial statements for the year ended 31 March 2018 are contained below. Dividends paid and proposed for the year amounted to 13.0p per Ordinary share.

 

First, second and third interim dividends for the year, each of 3.0p per Ordinary share, were paid on 27 October 2017, 26 January 2018 and 27 April 2018 respectively. The Directors recommend a final dividend of 4.0p per Ordinary share, payable on 27 July 2018 to shareholders on the register on 6 July 2018. The ex-dividend date is 5 July 2018. Under International Financial Reporting Standards ("IFRS") the third interim and final dividends will be accounted for in the financial year ended 31 March 2019. A resolution in respect of the final dividend will be proposed at the forthcoming Annual General Meeting.

 

Investment Trust Status

The Company is registered as a public limited company (registered in England and Wales No. 00386561) 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 April 2012.  The Directors are of the opinion that the Company has conducted its affairs for the year ended 31 March 2018 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

The issued Ordinary share capital at 31 March 2018 consisted of 29,997,580 Ordinary shares of 50p each and 50,000 3.5% Cumulative Preference Shares of £1 each. 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.

 

Each Ordinary and Cumulative Preference share carries one vote at general meetings of the Company. The Cumulative Preference shares carry a right to receive a fixed rate of dividend and, on a winding up of the Company, to the payment of such fixed cumulative preferential dividends to the date of such winding up and to the repayment of the capital paid up on such shares in priority to any payment to the holders of the Ordinary shares.

 

The Ordinary shares, excluding any treasury shares, carry a right to receive dividends and, 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 or Cumulative Preference shares in the Company other than certain restrictions which may from time to time be imposed 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 and promotional activities to the Company. 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 administrative and secretarial services to Aberdeen Asset Management PLC and promotional activities to AAML. Details of the management fee and fees payable for promotional activities are shown in notes 4 and 5 to the financial statements.

 

The management agreement is terminable on not less than six months' 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 March 2018, 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 Ordinary shares held

% of Ordinary shares held

Aberdeen Asset Managers Limited Retail PlansA

5,196,909

17.3

A Non-beneficial interest

 

There have been no changes notified to the Company between the year end and the date of approval of this Report.

 

Directors

The Board comprises four non-executive Directors. Mr R. Archibald was appointed as a Director on 1 May 2017 and Mr A. Davidson retired on 11 July 2017.

 

All Directors are considered by the Board to be independent of the Company and the Manager. Each Director has the requisite high level and range of business and financial experience which enables the Board to provide clear and effective leadership and proper governance of the Company.

 

Mr A. Robson is a non-executive director of Witan Pacific Investment Trust PLC ("WPC"). WPC's executive manager is Witan Investment Services Limited. WPC operates a multi-manager structure and Aberdeen Asset Management Asia Limited, part of the Standard Life Aberdeen Group, manages a part of WPC's assets. Despite his consequent involvement in two investment trusts (including this one) where the Standard Life Aberdeen Group has an investment management relationship, the remainder of the Board is unanimous in its opinion that Mr Robson remains independent in his role as a Director of the Company. 

 

The Directors attended scheduled Board and Committee meetings during the year ended 31 March 2018 as shown in the following table (with their eligibility to attend the relevant meetings in brackets):

 



Director



Board


Audit
Committee

Management
 Engagement
 Committee

 

Remuneration Committee

R. Talbut

5 (5)

2 (2)

1 (1)

1 (1)

R. Archibald

5 (5)

2 (2)

1 (1)

1 (1)

A. DavidsonA

2 (2)

1 (1)

- (-)

- (-)

M. Glen

5 (5)

2 (2)

 1 (1)

1 (1)

A. Robson

5 (5)

2 (2)

 1 (1)

1 (1)

A Retired 11 July 2017

 

The Board meets more frequently when business needs require.

 

Mr R. Talbut retires by rotation at the Annual General Meeting. Having served for more than nine years, Mr A. S. Robson will also retire at the Annual General Meeting. Being eligible, both Messrs Talbut and Robson offer themselves for re-appointment.

 

The Board believes that Messrs Talbut and Robson remain independent of the Manager and free from any relationship which could materially interfere with the exercise of their  judgement on issues of strategy, performance, resources and standards of conduct and confirms that, following formal performance evaluations, their performance continues to be effective and demonstrates commitment to the role. The Board therefore recommends the re-appointment of Messrs Talbut and Robson at the Annual General Meeting.

 

Directors' and Officers' Liability Insurance

The Company maintains insurance in respect of Directors' and Officers' liabilities in relation to their acts on behalf of the Company. In addition, the Company has entered into a separate deed of indemnity with each of the Directors reflecting the scope of the indemnity in the Articles of Association. Under the Articles of Association, each Director is entitled to be indemnified out of the assets of the Company to the extent permitted by law against any loss or liability incurred by him or her in the execution of his or her duties in relation to the affairs of the Company. 

 

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, or at the end of the year, in which any Director was interested.

 

The Company has a policy of conducting its business in an

honest and ethical manner. The Company takes a zero-tolerance approach to bribery and corruption and has procedures in place that are proportionate to the Company's circumstances to prevent them. The Manager also adopts a group-wide zero-tolerance approach and has its own detailed policy and procedures in place to prevent bribery and corruption. Copies of the Manager's anti-bribery and corruption policies are available on its website.

 

In relation to the corporate offence of failing to prevent tax evasion, it is the Company's policy to conduct all business in an honest and ethical manner. The Company takes a zero-tolerance approach to facilitation of tax evasion whether under UK law or under the law of any foreign country and is committed to acting professionally, fairly and with integrity in all its business dealings and relationships.

 

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 has applied 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 17 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 Company is also non-compliant with Provision A.4.1 of the UK Code which states that the Board should appoint a Senior Independent Director. The Board has considered whether a Senior Independent Director should be appointed and has concluded that, given the size of the Board and the fact that it is comprised entirely of non-executive Directors, this is unnecessary at the present time. However the Chairman of the Audit Committee leads the evaluation of the Chairman and may be contacted by shareholders if they have any concerns that cannot be resolved through discussions with the Chairman.

 

The full text of the Company's Corporate Governance Statement can be found on its website.

 

Going Concern

The Company's assets comprise mainly readily realisable securities which can be sold to meet funding commitments if necessary. The Board has set limits for borrowing and regularly reviews actual exposures, cash flow projections and compliance with banking covenants. The Directors believe that the Company has adequate resources to continue in operational existence for the foreseeable future and has the ability to meet its financial obligations as they fall due for a period of at least twelve months from the date of approval of this Report. For these reasons, they continue to adopt the going concern basis of accounting in preparing the financial statements.

 

Accountability and Audit

Each Director confirms that, so far as he or she is 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 Directors 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, Ernst & Young LLP, has indicated its willingness to remain in office. The Board will place resolutions before the Annual General Meeting to re-appoint Ernst & Young 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 Customer Services Department. 

 

All shareholders have the opportunity to put questions to the Board at the Annual General Meeting and a presentation from the Investment Manager covers the investment performance and strategy during the financial year and the outlook for the year ahead. 

 

Representatives from the Board make themselves available to meet with institutional shareholders in order to gauge their views. The Board's policy is to communicate directly with shareholders and their representative bodies without the involvement of the management group (including the Company Secretary or the Manager) in situations where direct communication is required. 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 communication from shareholders to which the Chairman responds personally as appropriate.

 

It is the Company's aim to give at least 20 working days' notice to shareholders of the Annual General Meeting. As recommended by the AIC Code, the Company makes available the proxy votes cast at general meetings.

 

Annual General Meeting

The Annual General Meeting will be held at the offices of Standard Life Aberdeen plc, Bow Bells House, 1 Bread Street, London EC4M 9HH on Thursday 5 July 2018 at 12 noon.

 

By order of the Board

Aberdeen Asset Management PLC

Company Secretary

40 Princes Street

Edinburgh EH2 2BY

 

29 May 2018

 

 



STATEMENT OF COMPREHENSIVE INCOME

 



Year ended

Year ended



31 March 2018

31 March 2017



 Revenue

 Capital

 Total

Revenue

 Capital

 Total


Notes

 £'000

 £'000

 £'000

 £'000

 £'000

 £'000

(Losses)/gains on investments at fair value

11

-

(2,357)

(2,357)

-

12,863

12,863

Currency (losses)/gains


-

(37)

(37)

-

-

-









Income

3







Dividend income


4,665

-

4,665

3,603

-

3,603

Interest income/(expense)


1

1,482

1,483

569

(101)

468

Stock dividends


79

-

79

259

-

259

Traded option premiums


167

-

167

204

-

204

Other income


-

-

-

55

-

55

Money market interest


4

-

4

4

-

4

Underwriting commission


-

-

-

1

-

1



_______

_______

______

_______

_______

_______



4,916

(912)

4,004

4,695

12,762

17,457



_______

_______

______

_______

_______

_______

Expenses








Management fee

4

(215)

(215)

(430)

(198)

(198)

(396)

Administrative expenses

5

(404)

-

(404)

(386)

-

(386)

Finance costs of borrowings

7

(172)

(172)

(344)

(164)

(164)

(328)



_______

_______

______

_______

_______

_______



(791)

(387)

(1,178)

(748)

(362)

(1,110)



_______

_______

______

_______

_______

_______

Profit/(loss) before taxation


4,125

(1,299)

2,826

3,947

12,400

16,347









Taxation

8

(19)

-

(19)

(22)

20

(2)



_______

_______

______

_______

_______

_______

Profit/(loss) attributable to equity holders of the Company


4,106

(1,299)

2,807

3,925

12,420

16,345



_______

_______

______

_______

_______

_______

Earnings per Ordinary share (pence)

10

13.69

(4.33)

9.36

13.08

41.41

54.49



_______

_______

______

_______

_______

_______









The Company does not have any income or expense that is not included in profit for the year, and therefore the "Profit for the year" is also the "Total comprehensive income for the year", as defined in IAS 1 (revised).

The total column of this statement represents the Statement of Comprehensive Income of the Company, prepared in accordance with IFRS. The revenue and capital columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies.

All items in the above statement derive from continuing operations.

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

 

 



BALANCE SHEET

 

 



As at

As at



31 March 2018

31 March 2017


Notes

£'000

£'000

Non-current assets




Ordinary shares


69,419

72,118

Convertibles


550

575

Preference shares


26,572

25,133



__________

__________

Securities at fair value

11

96,541

97,826



__________

__________

Current assets




Other receivables

12

935

1,108

Cash and cash equivalents


2,262

1,773



__________

__________



3,197

2,881



__________

__________

Creditors: amounts falling due within one year




Trade and other payables


(276)

(230)

Short-term borrowings


(9,000)

(19,000)



__________

__________


13

(9,276)

(19,230)



__________

__________

Net current liabilities


(6,079)

(16,349)



__________

__________

Total assets less current liabilities


90,462

81,477





Non-current liabilities




Long-term borrowings

13

(9,997)

-



__________

__________

Net assets


80,465

81,477



__________

__________

Share capital and reserves




Called-up share capital

15

15,049

15,049

Share premium account


19,308

19,308

Capital reserve

16

39,313

40,612

Revenue reserve


6,795

6,508



__________

__________

Equity shareholders' funds


80,465

81,477



__________

__________

Net asset value per Ordinary share (pence)

17

268.24

271.61



__________

__________

 

 



STATEMENT OF CHANGES IN EQUITY

 

Year ended 31 March 2018








Share





Share

premium

Capital

Revenue



capital

account

reserve

reserve

Total


£'000

£'000

£'000

£'000

£'000

 As at 31 March 2017

15,049

19,308

40,612

6,508

81,477

 (Loss)/profit for the year

-

-

(1,299)

4,106

2,807

 Equity dividends (see note 9)

-

-

-

(3,819)

(3,819)


_______

________

_______

_______

_______

 As at 31 March 2018

15,049

19,308

39,313

6,795

80,465


_______

________

_______

_______

_______

 Year ended 31 March 2017








Share





Share

premium

Capital

Revenue



capital

account

reserve

reserve

Total


£'000

£'000

£'000

£'000

£'000

 As at 31 March 2016

15,049

19,308

28,192

6,253

68,802

 Profit for the year

-

-

12,420

3,925

16,345

 Equity dividends (see note 9)

-

-

-

(3,670)

(3,670)


_______

________

_______

_______

_______

 As at 31 March 2017

15,049

19,308

40,612

6,508

81,477


_______

________

_______

_______

_______

The revenue reserve represents the amount of the Company's reserves distributable by way of dividend.


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

 

 



CASH FLOW STATEMENT

 


Year ended

Year ended


31 March 2018

31 March 2017


£'000

£'000

Net cash inflow from operating activities



Dividend income received{A}

4,740

3,164

Interest income received

-

721

Options premium received

176

207

Other income

-

56

Money market interest received

4

5

Management fee paid

(426)

(385)

Other cash expenses

(415)

(349)


_________

__________

Cash generated from operations

4,079

3,419




Interest paid

(310)

(327)

Overseas tax paid

(26)

(2)


_________

__________

Net cash inflows from operating activities

3,743

3,090


_________

__________

Cash flows from investing activities



Purchases of investments{A}

(11,251)

(8,833)

Sales of investments

11,859

9,313


_________

__________

Net cash inflow from investing activities

608

480


_________

__________

Cash flows from financing activities



Equity dividends paid

(3,819)

(3,670)

Loan arrangement fees

(6)

-


_________

__________

Net cash outflow from financing activities

(3,825)

(3,670)


_________

__________

Increase/(decrease) in cash and cash equivalents

526

(100)


_________

__________

Reconciliation of net cash flow to movements in cash and cash equivalents



Increase/(decrease) in cash and cash equivalents as above

526

(100)

Net cash and cash equivalents at start of year

1,773

1,873

Effect of foreign exchange rate changes

(37)

-


_________

__________

Net cash and cash equivalents at end of year

2,262

1,773


_________

__________




{A} Non-cash transactions during the year comprised stock dividends of £79,000 (2017 - £259,000).

 



NOTES TO THE FINANCIAL STATEMENTS

For the year ended 31 March 2018

 

1.

Principal activity


The Company is a closed-end investment company, registered in England and Wales No 00386561, with its Ordinary shares listed on the London Stock Exchange.

 

2.

Accounting policies


(a)

Basis of accounting



The financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"), as adopted by the International Accounting Standards Board ("IASB"), and interpretations issued by the International Reporting Interpretations Committee of the IASB ("IFRIC"). The Company adopted all of the IFRS which took effect during the year including amendments to IAS 7 which requires entities to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes. A reconciliation of changes in financing activities during the year is provided in note 14.






The financial statements have also been prepared in accordance with the AIC's Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' issued in November 2014 and updated in February 2018 with consequential amendments (applicable for accounting periods beginning on or after 1 January 2019 but adopted early).






The Company's assets consist substantially of equity shares in companies listed on recognised stock exchanges and in most circumstances are 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. The Directors believe that the Company has adequate resources to continue in operational existence for the foreseeable future and, for the above reasons, they continue to adopt the going concern basis in preparing the financial statements.






At the date of authorisation of these financial statements, the following Standards and Interpretations were effective for annual periods beginning on or after 1 January 2018:



IFRS 9 - Financial Instruments (revised)



IFRS 15 - Revenue from Contracts with Customers



IFRS 16 - Leasing (effective for annual periods beginning on or after 1 January 2019)






The following amendments to Standards were effective during the year:



IAS 7 - Disclosure iniative



IAS 12 - Recognition of Deferred Tax Assets for Unrealised Assets



IFRS 12 (AI 2014-2016) - Clarification of the scope of the Standard






The following amendments to Standards are all effective for annual periods beginning on or after 1 January 2018:



IFRS 15 - Clarifications



IFRS 15 - Effective date of IFRS 15






The following amendments to Standards are all effective for annual periods beginning on or after 1 January 2019:



IFRS 9 - Prepayment Features with Negative Compensation



IAS 12 (AI 2015-17) - Income tax consequences of payments on financial instruments classified as equity






In addition, under the Annual Improvements to IFRSs 2014 - 2016 Cycle, a number of Standards are included for annual periods beginning on or after 1 January 2017.






The Company intends to adopt the Standards and Interpretations in the reporting period when they become effective and the Board does not anticipate that the adoption of these Standards and Interpretations in future periods will materially impact the Company's financial results although there will be revised presentations to the Financial Statements and additional disclosures. In forming this opinion the Board notes the fundamental rewrite of accounting rules for financial instruments under IFRS 9, which is applicable for annual periods commencing 1 January 2018 and introduces a new classification model for financial assets. Financial assets are classified according to their contractual cash flow characteristics and the business models under which they are held. The Company's portfolio includes preference shares, which have contractual cash flows and the Board has determined it will be appropriate to continue to classify these securities at fair value through profit or loss as they are managed on a fair value basis rather than to collect cash flows. Additionally, the Board does not believe that IFRS 15 will have any impact on the financial statements of the Company as it does not have revenue from contracts with customers.





(b)

Investments



All investments have been designated upon initial recognition at fair value through profit or loss. This is because all investments are considered to form part of a group of financial assets which is evaluated on a fair value basis. Investments are recognised or derecognised on the trade date where a purchase or sale is under a contract whose terms require delivery within the timeframe established by the market concerned.






The fair value of the financial instruments is based on their quoted bid price at the Balance Sheet date, without deduction for any estimated future selling costs.






Changes in the value of investments held at fair value through profit or loss and gains and losses on disposal are recognised in the Statement of Comprehensive Income as "Gains/(losses) on investments". Also included within this are transaction costs in relation to the purchase or sale of investments, including the difference between the purchase price of an investment and its bid price at the date of purchase.





(c)

Income



Dividend income from equity investments, including all ordinary shares and all preference shares, certain of which have been reclassified as equity instruments during the year from debt securities, is accounted for when the shareholders' rights to receive payment have been established, normally the ex-dividend date.






If a scrip dividend is taken in lieu of a cash dividend, the net amount of the cash dividend declared is credited to the revenue account. Any excess in the value of the shares received over the amount of the cash dividend foregone is recognised as capital.






In prior years certain preference shares had been classified as debt securities and interest on them was accounted for on an effective interest rate basis. Any amortisation or accretion of the premium or discount respectively on acquisition as a result of using this basis was allocated against the capital reserve. The SORP recommends that such amortisation should be allocated against revenue. The Directors, as advised, believed this treatment was not appropriate for a high yielding investment trust which buys and sells debt securities, and that any premium or discount included in the price of such an investment was a capital item (see notes 3 and 11 for more detailed disclosures of the impact of the change in accounting treatment).






Interest from deposits is dealt with on an effective interest basis.






Underwriting commission is recognised when the underwriting services are provided and is taken to revenue, unless any shares underwritten are required to be taken up, in which case the proportionate commission received is deducted from the cost of the investment.





(d)

Expenses



All expenses are accounted for on an accruals basis. In respect of the analysis between revenue and capital items presented within the Statement of Comprehensive Income, all expenses have been presented as revenue items except those where a connection with the maintenance or enhancement of the value of the investments held can be demonstrated. Accordingly the management fee and finance costs have been allocated 50% to revenue and 50% to capital, in order to reflect the Directors' expected long-term view of the nature of the future investment returns of the Company.





(e)

Borrowings



Short-term borrowings, which comprise interest bearing bank loans and overdrafts, are initially recognised at cost, being the fair value of the consideration received, net of any issue expenses. The finance costs, being the difference between the net proceeds of borrowings and the total amount of payments that require to be made in respect of those borrowings, accrue evenly over the life of the borrowings.






Long-term borrowings are measured initially at the fair value of the consideration received, net of any issue expenses, and subsequently at amortised cost using the effective interest method.





(f)

Taxation



The 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 expenditure that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company has no liability for current tax.






Deferred tax is recognised in respect of all temporary differences at the Balance Sheet date, where transactions or events that result in an obligation to pay more tax in the future or right to pay less tax in the future have occurred at the Balance Sheet date. 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 temporary differences can be deducted. Deferred tax assets and liabilities are measured at the rates applicable to the legal jurisdictions in which they arise, using tax rates that are expected to apply at the date the deferred tax position is unwound.





(g)

Foreign currencies



Transactions involving foreign currencies are converted at the rate ruling at the time of the transaction. Monetary assets and liabilities and those carried at fair value through profit or loss in foreign currencies are translated at the closing rates of exchange at the Balance Sheet date. Any gain or loss arising from a change in exchange rate subsequent to the date of the transaction is included as an exchange gain or loss in capital reserve or the revenue account as appropriate.





(h)

Derivatives



The Company may enter into certain derivatives (e.g. traded options). Traded option contracts are restricted to writing out-of-the-money options with a view to generating income. Premiums received on traded option contracts are recognised as income evenly over the period from the date they are written to the date when they expire or are exercised or assigned. Gains and losses on the underlying shares acquired or disposed of as a result of options exercised are included in the capital account. Unexpired traded option contracts at the year end are accounted for at their fair value.





(i)

Cash and cash equivalents



Cash and cash equivalents comprises cash in hand and at banks and short-term deposits.





(j)

Receivables and payables



Other receivables and prepayments do not carry any interest and are short-term in nature, and are, accordingly, stated at their recoverable amount. Payables are non-interest bearing and are stated at their payable amount.





(k)

Dividends payable



Dividends are recognised from the date on which they are declared and approved by shareholders. Interim dividends are recognised when paid.

 



2018

2017

3.

Income

£'000

£'000


Income from listed investments




UK dividend incomeA

4,427

3,562


Overseas dividend income

238

41


Interest income from investmentsA

-

568


Money market interest

4

4


Stock dividends

79

259



_________

__________



4,748

4,434



_________

__________


Other income from investment activity




Deposit interest

1

1


Traded option premiums

167

204


Underwriting commission

-

1


Other income

-

55



_________

__________



168

261



_________

__________


Total income

4,916

4,695



_________

__________






A During the year the Company's preference share holdings previously classified as debt securities (interest income) were reclassifed as equity instruments (UK dividend income).




In 2017 the amount of £(101,000) included in the capital column of Interest Income represents the amortisation of the premium on the purchase of preference shares referred to in note 2 (c), which were previously classified as 'debt securities'. During the year ended 31 March 2018 and following a review of the previous accounting treatment, the Company changed the classification of its preference shares to 'equity securities' and reversed the accumulated amortisation of £1,482,000 that had been recorded in prior years (see note 11).

 



2018

2017



Revenue

Capital

Total

Revenue

Capital

Total

4.

Management fees

£'000

£'000

£'000

£'000

£'000

£'000


Management fees

215

215

430

198

198

396



_______

________

_______

________

________

________










The management fee is based on 0.45% per annum up to £100 million and 0.40% over £100 million, by reference to the net assets of the Company and including any borrowings up to a maximum of £30 million, and excluding commonly managed funds, calculated monthly and paid quarterly. The fee is allocated 50% to revenue and 50% to capital. The agreement is terminable on six months' notice. The total of the fees paid and payable during the year to 31 March 2018 was £430,000 (2017 - £396,000) and the balance due to AFML at the year end was £105,000 (2017 - £102,000). The Company held an interest in a commonly managed investment trust, Aberdeen Smaller Companies Income Trust PLC, in the portfolio during the year to 31 March 2018 (2017 - same). The value attributable to this holding is excluded from the calculation of the management fee payable by the Company.

 



2018

2017

5.

Administrative expenses

£'000

£'000


Directors' remuneration

115

95


Auditor's remuneration:




-     Fees payable to the Company's Auditor for the audit of the Company's annual accounts

21

21


- Non-audit services




-     fees payable to the Company's Auditor for iXBRL tagging services

2

2


Promotional activities

78

83


Professional fees

35

14


Directors' & Officers' liability insurance

10

10


Trade subscriptions

27

26


Share plan costs

17

16


Registrars fees

33

49


Printing, postage and stationery

25

29


Other administrative expenses

41

41



_________

__________



404

386



_________

__________






The management agreement with AFML also provides for the provision of promotional activities, which AFML has delegated to Aberdeen Asset Managers Limited. The total fees paid and payable under the management agreement in relation to promotional activities were £78,000 (2017 - £83,000). The Company's management agreement with AFML also provides for the provision of company secretarial and administration services to the Company; no separate fee is charged to the Company in respect of these services, which have been delegated to Aberdeen Asset Management PLC.




With the exception of Auditor's remuneration for the statutory audit, all of the expenses above, including fees for non-audit services, include irrecoverable VAT where applicable.  For the Auditor's remuneration for the statutory audit, irrecoverable VAT amounted to £4,000 (2017 - £4,000).

 

6.

Directors' remuneration


The Company had no employees during the year (2017 - nil). No pension contributions were paid for Directors (2017 - £nil).

 



2018

2017



Revenue

Capital

Total

Revenue

Capital

Total

7.

Finance costs of borrowings

£'000

£'000

£'000

£'000

£'000

£'000


On bank loans

172

172

344

164

164

328



_______

________

_______

________

_______

________

 





2018



2017





Revenue

Capital

Total

Revenue

Capital

Total

8.

Taxation

£'000

£'000

£'000

£'000

£'000

£'000


(a)

Analysis of the charge for the year









UK corporation tax

 -

 -

 -

20

(20)

 -



Overseas tax

19

 -

19

2

 -

2




________

________

_______

________

________

_______



Total tax charge

19

 -

19

22

(20)

2




________

________

_______

________

________

_______











(b)

Factors affecting the tax charge for the year



The tax assessed for the year is lower than the effective rate of corporation tax in the UK. The differences are explained in the reconciliation below:







2018

2017




Revenue

Capital

Total

Revenue

Capital

Total




£'000

£'000

£'000

£'000

£'000

£'000



Profit before taxation

4,125

(1,299)

2,826

3,947

12,400

16,347












Corporation tax at an effective rate of 19% (2017 - 20%)

784

(247)

537

789

2,479

3,268



Effects of:









Non-taxable UK dividend income 

(844)

-

(844)

(760)

-

(760)



Excess management expenses not utilised

105

73

178

-

52

52



Overseas withholding tax

19

-

19

2

-

2



Non-taxable overseas dividends

(45)

-

(45)

(9)

-

(9)



Losses/(gains) on investments not taxable

-

167

167

-

(2,571)

(2,571)



Losses on currency movements

-

7

7

-

-

-



Disallowed expenses

-

-

-

-

20

20




________

________

_______

_______

________

_______



Total tax charge

19

 -

19

22

(20)

2




________

________

_______

________

________

_______












At 31 March 2018 the Company had surplus management expenses and loan relationship debits with a tax value of £4,338,000 (2017 - £4,126,000) in respect of which a deferred tax asset has not been recognised. This is because the Company is not expected to generate taxable income in a future period in excess of the deductible expenses of that future period and, accordingly, it is unlikely that the Company will be able to reduce future tax liabilities through the use of existing surplus expenses.

 



2018

2017

9.

Dividends

£'000

£'000


Amounts recognised as distributions to equity holders in the period:




Third interim dividend for 2017 of 3.00p (2016 - 3.00p) per share

900

900


Final dividend for 2017 of 3.75p (2016 - 3.25p) per share

1,125

975


First two interim dividends for 2018 totalling 6.00p (2017 - 6.00p) per share

1,800

1,800


Refund of unclaimed dividends from previous periods

(8)

(7)



_______

_______



3,817

3,668






3.5% Cumulative Preference shares

2

2



_______

_______


Total

3,819

3,670



_______

_______






The third interim dividend of 3.00p for the year to 31 March 2018, which was paid on 27 April 2018, and the proposed final dividend of 4.00p for the year to 31 March 2018, payable on 27 July 2018, have not been included as liabilities in these financial statements.




Set out below are the total ordinary dividends payable in respect of the financial year, which is the basis on which the requirements of Sections 1158-1159 of the Corporation Tax Act 2010 are considered:







2018

2017



£'000

£'000


Three interim dividends for 2018 totalling 9.00p (2017 - 9.00p) per share

2,700

2,700


Proposed final dividend for 2018 of 4.00p (2017 - 3.75p) per share

1,200

1,125



_______

_______



3,900

3,675



_______

_______

 



2018

2017

10.

Returns per share

£'000

£'000


Returns per Ordinary share are based on the following figures:




Revenue return

4,106

3,925


Capital return

(1,299)

12,420



_______

_______


Total return

2,807

16,345



_______

_______


Weighted average number of Ordinary shares

29,997,580

29,997,580



__________

_________

 



2018

2017

 



Listed

Listed

 



investments

investments

 

11.

Non-current assets - Securities at fair value

£'000

£'000

 


Opening book cost

76,532

76,648

 


Opening investment holdings gains

21,294

8,501

 


Opening valuation

97,826

85,149

 


Purchases

11,313

9,092

 


Sales - proceeds

(11,727)

(9,169)

 


Sales - net realised (losses)/gains

(1,567)

62

 


Accreted/(amortised) cost adjustmentA

1,482

(101)

 


Fair value movement in the year

(786)

12,793

 



_______

_______

 


Total investments held at fair value through profit or loss

96,541

97,826

 



_______

_______

 





 


A In 2017 the amount of £(101,000) represents the amortisation of the premium on the purchase of preference shares, which were previously classified as 'debt securities'. During the year ended 31 March 2018 and following a review of the previous accounting treatment, the Company changed the classification of its preference shares to 'equity securities' and reversed the accumulated amortisation of £1,482,000 that had been recorded in prior years. There is no impact on the fair value of investments as a result of this change, nor on the net asset value per share of the Company, the revenue or capital earnings per share, or any of the individual reserve balances.

 





 



2018

2017

 



Listed

Listed

 



investments

investments

 



£'000

£'000

 


Closing book cost

76,033

76,532

 


Closing investment holdings gains

20,508

21,294

 



_______

_______

 


Total investments held at fair value through profit or loss

96,541

97,826

 



_______

_______

 





 



2018

2017

 


(Losses)/gains on investments

£'000

£'000

 


Net realised (losses)/gains on sales of investmentsA

(1,472)

350

 


Cost of call options exercised

(95)

(288)

 



_______

_______

 


Net realised (losses)/gains on sales

(1,567)

62

 


Movement in fair value of investments

(701)

12,806

 


Cost of put options assigned

(85)

(13)

 


Movement in appreciation of traded options held

(4)

8

 



_______

_______

 



(2,357)

12,863

 



_______

_______

 





 


A Includes losses realised on the exercise of traded options of £179,000 (2017 - £301,000) which are reflected in the capital column of the Statement of Comprehensive Income.

 



 


The cost of the exercising of call options and the assigning of put options is the difference between the market price of the underlying shares and the strike price of the options. The premiums earned on options expired, exercised or assigned of £167,000 (2017 - £204,000) have been dealt with in the revenue account.

 



 


The movement in the fair value of traded option contracts has been calculated in accordance with the accounting policy stated in note 2(h) and has been charged to the capital reserve.

 



 


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 on purchases of investments in the year was £41,000 (2017 - £41,000).  The total costs on sales of investments in the year was £3,000 (2017 - £5,000).

 



 


All investments are categorised as held at fair value through profit and loss and were designated as such upon initial recognition.

 



 


At 31 March 2018 the Company held the following investments comprising more than 3% of the class of share capital held:

 












Class



Country of

Number of

Class of

held


Company

Incorporation

shares held

shares held

%


Aberdeen Smaller Companies Income Trust PLC

Scotland

3,120,476

Ordinary

14.1


Ecclesiastical Insurance Office

England

4,240,000

8 5/8% Cum Pref

4.0


Royal & Sun Alliance

England

4,350,000

7 3/8% Cum Pref

3.5


General Accident

Scotland

3,548,000

7.875% Cum Pref

3.2

 



2018

2017

12.

Other receivables

£'000

£'000


Accrued income and prepayments

917

982


Other debtors

2

115


Option contract premium

16

11



_______

_______



935

1,108



_______

_______


None of the above amounts is overdue.



 



2018

2017

13.

Current liabilities

£'000

£'000


Short-term bank loans

9,000

19,000


Option contracts

48

30


Other creditors

228

200



_______

_______



9,276

19,230



_______

_______






Included above are the following amounts owed to AFML for management and secretarial services and for the promotion of the Company.







2018

2017



£'000

£'000


Other creditors

133

128



_______

_______







2018

2017


Non-current liabilities

£'000

£'000


Long-term bank loan

10,000

-


Loan arrangement fees

(3)

-



_______

_______



9,997

-



_______

_______


The Company has an agreement with Scotiabank Europe PLC to provide a loan facility to 30 October 2020 for up to £20,000,000. A £10,000,000 fixed rate loan was drawn down on 1 November 2017 at a rate of 1.956%. This rate is fixed until maturity on 30 October 2020. In addition, at the year end £9,000,000 had been drawn down at an all-in interest rate of 1.45278%, maturing on 3 April 2018. At the date of signing this report the amount drawn down was unchanged at £9,000,000 with an all-in interest rate of 1.46687%, maturing on 4 June 2018.




The terms of the Scotiabank Europe facility contain covenants that gross borrowings may not exceed one-third of adjusted net assets and that adjusted net assets may not be less than £37 million. The Company has met these covenants with significant headroom since inception of the agreement until the date of this Report.




The arrangement expenses incurred on the draw down of the loan are being amortised over the three year term of the loan resulting in a reduction to the carrying value of the loan drawn down being reduced by £3,000 (2017 - £Nil).

 



2018

2017

14.

Analysis of changes in financing during the year

£'000

£'000


Opening balance at 1 April

19,000

19,000


Cashflow:




Loan arrangement fees

(6)

-


Non cash:




Unamortised loan arrangement fees

3

-



_______

_______


Closing balance at 31 March

18,997

19,000



_______

_______

 



2018

2017

15.

Called up share capital

Number

£'000

Number

£'000


Allotted, called up and fully paid






Ordinary shares of 50 pence each

29,997,580

14,999

29,997,580

14,999


3.5% Cumulative Preference shares of £1 each

50,000

50

50,000

50




_______


_______




15,049


15,049




_______


_______

 



2018

2017

16.

Capital reserve

£'000

£'000


At 31 March 2017

40,612

28,192


Net (losses)/gains on sales of investments during year

(1,567)

62


Movement in fair value gains on investments

(786)

12,793


Accreted/(amortised) cost adjustment charged to capital

1,482

(101)


Management fees

(215)

(198)


Interest on bank loans

(172)

(164)


Tax relief on capitalised expenses

-

20


Currency (losses)/gains

(37)

-


Traded options

(4)

8



_______

_______


At 31 March 2018

39,313

40,612



_______

_______

 

17.

Net asset value per Ordinary share 


The net asset value per share and the net assets attributable to the Ordinary shareholders at the year end were as follows:



2018

2017


Net assets attributable

£80,465,000

£81,477,000


Number of Ordinary shares in issue

29,997,580

29,997,580


Net asset value per share

268.24p

271.61p






The Company also uses net asset value (ex income) per share as an alternative performance measure. This is calculated as follows:







2018

2017


Net assets attributable

£80,465,000

£81,477,000


Less: Revenue for the year

£(4,106,000)

£(3,925,000)


Add: Dividends during the year

£1,792,000

£1,793,000


Net assets (ex income)

£78,151,000

£79,345,000


Number of Ordinary shares in issue

29,997,580

29,997,580


NAV (ex income) per share

260.52p

264.50p

 

18.

Financial instruments


Risk management


The Company's investment activities expose it to various types of financial risk associated with the financial instruments and markets in which it invests. 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 may from time to time use FTSE options for protection of the loss of value to the portfolio.




Subject to Board approval, the Company also has the ability to enter into derivative transactions, in the form of traded options, for the purpose of enhancing income returns and portfolio management. During the year, the Company entered into certain derivative contracts. As disclosed in note 3, the premium received and fair value changes in respect of options written in the year were £167,000 (2017 - £204,000). Positions closed during the year realised a loss of £179,000 (2017 - £301,000). The largest position in derivative contracts held during the year at any given time was £94,000 (2017 - £166,000). The Company had open positions in derivative contracts at 31 March 2018 valued at a liability of £48,000 (2017 - £30,000) as disclosed in note 13.




The Board has delegated the risk management function to AFML under the terms of its management agreement with AFML (further details of which are included under note 4). The Board regularly reviews and agrees policies for managing each of the key financial risks identified with the Manager. The types of risk and the Manager's approach to the management of each type of risk, are summarised below. Such approach has been applied throughout the year and has not changed since the previous accounting period. The numerical disclosures exclude short-term debtors and creditors given their relatively low value.




Risk management framework


The directors of AFML collectively assume responsibility for AFML's obligations under the AIFMD including reviewing investment performance and monitoring the Company's risk profile during the year.






The Group's Internal Audit Department is independent of the Risk Division and reports directly to the Group's co-CEOs and to the Audit Committee of the Group's Board of Directors. The Internal Audit Department is responsible for providing an independent assessment of the Group's control environment.




The Manager conducts its risk oversight function through the operation of the Group's risk management processes and systems which are embedded within the Group's operations. The Group's Risk Division supports management in the identification and mitigation of risks and provides independent monitoring of the business. The Division includes Compliance, Business Risk, Market Risk, Risk Management and Legal. The team is headed up by the Group's Head of Risk, who reports to the Group's co-CEOs. The Risk Division achieves its objective through embedding the Risk Management Framework throughout the organisation using the Group's operational risk management system ("SWORD").




The Group's corporate governance structure is supported by several committees to assist the board of directors of Standard Life Aberdeen plc, its subsidiaries and the Company to fulfil their roles and responsibilities. The Group's Risk Division is represented on all committees, with the exception of those committees that deal with investment recommendations. The specific goals and guidelines on the functioning of those committees are described on the committees' terms of reference.




Risk management


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





(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 convertibles and preference shares;



-     the level of income receivable on cash deposits; and



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






Management of the risk



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.






The Board imposes borrowing limits to ensure gearing levels are appropriate to market conditions and reviews these on a regular basis. Borrowings comprise fixed rate, revolving, and uncommitted facilities. The fixed rate facilities are used to finance opportunities at low rates and, the revolving and uncommitted facilities to provide flexibility in the short-term. Current bank covenant guidelines state that the gross borrowings will not exceed one-third of adjusted net assets.






The Board reviews on a regular basis the value of investments in convertibles and preference shares.






Interest rate profile



The interest rate risk profile of the portfolio of financial assets and liabilities (excluding ordinary shares and convertibles) at the Balance Sheet date was as follows:











Weighted







average







period

Weighted






for which

average






rate is

interest

Fixed

Floating




fixed

rate

rate

rate



As at 31 March 2018

Years

%

£'000

£'000



Assets







UK preference shares

-

8.50

26,572

-



Cash and cash equivalents

-

0.29

-

2,262




_______

_______

_______

_______



Total assets

-

-

26,572

2,262




_______

_______

_______

_______



Liabilities







Short-term bank loans

0.09

1.45

(9,000)

-



Long-term bank loans

2.58

1.96

(9,997)

-




_______

_______

_______

_______



Total liabilities

-

-

(18,997)

-




_______

_______

_______

_______











Weighted







average







period

Weighted






for which

average






rate is

interest

Fixed

Floating




fixed

rate

rate

rate



As at 31 March 2017

Years

%

£'000

£'000



Assets







UK preference shares

-

8.50

25,133

-



Cash and cash equivalents

-

0.29

-

1,773




_______

_______

_______

_______



Total assets

-

-

25,133

1,773




_______

_______

_______

_______



Liabilities







Short-term bank loans

0.72

1.66

(19,000)

-




_______

_______

_______

_______



Total liabilities

-

-

(19,000)

-




_______

_______

_______

_______










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



The UK preference shares assets have no maturity date.



Short-term debtors and creditors (with the exception of bank loans) have been excluded from the above tables.






Interest rate sensitivity



The sensitivity analyses below have been determined based on the exposure to interest rates for non-derivative instruments at the Balance Sheet date and 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 before tax for the year ended 31 March 2018 would increase/decrease by £23,000 (2017 - £18,000). This is mainly attributable to the Company's exposure to interest rates on its floating rate cash balances. These figures have been calculated based on cash positions at each year end.



-     profit before tax for the year ended 31 March 2018 would increase/decrease by £1,183,000 (2017 - increase/decrease by £2,139,000). This is mainly attributable to the Company's exposure to interest rates on its investments in convertibles and preference shares. This is based on a Value at Risk ('VaR') calculated at a 99% confidence level.






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. The risk parameters used will also fluctuate depending on the current market perception.






Currency risk



A small proportion of the Company's investment portfolio is invested in overseas securities whose values are subject to fluctuation due to changes in exchange rates.






Management of the risk



The revenue account is subject to currency fluctuations arising on dividends received in foreign currencies and, indirectly, due to the impact of foreign exchange rates upon the profits of investee companies. The Company does not hedge this currency risk. The Company does not have any exposure to foreign currency liabilities.






Price risk



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






Management of the risk



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 to specific sectors 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 recognised stock exchanges.






Price sensitivity



If market prices at the Balance Sheet date had been 10% higher or lower while all other variables remained constant, the profit before tax attributable to Ordinary shareholders for the year ended 31 March 2018 would have increased/decreased by £6,942,000 (2017 - increase/decrease of £7,212,000). This is based on the Company's equity portfolio held at each year end.





(ii)

Liquidity risk



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






Management of the risk



Liquidity risk is not considered to be significant as the Company's assets comprise mainly readily realisable securities, which can be sold to meet funding commitments if necessary.






Short-term flexibility is achieved through the use of loan facilities, details of which can be found in note 13. Under the terms of the loan facility, the Manager provides the lender with loan covenant reports on a monthly basis, to provide the lender with assurance that the terms of the facility are not being breached. The Manager will also review the credit rating of a lender on a regular basis.






The Board imposes borrowing limits to ensure gearing levels are appropriate to market conditions and reviews these on a regular basis. Borrowings comprise a revolving loan facility and a fixed term loan facility. The Board has imposed a maximum equity gearing of 35% which constrains the amount of gearing that can be invested in equities which, in normal market conditions, are more volatile than the convertibles and preference shares part of the portfolio. Details of borrowings at 31 March 2018 are shown in note 13.






Maturity profile



The maturity profile of the Company's financial liabilities at the Balance Sheet date was as follows:










Within

Within

More than




1 year

1-5 years

5 years



At 31 March 2018

£'000

£'000

£'000



Trade and other payables

(276)

-

-



Short-term bank loans

(9,012)

-

-



Long-term bank loans

(196)

(10,310)

-




_______

_______

_______




(9,484)

(10,310)

-




_______

_______

_______










Within

Within

More than




1 year

1-5 years

5 years



At 31 March 2017

£'000

£'000

£'000



Trade and other payables

(230)

-

-



Short-term bank loans

(19,640)

-

-




_______

_______

_______




(19,870)

-

-




_______

_______

_______








(iii)

Credit risk






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






Management of the risk



The risk is managed as follows:



-     where the Investment Manager makes an investment in a bond, corporate or otherwise, the credit rating of the issuer is taken into account so as to minimise the risk to the Company of default;



-     transactions involving derivatives are entered into only with investment banks, the credit rating of which is taken into account so as to minimise the risk to the Company of default;



-     investment transactions are carried out with a large number of brokers, whose credit-standing is reviewed periodically by the investment manager, 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 Custodian's records are performed on a daily basis to ensure discrepancies are investigated on a timely basis. The Standard Life Aberdeen Group's Compliance department carries out periodic reviews of the Custodian's operations and reports its finding to the Standard Life Aberdeen Group's Risk Management Committee and to the Board of the Company. This review will also include checks on the maintenance and security of investments held;



-     transactions involving derivatives, structured notes and other arrangements wherein the creditworthiness of the entity acting as broker or counterparty to the transaction is likely to be of sustained interest are subject to rigorous assessment by the Investment Manager of the credit worthiness of that counterparty. The Company's aggregate exposure to each such counterparty is monitored regularly by the Board; and



-     cash is held only with reputable banks with high quality external credit enhancements.






It is the Investment Manager's policy to trade only with A- and above (Long Term rated) and A-1/P-1 (Short Term rated) counterparties.






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






Credit risk exposure



In summary, compared to the amounts in the Balance Sheet, the maximum exposure to credit risk at 31 March 2018 was as follows:








2018

2017




Balance

Maximum

Balance

Maximum




Sheet

exposure

Sheet

exposure




£'000

£'000

£'000

£'000



Non-current assets







Quoted convertibles and preference shares at fair value through profit or loss

27,122

27,122

25,708

25,708



Current assets







Trade and other receivables

18

18

126

126



Accrued income

905

905

972

982



Cash and cash equivalents

2,262

2,262

1,773

1,773




_______

_______

_______

_______




30,307

30,307

28,579

28,589




_______

_______

_______

_______










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






Fair value of financial assets and liabilities



The fair value of the long-term loan has been calculated at £10,034,000 as at 31 March 2018 (2017 - not applicable) compared to an accounts value in the financial statements of £9,997,000 (2017 - not applicable) (note 13). The fair value of each loan is determined by aggregating the expected future cash flows for that loan discounted at a rate comprising the borrower's margin plus an average of market rates applicable to loans of a similar period of time and currency. The carrying values of fixed asset investments are stated at their fair values, which have been determined with reference to quoted market prices. Traded options contracts are valued at fair value which have been determined with reference to quoted market values of the contracts. The contracts are tradeable on a recognised exchange. For all other short-term debtors and creditors, their book values approximates to fair values because of their short-term maturity.

 

19.

Fair value hierarchy


IFRS 13 'Financial Value Measurement' 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 levels:





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 liability, either directly (ie as prices) or indirectly (ie derived from prices); and


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




The financial assets and liabilities measured at fair value in the statement of financial position are grouped into the fair value hierarchy at 31 March 2018 as follows:











Level 1

Level 2

Level 3

Total



Note

£'000

£'000

£'000

£'000


Financial assets at fair value through profit or loss







Quoted investments

a)

96,541

-

-

96,541









Financial liabilities at fair value through profit or loss







Derivatives

b)

-

(48)

-

(48)




_______

_______

_______

_______


Net fair value


96,541

(48)

-

96,493




_______

_______

_______

_______











Level 1

Level 2

Level 3

Total


As at 31 March 2017

Note

£'000

£'000

£'000

£'000


Financial assets at fair value through profit or loss







Quoted investments

a)

97,826

-

-

97,826









Financial liabilities at fair value through profit or loss







Derivatives

b)

-

(30)

-

(30)




_______

_______

_______

_______


Net fair value


97,826

(30)

-

97,796




_______

_______

_______

_______









a)

Quoted investments








The fair value of the Company's quoted investments has been determined by reference to their quoted bid prices at the reporting date. Quoted investments included in Fair Value Level 1 are actively traded on recognised stock exchanges.





b)

Derivatives



The fair value of the Company's investments in Exchange Traded Options has been determined using observable market inputs on an exchange traded basis although not actively traded and therefore has been classed as Level 2.






The fair value of the Company's investments in Over the Counter Options has been determined using observable market inputs other than quoted prices and included within Level 2.

 

20.

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 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. This review includes the nature and planned level of gearing, which takes account of the Investment 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.

 

21.

Related party transactions


Directors' fees and interests


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




Transactions with the Manager


The Company has an agreement with Aberdeen Fund Managers Limited for the provision of management, secretarial, accounting and administration services and for the carrying out of promotional activities in relation to the Company. Details of transactions during the year and balances outstanding at the year end disclosed in notes 4 and 5.

 

22.

Alternative performance measures (unaudited)


Alternative performance measures are numerical measures of the Company's current, historical or future performance, financial position or cash flows, other than financial measures defined or specified in the applicable financial framework. The Company's applicable financial framework includes IFRS and the AIC SORP.




The Directors assess the Company's performance against a range of criteria which are viewed as particularly relevant for closed-end investment companies. 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 with debt at fair value 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 March 2018 and 31 March 2017.








Dividend


Share


2018

rate

NAV

price


31 March 2017

N/A

271.61p

243.25p


6 April 2017

3.00p

269.97p

237.75p


6 July 2017

3.75p

275.30p

250.00p


5 October 2017

3.00p

284.05p

271.75p


4 January 2018

3.00p

292.22p

287.00p


31 March 2018

N/A

268.24p

260.00p


Total return


3.3%

12.2%








Dividend


Share


2017

rate

NAV

price


31 March 2016

N/A

229.36p

202.00p


7 April 2016

3.00p

225.71p

200.00p


7 July 2016

3.25p

235.38p

203.25p


6 October 2016

3.00p

259.42p

231.00p


5 January 2017

3.00p

258.36p

227.63p


31 March 2017

N/A

271.61p

243.25p


Total return


24.5%

27.5%







Ongoing charges





Ongoing charges is considered to be an alternative performance measure. 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 and expressed as a percentage of the average net asset values throughout the year.







2018

2017


Investment management fees (£'000)

430

396


Administrative expenses (£'000)

404

386


Less: non-recurring charges (£'000)

(35)

-



_______

_______


Ongoing charges (£'000)

799

782



_______

_______


Average net assets (£'000)

84,343

74,911


Ongoing charges ratio

0.95%

1.04%

 

Additional Notes to Annual Financial Report

The Annual General Meeting will be held on 5 July 2018 at 12 noon at Bow Bells House, 1 Bread Street, London EC4M 9HH.

 

The Annual Financial Report Announcement is not the Company's statutory accounts. The above results for the year ended 31 March 2018 are an abridged version of the Company's full accounts, which have been approved and audited with an unqualified report. The 2017 and 2018 statutory accounts received unqualified reports from the Company's auditor and did not include any reference to matters to which the auditor drew attention by way of emphasis without qualifying the reports, and did not contain a statement under S.498 of the Companies Act 2006. The financial information for 2017 is derived from the statutory accounts for 2017 which have been delivered to the Registrar of Companies. The 2018 accounts will be filed with the Registrar of Companies in due course.

 

The Annual Report and Accounts will be posted to shareholders in June 2018 and copies will be available from the registered office of the Manager and on the Company's website, www.shiresincome.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.  Investors may not get back the amount they originally invested.

 

By order of the Board

Aberdeen Asset Management PLC

Company Secretary

29 May 2018

 

* 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.

 


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Annual Financial Report - RNS