Regulatory Story
Go to market news section View chart   Print
RNS

Annual Financial Report

Released 07:00 05-Dec-2017

RNS Number : 3559Y
Standard Life Equity Income Tst PLC
05 December 2017
 

STANDARD LIFE EQUITY INCOME TRUST PLC

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 30 SEPTEMBER 2017

 

 

Strategic Report

 

 

Chairman's Statement

 

Performance

I am very pleased to report the results for the year to 30 September 2017 which, in my view, amply justify the confidence in the Company which shareholders demonstrated by passing the continuation vote at last year's Annual General Meeting. The Net Asset Value Total Return for the year was 14.7%, which compares with 11.9% from the FTSE All-Share Index and, with a recovering investment performance as the year progressed, the discount on our shares narrowed slightly from 4.4% to 4.0%. This resulted in a Share Price Total Return to shareholders of 15.9%.

 

Although the Board was confident that there would be a recovery from the sharp reverse experienced in the aftermath of the Brexit referendum in June 2016, the performance, both in absolute and relative terms, did not start to improve until the second half of the financial year. The detailed reasons for this are discussed at length in the Manager's Report, but the results confirm the soundness of the index-agnostic, stock specific approach of our Manager and the skill of Thomas Moore in applying this approach to the Company's portfolio.

 

The recovery this year, combined with the good results achieved prior to 2016, mean that our longer-term record remains very good. Net Asset Value Total Return over the last five years has been 87.3% and the Share Price Total Return was 90.3% against the 61.2% Total Return from the FTSE All-Share Index. This demonstrates the degree to which truly active management can provide superior returns, even after taking account of the higher level of cost associated with active management, to which so much attention is being paid at present.

 

Earnings and Dividend

Our revenue account has continued to perform very well. Earnings per share for the year were 19.23p which equates to a 10% increase from last year's earnings of 17.48p. It is reassuring to note that the ordinary dividend receipts, as opposed to income from special dividends, rose by 12.9%. The great majority of our holdings have produced good results with consequent increases in dividends and there has continued to be a flow of special dividends.  The strong underlying growth in regular dividends gives us confidence that the revenue stream from the portfolio continues to be secure as we look forward into 2018 and that we will be able to extend our record of increasing our own dividends to shareholders.

 

The Board is recommending a final dividend of 5.5p. This is a 0.5p increase on 2016 and reflects the strength of the revenue account. The total dividend for the year is therefore 17.1p, an increase for the year of 11.0%. For comparison, the Retail Prices Index increased by 3.9% over the year to 30 September 2017. Subject to shareholder approval at the Annual General Meeting, to be held on 18 January 2018, this dividend will be paid on 22 January 2018 to shareholders on the register on 22 December 2017 with an associated ex-dividend date of 21 December 2017. This is the seventeenth successive increase in annual dividend and the Board aims to build on this track record. The Board has reviewed its dividend policy and is looking to spread the dividend payments more evenly in future. The Board expects to increase the dividend in 2018 by a minimum of 5%.

 

Key Performance Indicators (KPIs)

The KPIs by which performance of the Manager is measured are as follows:

 

•      NAV Total Return relative to the Company's benchmark

•      Share price (capital return); and

•      Premium or discount to net asset value.

 

A record of these KPIs, for the year under review, is included in the Financial Highlights. The ten year record is included in the Annual Report.

 

 

Total Return

Capital Return

 

Std Life Equity Income Trust

Net Asset Value*

FTSE

All-Share

Index

Std Life Equity

      Income Trust

Share price

FTSE

All-Share

Index

1 year

14.7%

11.9%

11.5%

7.8%

2 years

16.2%

30.8%

4.7%

21.4%

3 years

33.1%

27.8%

16.7%

14.6%

5 years

87.3%

61.2%

56.3%

35.0%

10 years

106.6%

75.2%

47.8%

22.1%

Source: Thomson Reuters Datastream. Data to 30 September 2017

* The Net Asset Value Total Returns are calculated under FRS 102 except that they include an adjustment for the third interim dividend of 4.0p which had been declared, but not paid, at the year end.

 

The table above illustrates how the Company has performed with regards to the Key Performance Indicators. It shows that over various different timeframes, from 1 year to 10 years up to 30 September 2017, the Company has outperformed its benchmark, the FTSE All-Share Index, on both a Net Asset Value Total Return basis and a share price capital return basis, with the exception of the two year return since 30 September 2015. The latter covers the Brexit referendum period, which affected the results last year.

 

The Board measures the level of the discount relative to the unweighted average discount of the other investment companies in the UK Equity Income sector. During the year the discount has traded between 11.3% and 2.6%. Over much of the last five years, the discount has been narrower than that of the sector average. It was only as the impact of the market reaction to the Brexit referendum result was felt that the discount widened. Since April 2017 it has been trading in line with or narrower than the sector average, and this has continued since the end of the financial year.

 

Gearing

The Board has set gearing parameters of between 5% net cash and 15% net gearing. As at 30 September 2017, the net gearing level was 9.9%. The Company continues to have a £30m bank facility with Scotiabank (Ireland) Ltd. This facility was in use throughout the year, with the average amount drawn down being slightly higher than last year, at £26.6m. The weighted cost of this borrowing was an extremely low 1.1%, well down from 2016's 1.5%. Being geared during a period of generally rising markets, and paying interest at a far lower rate than the yield on our portfolio, has had a positive effect of 1.2% on our results. Following the Bank of England's decision to raise interest rates in October 2017, the borrowing interest rate for the Company's loan has increased and is currently just over 1.3%.

 

Share Capital

3,895,938 new Ordinary shares were issued in January 2017 at 320p on the expiration of our Subscription shares, increasing the shares in issue by 8.6%. Since that time, the Company has only Ordinary shares in issue. With the Ordinary shares trading at a discount throughout the year, no other shares have been issued; rather 15,985 shares were bought back in at an average discount of 7.6%. These Ordinary shares are held in treasury.

 

Standard Life Aberdeen

The merger of Standard Life plc and Aberdeen Asset Management PLC was approved by the shareholders of each company in June and the two companies came together in August 2017. Your Board recognises that this could have implications for the way in which the portfolio of the Company is managed. To that end the Board has sought reassurance from senior management at Aberdeen Standard Investments, the name under which the investment operations of the new group are conducted, that they recognise the value that the Board places on the team and the process that has served the Company so well over the past decade and more.  The Board is pleased to be able to state that it has received such reassurances. The Board recognises that the scale of the merger is such that it will take time for any changes resulting from it to be implemented and will continue to pay close attention to developments and the implications they may have for the management of your Company.

 

Manager

In light of the above, the Board believes that the appointment of the Manager continues to be in the long-term interests of shareholders. This conclusion has been reached on the basis of the strength of the long-term returns that the Manager has delivered for the Company, our confidence that the process by which these returns have been generated remains appropriate for the objectives of the Company and that it continues to be applied by the portfolio manager, Thomas Moore. The Board considers this combination of investment process and portfolio manager to be key to the future success of the Company.

 

Governance and Board

Keith Percy stood down from the Board at the conclusion of the Annual General Meeting in December 2016 after 25 years. Caroline Hitch was appointed to the Board on 1 January 2017. Caroline has over 30 years of experience in the investment management business, most recently with HSBC, where she was a member of the senior investment team. She will stand for election at the Annual General Meeting on 18 January 2018.

 

AGM

The Annual General Meeting of the Company will be held at the offices of the Manager, 'The Gherkin', 30 St Mary Axe, London EC3A 8EP on Thursday, 18 January 2018. The meeting will start at 11.30am and will include a presentation on the portfolio from our portfolio manager, Thomas Moore.  The Board hopes that shareholders will be able to attend.  Shareholders should note that, as security at the Manager's office is tight, identification will be required in order to gain entry to the building.

 

Outlook

The unexpected outcomes of major political events in the last 18 months illustrate the folly of trying to predict the future. Life goes on and businesses continue to trade, to plan for the future and to innovate and develop. Investment opportunities continue to exist, even if the predictability of the political landscape and future economic growth is not as high as it has been.

 

The benefits of investing on an index-agnostic basis, which puts greater emphasis on focusing on the fundamental business case, can be illustrated by the long-term performance of the Company over the last five and ten years. The Board recognises that there will be times when markets focus on macro factors, but over the long term, investing in good companies, with superior products, good management teams and a coherent strategy will generate rewards to investors. The political situation will undoubtedly provide challenges, but in so doing will provide those management teams with opportunities to develop their businesses. The Board is confident that the Manager is alert to the situation and has the resources to analyse these companies and identify these opportunities.

 

Richard Burns

Chairman

4 December 2017

 

 

Strategic Report

 

Objective and Investment Policy

 

Objective

To provide shareholders with an above average income from their equity investment while also providing real growth in capital and income.

 

Investment Policy

The management of the Company's investments and the day to day operation of the Company is delegated to Standard Life Investments (Corporate Funds) Limited (the "Manager").

 

The Directors set the investment policy which is to invest in a diversified portfolio consisting mainly of quoted UK equities which will normally comprise between 50 and 70 individual equity holdings.

 

In order to reduce risk in the Company without compromising flexibility:

 

•      no holding within the portfolio will exceed 10% of net assets; and

 

•      the top ten holdings within the portfolio will not exceed 50% of net assets.

 

The Company may invest in convertible preference shares, convertible loan stocks, gilts and corporate bonds.

 

The Directors set the gearing policy within which the portfolio is managed.  The parameters are that the portfolio should operate between holding 5% net cash and 15% net gearing. The Directors have delegated responsibility to the Manager for the operation of the gearing level within the above parameters.

 

Investment process

The portfolio is invested on an index-agnostic basis. The process is based on a bottom-up stock-picking approach where sector allocations are a function of the sum of the stock selection decisions, constrained only by the appropriate risk control parameters. The aim is to evaluate changing corporate situations and identify insights that are not fully recognised by the market.

 

Idea generation and research

The vast majority of the investment insights are generated from information and analysis from one-on-one company meetings. Collectively, more than 3,000 company meetings are conducted annually across Standard Life Investments. These meetings are used to ascertain the company's own views and expectations of the future prospects for their company and the markets in which they operate. Through actively questioning the senior management and key decision makers of companies, the portfolio managers and analysts look to uncover the key changes affecting the business and the materiality of their impact on company fundamentals within the targeted investment time horizon.

 

Investment process in practice

The index-agnostic approach ensures that the weightings of the holdings reflect the conviction levels of the investment team, based on an assessment of the management team, the strategy, the prospects and the valuation metrics. The process recognises that some of the best investment opportunities come from under-researched parts of the market where the breadth and depth of the analyst coverage that the portfolio manager can access provides the scope to identify a range of investment opportunities.

 

The consequence of this is that the Company's portfolio looks very different from many other investment vehicles providing their investors with access to UK equity income. This is because the process focuses on conviction levels rather than index weightings. This means that the Company may provide a complementary portfolio to the existing portfolios of investors who like to make their own decisions and manage their ISAs, SIPPs and personal dealing accounts themselves. Around 60% of the Company's portfolio is invested in companies outside the FTSE 100.

 

The index-agnostic approach further differentiates the portfolio because it allows the Manager to take a view at a thematic level, concentrate the portfolio's holdings in certain areas and avoid others completely. For example, the Company currently has no exposure to large cap pharmaceuticals, on the basis that the underlying current and future cash generation is very poor among these multinationals. The Manager believes that this poses serious questions over their ability to continue to pay dividends over the medium term.

 

The effect of this approach is that the weightings of the portfolio can be expected to differ significantly from that of any index, and the returns generated by the portfolio may reflect this divergence, particularly in the short term.

 

Principal Risks and Uncertainties

 

The Board has an ongoing process for identifying, evaluating and managing the principal risks and uncertainties of the Company and has carried out a robust review. The process is regularly reviewed by the Board. Most of the Company's principal uncertainties and risks are market related and are no different from those of other investment trusts that invest primarily in the UK listed market. Risks may vary in significance from time to time and the controls and actions to mitigate these are described below.

 

The Board considers the following to be the principal risks and uncertainties:

 

•      Investment Performance The Board recognises that market risk is significant in achieving performance and consequently it reviews strategy and investment guidelines to ensure that these are appropriate. Regular reports are received from the Manager on stock selection, asset allocation, gearing and the costs of running the Company. The performance is reviewed in detail and discussed with the Manager at each Board meeting.

 

The Board regularly reviews the impact of geopolitical instability and change on market risk. The Board is mindful of the continuing uncertainty following the UK's referendum decision to leave the EU and, along with the Manager, is closely monitoring the situation.

 

The Board, through its review process, did not identify any specific new actions required to mitigate performance

risks during the year. The Manager's Report explains the changes made within the portfolio during the year.

 

•      Operational Risk In common with most investment trusts the Board delegates the operation of the business to third parties, the principal delegate being the Manager. As part of the annual assessment of key third party service providers, the internal control reports of the service providers are reviewed.

 

During the year there were no issues identified that compromised the security of the assets and the Board received assurances on the internal control environment of service providers from these reports.

 

The recent merger of Standard Life plc and Aberdeen Asset Management PLC creates additional operational risk for the Company due to the potential for change in the way the Manager provides its services to the Company. The Board has received assurance that the key personnel and processes currently in place at the Manager will continue to operate for the Company. The Board will keep under close review any potential implications for the Company arising from the merger and the integration process.

 

•      Discount/Premium to NAV A significant share price discount or premium to net asset value per share could lead to high levels of uncertainty and could potentially reduce shareholder confidence.

 

The Board keeps the level of the Company's discount/ premium under regular review.

 

•      Regulatory Risk The Company operates in an environment with significant regulation including, but not limited to the Companies Act 2006, the Corporation Tax Act 2010, Alternative Investment Fund Managers Directive ('AIFMD') and the Markets in Financial Instruments Directive II ('MiFID II') which comes into effect on 3 January 2018.

 

There has been no significant change in this risk during the year though the environment as a whole is considered to be one of increasing costs for compliance with ever increasing regulation.

 

Management Policies

 

Employee, Environmental and Human Rights Policy

As an externally managed investment trust, the Company has no direct employee or environmental responsibilities, nor is it responsible for the emission of greenhouse gases. Its principal responsibility to shareholders is to ensure that the investment portfolio is properly managed and invested. The Company has no employees and, accordingly, has no requirement to report separately on employment matters. The management of the portfolio is undertaken by the Manager. The Manager engages with the Company's underlying investee companies in relation to their corporate governance practices and in developing their policies on social, community and environmental matters and further information may be found in the Statement of Corporate Governance. The Manager's specific policies are outlined in their Governance and Stewardship Guidelines, which may be found on the Manager's website at https://www.standardlifeinvestments.com/governance_and_stewardship/what_is_corporate_governance/principles_and_ policies.html .   In light of the nature of the Company's business, there are no relevant human rights issues and, therefore, the Company does not have a human rights policy.

 

Future Strategy

The Board and Manager intend to maintain the strategic policies set out above for the year ending 30 September 2018 as it is believed that these are in the best interest of shareholders.

 

Approval of the Strategic Report

The Strategic Report was approved by the Board of Directors on 4 December 2017 and signed on its behalf by:

 

Richard Burns

Chairman

4 December 2017

 

 

Manager's Report

 

Over the medium term, we believe that taking an index-agnostic approach to UK equity income can provide two key benefits - improved diversification of income sources and the potential for an enhanced total return. It is pleasing to report that the portfolio has delivered both of these key benefits during the period under review.

 

Market Review

The UK equity market performed strongly during the 12 month period under review, helped by a strengthening global economy and robust corporate results. This came against the backdrop of political upheaval at home and abroad and pronounced exchange rate movements.

 

Market sentiment was affected by major political events, notably Donald Trump's surprise US election victory in November 2016. This sparked a global 'reflation trade', buoyed by his campaign pledges to cut taxes, increase infrastructure spending and roll back regulation. Rising inflation expectations and higher bond yields consequently drove a rotation out of 'bond proxies' and into cyclicals and financials. This lost impetus after Mr. Trump's administration failed to pass key policies, leading to doubts on whether tax and spending measures could be enacted in a timely manner.

 

Political events in the UK also had an impact on markets, in particular the start of UK-EU divorce negotiations by triggering Article 50 and the loss of the Conservative Party's parliamentary majority following the general election in June. Although these events caused bouts of volatility in sterling, the currency actually appreciated during the period under review against the US dollar and on a trade-weighted basis. The resilience of the currency partly reflected UK economic data remaining more robust than many economists had predicted immediately after the EU referendum, leading to guidance from the Bank of England's Monetary Policy Committee that it stands ready to hike interest rates.

 

The Bank of England was not the only central bank adopting a more hawkish stance, with the Federal Reserve raising rates on four occasions since December 2016 and signalling that it is set to reduce its bond holdings, commencing the unwind of the quantitative easing programme that it undertook in the wake of the financial crisis. Meanwhile, the European Central Bank hinted that it will also begin to taper its quantitative easing programme towards the end of the year, citing an improving economy.

 

Performance

For the 12 months ending 30 September 2017, the Company NAV per share returned 14.7% on a total return basis, outperforming the FTSE All-Share Index total return of 11.9%. Income from ordinary dividends rose by 12.9%.

 

The portfolio generated a total income of £10.17m, an increase of 13.1% on 2016. This equates to a gross yield on the investment portfolio of 3.9%, which compares to the yield on the FTSE All-Share Index of 3.7%.

 

The Company's performance benefited from its holding in asset management businesses River & Mercantile and Premier Asset Management whose shares responded to evidence of very strong fund flows and revenue growth. River & Mercantile's share price increased by 48% during the year and Premier Asset Management's share price increased by 36% since it was first purchased by the Company in early October 2016. Both holdings demonstrate the benefit of our index-agnostic approach in uncovering small cap stocks with significant capital and dividend growth potential.

 

The Company's holdings in the Travel & Leisure sector benefited performance. Cruise ship operator Carnival was a significant contributor to performance as the market responded to evidence of strengthening pricing and on-board spending, partly resulting from management initiatives.  Online gambling operator GVC also benefited performance as management's focus on player retention and yield improvement helped the business to deliver double digit revenue growth. GVC's share price has increased by 27% since the Company first purchased the holding in January 2017.

 

Performance also benefited from the Company's holdings in the industrials sector, notably packaging business DS Smith, whose share price was up 28% in the year, having benefited from the announcement of a US acquisition, and heat treatment business Bodycote, which benefited from improving demand in its major end markets of automotive and aerospace & defence, increasing its share price by 56% over the year.

 

The Pharmaceuticals sector performed poorly during the period as the sector was blighted with high-profile disappointments including increased generic competition and poor drug trial results. Avoiding GlaxoSmithKline and Shire proved particularly helpful to the Company's performance relative to the wider UK market.

 

Top 5 Stock Level Absolute

 Contributors Over The Year

Absolute Contribution

(%)

Rio Tinto

1.33

River & Mercantile

1.24

Aviva

0.94

Prudential

0.90

Carnival*

0.84

 

Bottom 5 Stock Level Absolute

Contributors Over The Year

BT Group*

-0.81

Imperial Brands

-0.55

Babcock International

-0.44

Sage

-0.39

Connect

-0.29

* Stocks sold during the year by the Company

 

Among major detractors to performance, Sage came under pressure, its share price decreasing by 5% over the year due to profit-taking, while BT shares fell sharply on the announcement of improper accounting at its Italian division and deteriorating UK public sector and international corporate demand. The holding of shares in support services firm Babcock also detracted from performance due to concerns over the outlook for UK government outsourcing budgets.

 

Activity

 

Significant purchases in the portfolio were as follows:

 

BP and Royal Dutch Shell: In both cases we have been impressed by evidence of management's success in reducing their break-even cost of production to such an extent that the dividend is set to be covered by profits. As well as managing costs and capital expenditure, both companies have increased their production growth by focusing on improved delivery of their new projects. The dividend yields of both companies are very high relative to the wider market, reflecting low market expectations, which provides some scope for their valuations to increase.

 

HSBC: Growth prospects appeared to be greatly improved after a period of heavy restructuring, helped by an improved capital position and the tailwinds of an improving global economy and rising rates.

 

BAE Systems: Low valuation does not appear to factor in its attractive market position, improving defence spending outlook and self-help potential under a new management team.

 

Phoenix: The life insurance company's management team has a strong track record in making value-creating acquisitions, managing costs and capital efficiently.  The company's strong cash generation allows a highly attractive dividend to be paid.

 

Ashmore: A specialist emerging markets asset management business improved its fund flow prospects as its major asset class, Emerging Markets Debt, came back into favour.

 

Significant sales in the portfolio were as follows:

 

BT: The holding was sold due to concern over potential pressure on cash flows from regulation, capital expenditure and pension contributions, thereby limiting the scope to increase its dividend.

 

RELX: Profits were taken in the IT and analytics group whose strong visibility and low cyclicality had become better reflected in its valuation after a period of very strong share price performance.

 

Carnival: The Company took profits in its holding in the cruise ship operator after an increase in the stock's valuation since the initial purchase in June 2016, reflecting a dramatic shift in the market's view of the stock on evidence of its progress in medium-term strategic initiatives.

 

Safestyle: The holding in the double-glazing manufacturer was sold on concern that demand might struggle to hold up in the wake of the heightened political uncertainty around the snap UK general election. The shares delivered a total return of more than 200% during the holding period from December 2013.

 

Glencore: Some profits were taken in the mining company whose valuation had increased sharply in response to higher commodity prices. Since its listing on the UK market, management's track record on capital discipline has been mixed.

 

Outlook and Strategy

 

We continue to identify many examples of companies that offer good dividend and capital growth prospects at attractive valuations. The UK political environment remains highly uncertain, which has resulted in a divergence in valuation between stocks and sectors, as investors have tended to spurn small and mid-cap stocks in favour of defensive large-cap stocks. Heightened short-term political uncertainty can result in a shift in investor focus away from corporate fundamentals, which has historically provided us with some of our most compelling valuation opportunities.

 

We remain cautious on some of the traditional large-cap income sectors, such as Pharmaceuticals and Consumer Staples, where dividend growth is set to be constrained by weak growth and low levels of dividend cover.  While we have found some valuation opportunities among large-cap sectors, notably Oil & Gas, we continue to identify superior dividend growth prospects within mid-cap and small-cap stocks.

 

Throughout these uncertain times, we remain focused on identifying attractively valued stocks with the potential to surprise positively on the cash-flows and dividends that they report. Successfully anticipating positive change in a company's fundamentals can act as the trigger for that company's valuation to increase, driving the stock's total return, as we have witnessed with some of our major holdings.

 

Thomas Moore

Portfolio Manager

 

4 December 2017

 

 

Key Financial Highlights

 

Total return for periods to 30 September 2017

 

 

NAV (1)

1 Year

 

+14.7%

3 years

 

+33.1%

5 years

 

+87.3%

 

 

Share Price

 

 

+15.9%

 

 

+29.9%

 

 

+90.3%

 

Capital return for the year ended

30 September 2017

As at 30 September 2017

NAV per Share

Share Price

Discount

Dividend Yield

478.6p(2)

+10.9%

459.6p

+11.5%

4.0%(1)

3.7%

(2016: 431.5p)

(2016: 412.4p)

(2016: 4.4%)

(2016: 3.7%)

(1) The Net Asset Value Total Returns are calculated on the adjusted basis (see note 2 below) and assumes that all dividends are re-invested on the date the shares go ex-dividend. More details are provided in the Report of the Audit Committee contained in the Annual Report.

 (2) The Net Asset Value (NAV), on 30 September 2017 only, differs from the NAV reported in the Statement of Financial Position. The NAV above is calculated in accordance with Financial Reporting Standards 102, except that it includes an adjustment for the third interim dividend of 4.0p which had been declared, but not paid, at the year end. There is no impact on prior year numbers. The discount is derived from this NAV.

 

As at 30 September 2017

Market Cap

Net Assets

Net Gearing

£226.0 million

+21.1%

(2016: £186.7m)

£235.3 million

+17.8%

(2016: £199.7m)

9.9%

 

(2016: 7.5%)

 

For year ended 30 September 2017

DPS

EPS

Ongoing Charges

17.10p

+11.1%

(2016: 15.40p)

19.23p

10.0%

(2016: 17.48p)

 

0.87%

(2016: 0.96%)

 

Going Concern

The Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for at least the next 12 months. In considering this, the Directors took into account the diversified portfolio of readily realisable securities which can be used to meet short-term funding commitments, and the ability of the Company to meet all of its liabilities and ongoing expenses.

 

The Company's Articles of Association require that at every fifth AGM, the Directors shall propose an ordinary resolution to the effect that the Company continues as an investment trust. An ordinary resolution approving the continuation of the Company for the next five years was passed at the AGM on 15 December 2016.

 

Accordingly, the Directors believe that it is reasonable for the Financial Statements to continue to be prepared on a going concern basis.

 

Viability Statement

In accordance with Provision C.2.2 of the UK Corporate Governance Code revised in April 2016 and Principle 21 of the AIC Code of Corporate Governance, the Board has assessed the Company's prospects for a five year period. The Board considers five years to be an appropriate period for an investment trust company with a portfolio of equity investments based on the cycle for the continuation vote, and the financial position of the Company as detailed in the Strategic Report.

 

The Board has considered the Company's financial position and its ability to liquidate its portfolio and meet its liabilities and draws attention to the following points which the Board took into account in its assessment of the Company's future viability:-

 

a)    The Company's investments are traded on a major stock exchange and there is a spread of investments held

b)    The Company is closed ended in nature and therefore does not need to sell investments when shareholders wish to sell their shares.

c)    The Company's main liability is its bank loan of £27million, which represents 11.4% of the Company's net assets.

d)    The Company's cash balance (including money market funds) at 30 September 2017 was £3.6m.

e)    The Board has considered the principal risks faced by the Company, together with the steps taken to mitigate these risks, as detailed in the Strategic Report and in the Statement of Corporate Governance and referred to in Note 15 of the Financial Statements and has concluded that the Company would be able to take appropriate action to protect the value of the Company. The Company takes any potential risks to its ongoing screen and ability to perform very seriously and works hard to ensure that risks are kept to a minimum at all times.

f)     Expenses are relatively predictable and modest in relation to asset values.

g)    There are no capital commitments currently foreseen that would alter the Board's view.

 

As detailed in the Chairman's Statement, the Company has a good long-term performance record and the Directors consider the Company's future prospects to be positive.

 

In assessing the Company's future viability, the Board has assumed that investors will wish to continue to have exposure to the Company's activities in the form of a closed ended entity, long-term performance will continue to be satisfactory and the Company will continue to have access to sufficient capital.

 

Therefore, after careful consideration of the Company's current position and future prospects and taking into account its risk- aware attitude, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period of its assessment and until the next continuation vote takes place in 2022.

 

Statement of Directors' Responsibilities

The Directors are responsible for preparing the Annual Report and the Financial Statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the Financial Statements in accordance with UK Accounting Standards, (United Kingdom Generally Accepted Accounting Practice), including FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland". The Directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.

 

In preparing these Financial Statements, the Directors are required to:

 

•      select suitable accounting policies and then apply them consistently;

 

•      make judgments and estimates that are reasonable and prudent; and

 

•      state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Financial Statements.

 

The Directors are responsible for keeping proper accounting records that are sufficient to show and explain the company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its Financial Statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

 

The Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that comply with applicable laws and regulations.

 

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

The work carried out by the auditor does not involve a review of the corporate and financial information included on the company's website and, accordingly, the auditor accepts no responsibility for any changes that may have occurred to the financial statement since they were initially presented on the website.

 

The Directors are also responsible for ensuring that the Annual Report and Financial Statements, taken as a whole are fair, balanced and understandable and provide the information necessary to assess the Company's position, performance, business model and strategy.

 

 

Directors' Responsibility Statement

 

Each Director confirms that:

•      the Financial Statements have been prepared in accordance with UK Accounting Standards, (United Kingdom Generally Accepted Accounting Practice), including FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland" and applicable law and give a true and fair view of the assets, liabilities, financial position and profit of the Company as at 30 September 2017;

 

•      the Strategic Report includes a fair review of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties that the Company faces; and

 

•      the Annual Report and Financial Statements, taken as a whole are fair, balanced and understandable and provide the information necessary to assess the Company's position, performance, business model and strategy.

 

For and on behalf of the Board of Standard Life Equity Income Trust plc

 

Richard Burns

Chairman

4 December 2017

 

 

Statement of Comprehensive Income

 

For the year ended 30 September 2017

 

 

 

Notes

2017

2016

Revenue

£'000

Capital

£'000

Total

£'000

Revenue

£'000

Capital

£'000

Total

£'000

 

 

 

 

 

 

 

 

Net gains/(losses) on investments at fair value

9

-

23,248

23,248

-

(4,578)

(4,578)

Currency (losses)/gains

 

-

(1)

(1)

-

23

23

Income

2

10,173

-

10,173

8,997

-

8,997

Investment management fee

3

(483)

(1,127)

(1,610)

(434)

(1,012)

(1,446)

Administrative  expenses

4

(324)

-

(324)

(465)

-

(465)

NET RETURN BEFORE FINANCE COSTS

AND  TAXATION

 

9,366

22,120

31,486

8,098

(5,567)

2,531

 

 

 

 

 

 

 

 

Finance costs

5

(91)

(213)

(304)

(116)

(270)

(386)

RETURN BEFORE TAXATION

 

9,275

21,907

31,182

7,982

(5,837)

2,145

 

 

 

 

 

 

 

 

Taxation

6

(42)

-

(42)

(26)

-

(26)

RETURN AFTER TAXATION

 

9,233

21,907

31,140

7,956

(5,837)

2,119

 

 

 

 

 

 

 

 

RETURN PER ORDINARY SHARE:

8

 

 

 

 

 

 

BASIC

 

19.23p

45.61p

64.84p

17.92p

(13.15p)

4.77p

 

 

 

 

 

 

 

 

DILUTED

19.23p

45.61p

64.84p

17.48p

n/a

4.66p

                   

 

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

 

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

 

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

 

 

 

 

Statement of Financial Position

 

As at 30 September 2017

 

 

 

Notes

2017

2016

£'000

£'000

£'000

£'000

FIXED ASSETS

 

 

 

 

 

Investments at fair value through profit or loss

9

 

261,924

 

214,024

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Debtors

10

1,330

 

1,259

 

Money market funds

 

3,416

 

10,754

 

Cash and short term deposits

 

161

 

287

 

 

 

4,907

 

12,300

 

 

 

 

 

 

 

CREDITORS: AMOUNTS FALLING DUE

WITHIN ONE YEAR

 

 

 

 

 

Bank loan

11

(27,000)

 

(26,000)

 

Other creditors

11

(2,558)

 

(594)

 

 

 

(29,558)

 

(26,594)

 

NET CURRENT LIABILITIES

 

 

(24,651)

 

(14,294)

NET ASSETS

 

 

237,273

 

199,730

 

 

 

 

 

 

CAPITAL AND RESERVES

 

 

 

 

 

Called-up share capital

12

 

12,295

 

11,321

Share premium account

 

 

52,043

 

40,550

Capital redemption reserve

 

 

12,616

 

12,616

Capital reserve

 

 

148,939

 

127,096

Revenue reserve

 

 

11,380

 

8,147

EQUITY SHAREHOLDERS' FUNDS

 

 

237,273

 

199,730

 

 

 

 

 

 

NET ASSET VALUE PER ORDINARY SHARE:

13

 

 

 

 

BASIC

 

 

482.63p

 

441.07p

 

 

 

 

 

 

DILUTED

 

 

482.63p

 

431.48p

 

The financial statements were approved by the Board of Directors and authorised for issue on 4 December 2017 and were signed on its behalf by:

 

Richard Burns, Chairman

 

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

 

 

 

 

Statement of Changes in Equity

 

For the year ended 30 September 2017

 

 

Notes

Share capital

£'000

Share premium account

£'000

Capital redemption

reserve

£'000

Capital reserve

£'000

Revenue reserve

£'000

Total

 

£'000

Balance at 30 September 2016

 

11,321

40,550

12,616

127,096

8,147

199,730

Issue of ordinary shares on conversion of subscription shares

12

974

11,493

-

-

-

12,467

Purchase of own shares for treasury

 

-

-

-

(64)

-

(64)

Return after taxation

 

-

-

-

21,907

9,233

31,140

Dividends paid

7

-

-

-

-

(6,000)

(6,000)

BALANCE AT 30 SEPTEMBER 2017

 

12,295

52,043

12,616

148,939

11,380

237,273

 

For the year ended 30 September 2016

 

 

Notes

Share capital

£'000

Share premium account

£'000

Capital redemption

reserve

£'000

Capital reserve

£'000

Revenue reserve

£'000

Total

 

£'000

Balance at 30 September 2015

 

10,745

32,473

12,616

132,933

6,881

195,648

Issue of ordinary shares on conversion of subscription shares

12

325

3,839

-

-

-

4,164

Issue of ordinary shares

 

251

4,238

-

-

-

4,489

Return after taxation

 

-

-

-

(5,837)

7,956

2,119

Dividends paid

7

-

-

-

-

(6,690)

(6,690)

BALANCE AT 30 SEPTEMBER 2016

 

11,321

40,550

12,616

127,096

8,147

199,730

 

The capital reserve at 30 September 2017 is split between realised £111,074,000 and unrealised £37,865,000

(30 September 2016 is split realised £89,793,000 and unrealised £37,303,000).

 

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

 

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

 

 

Statement of Cash Flows

 

For the year ended 30 September 2017

 

 

Notes

2017

£'000

2016

£'000

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

Net return before finance costs and taxation

 

31,486

2,531

Adjustment for:

 

 

 

(Gains)/losses on investments at fair value

 

(23,248)

4,578

Net currency losses/(gains)

 

1

(23)

Dividend income

 

(9,940)

(8,951)

Dividends received

 

10,018

8,791

Interest income

 

(17)

(42)

Interest received

 

21

43

(Increase)/decrease in other debtors

 

(3)

1

Decrease in other creditors

 

(17)

(323)

Net cash outflow from servicing of finance

 

(302)

(371)

Net tax paid

 

(46)

(110)

NET CASH INFLOW FROM OPERATING ACTIVITIES

 

7,953

6,124

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

Purchases of investments

 

(133,399)

(64,809)

Sales of investments

 

110,580

56,846

NET CASH OUTFLOW FROM INVESTING ACTIVITIES

 

(22,819)

(7,963)

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

Issue of ordinary shares from conversion of subscription shares

 

12,467

4,164

Purchase of own shares for treasury

 

(64)

-

Issue of ordinary shares

 

-

4,489

Equity dividends paid

7

(6,000)

(6,690)

Drawdown of loan

 

1,000

1,000

NET CASH INFLOW FROM FINANCING ACTIVITIES

 

7,403

2,963

NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS

 

(7,463)

1,124

 

 

 

 

ANALYSIS OF CHANGES IN CASH AND CASH EQUIVALENTS

 

 

 

Opening balance

 

11,041

9,894

(Decrease)/increase in cash and cash equivalents

 

(7,463)

1,124

Currency movements

 

(1)

23

CLOSING BALANCE

 

3,577

11,041

 

 

 

 

COMPONENTS OF CASH AND CASH EQUIVALENTS

 

 

 

AAA money market funds

 

3,416

10,754

Cash and short term deposits

 

161

287

 

 

3,577

11,041

 

 

 

Notes to the Financial Statements

 

For the year ended 30 September 2017

 

1.    Accounting policies

(a)   Basis of accounting

The financial statements have been prepared in accordance with Financial Reporting Standard 102 and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts'.

 

They have also been prepared on the assumption that approval as an investment trust will continue to be granted. The financial statements have been prepared on a going concern basis. The Directors believe this is appropriate for the reasons outlined in the Directors' Report.

 

All values are rounded to the nearest thousand pounds (£000) except where indicated otherwise.

 

(b)   Valuation of investments

The Company's business is investing in financial assets with a view to profiting from their total return in the form of income and capital growth. This portfolio of financial assets is managed and its performance evaluated on a fair value basis, in accordance with a documented investment strategy, and information about the portfolio is provided internally on that basis to the Company's Board of Directors. Accordingly, the Company classifies the investments 'at fair value through profit or loss'. They are included initially at fair value, which is taken to be their cost (excluding expenses incidental to the acquisition which are written off in the Statement of Comprehensive Income, and allocated to 'capital' at the time of acquisition). Subsequent to initial recognition, investments are valued at fair value through profit or loss. For listed investments, this is deemed to be bid market prices or closing prices for SETS stocks sourced from the London Stock Exchange. SETS is the London Stock Exchange electronic trading service covering most of the market including all FTSE 100 constituents and most liquid FTSE 250 along with some other securities.

 

Gains and losses arising from changes in fair value are included in net profit or loss for the period as a capital item in the Statement of Comprehensive Income and are ultimately recognised in the capital reserve.

 

(c)   Money market funds

The money market funds are used by the Company to provide additional short term liquidity. As they are not listed on a recognised exchange and due to their short term nature, they are recognised in the financial statements as a current asset and are included at fair value through profit or loss.

 

The money market fund in which the Company invests is managed by Standard Life Investments Limited. The share class of the money market fund in which the Company invests does not charge a management fee.

 

(d)   Income

Income from equity investments (other than special dividends), including taxes deducted at source, is included in revenue by reference to the date on which the investment is quoted ex-dividend. Special dividends are credited to revenue or capital according to the circumstances. Foreign income is converted at the exchange rate applicable at the time of receipt. Interest receivable on short term deposits is accounted for on an accruals basis.

 

(e)   Expenses and interest payable

Expenses are accounted for on an accruals basis. Expenses are charged to capital when they are incurred in connection with the maintenance or enhancement of the value of investments. In this respect, the investment management fee and relevant finance costs are allocated between revenue and capital in line with the Board's expectation of returns from the Company's investments over the long term in the form of revenue and capital respectively (see notes 3 and 5).

 

Transaction costs incurred on the purchase and disposal of investments are recognised as a capital item in the Statement of Comprehensive Income.

 

(f)    Dividends payable

Interim dividends are accounted for when they are paid. Final dividends are accounted on the date that they are approved by shareholders.

 

(g)   Capital and reserves

Called-up share capital

Share capital represents the nominal value of ordinary shares issued.

 

Share premium account

The share premium account represents the premium above nominal value received by the Company on issuing shares net of issue costs.

 

Capital redemption reserve

The capital redemption reserve represents the nominal value of ordinary shares repurchased and cancelled.

 

Capital reserve

Gains or losses on realisation of investments and changes in fair values of investments are included within the capital reserve. The capital element of the management fee along with any associated irrecoverable VAT and relevant finance costs are charged to this reserve. Any associated tax relief is also credited to this reserve.

 

Revenue reserve

The revenue reserve represents accumulated revenue profits retained by the Company that have not currently been distributed to shareholders as a dividend.

 

(h)   Taxation

Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the Statement of Financial Position date where transactions or events that result in an obligation to pay more or a right to pay less tax in future have occurred at the Statement of Financial Position date measured on an undiscounted basis and based on enacted tax rates. This is subject to deferred tax assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the underlying timing differences can be deducted. Timing differences are differences arising between the Company's taxable profits and its results as stated in the accounts that arise from the inclusion of income and expenses in tax assessments in periods different from those in which they are recognised in the accounts.

 

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

 

(i)    Cash and cash equivalents

Cash comprises bank balances and cash held by the Company. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

 

(j)    Bank borrowings

Interest bearing bank loans and overdrafts are recorded initially at fair value, being the proceeds received, net of direct issue costs. They are subsequently measured at amortised cost. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are accounted for on an accruals basis in the Statement of Comprehensive Income using the effective interest rate method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise.

 

2.    Income

 

2017

£'000

2016

£'000

Income from investments

 

 

UK investment income

 

 

Ordinary dividends

7,661

6,941

Special dividends

744

600

 

8,405

7,541

Overseas and Property Income Distribution investment income

 

 

Ordinary dividends

1,329

1,024

Special dividends

206

386

 

1,535

1,410

 

9,940

8,951

Other income

 

 

Money market interest

17

42

Stock dividends

212

-

Underwriting commission

4

4

 

233

46

Total income

10,173

8,997

 

3.    Investment management fee

 

2017

£'000

2016

£'000

Charged to revenue reserve

483

434

Charged to capital reserve

1,127

1,012

 

1,610

1,446

 

The Company has an agreement with Standard Life (Corporate Funds) Limited for the provision of management services. The contract is terminable by either party on not less than six months' notice.

 

With effect from 15th November 2016, the fee is based on 0.65% on the first £250m of total assets, reduced to 0.55% over and above £250m of total assets (previously 0.65% on all total assets), payable quarterly in arrears and is chargeable 30% to revenue and 70% to capital (see note 1(e)).

 

4.    Administrative expenses

 

2017

£'000

2016

£'000

Directors' fees

114

111

Employers' National Insurance

10

10

Fees payable to the Company's Auditor (excluding VAT):

 

 

- for the audit of the annual financial statements

24

23

Professional fees

31

47

Depositary fees

47

43

Other expenses

98

231

 

324

465

 

With the exception of fees payable to the Company's auditor, irrecoverable VAT has been included under the relevant expense line above. Irrecoverable VAT on fees payable to the Company's auditor is included within other expenses.

 

Additional information concerning Directors' fees can be found in the Directors' Remuneration Report.

 

5     Finance costs

 

2017

£'000

2016

£'000

On bank loans and overdrafts:

 

 

Charged to revenue reserve

91

116

Charged to capital reserve

213

270

 

304

386

Finance costs are chargeable 30% to revenue and 70% to capital (see note 1(e)).

 

6.    Taxation

 

2017

£'000

2016

£'000

(a) Analysis of charge for the year

 

 

Overseas withholding tax

42

26

(b) Factors affecting current tax charge for the year

 

 

The corporation tax rate was 20% until 31 March 2017 and 19% from 1 April 2017, giving an effective rate of 19.5%. The tax assessed for the year is lower than that resulting from applying the standard rate of corporation tax in the UK.

 

 

A reconciliation of the Company's current tax charge is set out below:

 

 

Return before taxation

31,182

2,145

Return at an effective rate of corporation tax 19.5% (2016 - 20%)

6,080

429

Effects of:

 

 

(Gains)/losses on investments not taxable

(4,533)

911

Non-taxable income

(1,884)

(1,729)

Excess management expenses and loan relationship debit expenses

337

389

Overseas withholding tax

42

26

Total taxation

42

26

 

 

At 30 September 2017, the Company had unutilised management expenses and loan relationship losses of £23,172,000 (2016 - £21,445,000). No deferred tax asset has been recognised on the unutilised management expenses and loan relationship losses as it is unlikely there will be suitable taxable profits from which the future reversal of the deferred tax asset could be deducted.

 

7.    Dividends on Ordinary shares

 

2017

£'000

2016

£'000

Amounts recognised as distributions to equity holders in the year:

 

 

Final dividend for 2016 of 5.00p per share (2015 - 4.70p)

2,264

2,020

First interim dividend for 2017 of 3.80p per share (2016 - 3.40p)

1,868

1,520

Second interim dividend for 2017 of 3.80p per share (2016 - 3.40p)

1,868

1,520

Third interim dividend for 2017 of 4.00p per share (2016 - 3.60p)

-

1,630

 

6,000

6,690

 

 

 

Revenue available for distribution

9,233

7,956

 

The third interim dividend was declared on 1 September 2017 with an ex date of 14 September 2017. This dividend of 4.00p per share was paid in 6 October 2017 and has not been included as a liability in these financial statements.

 

The proposed final dividend for 2017 is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements.

 

We set out below the total dividends paid and proposed 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.

 

 

2017

£'000

2016

£'000

First interim dividend for 2017 of 3.80p per share (2016 - 3.40p)

1,868

1,520

Second interim dividend for 2017 of 3.80p per share (2016 -3.40p)

1,868

1,520

Third interim dividend for 2017 of 4.00p per share (2016 - 3.60p)

1,967

1,630

Proposed final dividend for 2017 of 5.50p per share (2016 - 5.00p)

2,704

2,264

 

8,407

6,934

 

8.    Return per Ordinary share

 

 

2017

2016

 

£'000

p

£'000

p

Basic

 

 

 

 

Revenue return

9,233

19.23

7,956

17.92

Capital return

21,907

45.61

(5,837)

(13.15)

Total return

31,140

64.84

2,119

4.77

 

 

 

 

 

Weighted average number of Ordinary shares in issue1

 

48,025,624

 

44,390,125

Diluted

 

 

 

 

Revenue return

9,233

19.23

7,956

17.48

Capital return

21,907

45.61

(5,837)

n/a

Total return

31,140

64.84

2,119

4.66

 

 

 

 

 

Number of dilutive shares

 

-

 

1,119,925

Diluted shares in issue

 

48,025,624

 

45,510,050

 

The calculation of the diluted total, revenue and capital returns per Ordinary share are carried out in accordance with IAS 33, "Earnings per Share". For the purposes of calculating diluted total, revenue and capital returns per Ordinary share, the number of Ordinary shares is the weighted average used in the basic calculation plus the number of Ordinary shares deemed to be issued for no consideration on exercise of all Subscription shares by reference to the average share price of the Ordinary shares during the period.

 

The Subscription shares lapsed on the last business day of December 2016 therefore there is no dilution effect in year ended 30 September 2017.

 

For the year ended 30 September 2016 the assumed conversion for Ordinary shares was non-dilutive to the capital return per Ordinary share.

 

1 Calculated excluding shares held in treasury where applicable.

 

9.    Investments

 

 

2017

£'000

2016

£'000

Fair value through profit or loss

 

 

Opening book cost

176,720

167,215

Opening fair value gains on investments held

37,304

43,662

Opening fair value

214,024

210,877

Movements in the year:

 

 

Purchases at cost

135,378

64,422

Sales - proceeds

(110,726)

(56,697)

          - realised gains on sales

22,687

1,780

Current year fair value gains/(losses) on investments held

561

(6,358)

Closing fair value

261,924

214,024

 

 

 

Closing book cost

224,059

176,720

Closing fair value gains on investments held

37,865

37,304

Closing fair value

261,924

214,024

 

 

 

Gains/(losses) on investments held at fair value through profit or loss

 

 

Gains on sales

22,687

1,780

Increase/(decrease) in fair value gains on investments held

561

(6,358)

 

23,248

(4,578)

 

Transaction costs

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

 

 

2017

£'000

2016

£'000

Purchases

675

349

Sales

110

52

Total

785

401

 

10.   Debtors: amounts falling due within one year

 

2017

£'000

2016

£'000

Amounts due from brokers

498

352

Net dividends and interest receivable

631

709

Other debtors

201

198

 

1,330

1,259

 

 

 

 

11.   Creditors: amounts falling due within one year

 

2017

£'000

2016

£'000

Bank loan

27,000

26,000

Other creditors

 

 

Amounts due to brokers

1,979

-

Investment management fee payable

430

369

Sundry creditors

149

225

 

2,558

594

 

As at 30 September 2017, the Company had drawn down £27 million (2016 - £26 million) of the £30 million (2016 - £30 million) loan facility arranged with Scotiabank (Ireland) Ltd, maturing on 4 October 2017, at an interest rate of 1.09888%. Subsequent to the year end, the £27 million was increased to £28.5 million and rolled over on a monthly basis. The loan was renewed on 3 November 2017, at an interest rate of 1.346%.

 

12.   Called up share capital

 

2017

£'000

2016

£'000

Issued and fully paid:

 

 

Ordinary shares of 25p each

 

 

Opening balance of 45,282,829 (2016 - 42,976,691) Ordinary shares

11,321

10,744

Issue of 3,895,938 (2016 - 1,301,138) Ordinary shares on conversion of

Subscription shares

974

326

Buyback of 15,985 (2016 - nil) Ordinary shares

(4)

-

Issue of nil (2016 - 1,005,000) Ordinary shares

-

251

Closing balance of 49,162,782 (2016 - 45,282,829) Ordinary shares

12,291

11,321

Subscription shares of 0.01p each

 

 

Opening balance of 3,895,938 (2016 - 5,197,076) Subscription shares

-

1

Conversion of 3,895,938 (2016 - 1,301,138) Subscription shares into Ordinary shares

-

(1)

Closing balance of nil (2016 - 3,895,938) Subscription shares

-

-

Treasury shares

 

 

Opening balance of nil (2016 - nil) treasury shares

-

-

Buyback of 15,985 (2016 - nil) Ordinary shares to treasury

4

-

Closing balance of 15,985 (2016 - nil) treasury shares

4

-

 

12,295

11,321

 

On 17 December 2010 the Company issued 7,585,860 Subscription shares of 0.01p each by way of a bonus issue to the Ordinary shareholders on the basis of one Subscription share for every five Ordinary shares. Each Subscription share conferred the right, but not the obligation, to subscribe for one Ordinary share on any subscription date, being the last business day of June and December in each year commencing June 2011 with the final subscription date being the last business day of December in 2016, after which the rights under the Subscription shares lapsed. The conversion price was determined as being 320p.

 

During the year, shareholders have exercised their right to convert 3,895,938 (2016 - 1,301,138) Subscription shares into ordinary shares for a total consideration of £12,467,000 (2016 - £4,164,000).

 

During the year, 15,985 Ordinary shares (2016 - nil) were repurchased for a consideration of £64,000 (2016 - £nil). The total shares held in treasury is 15,985 (2016 - nil). The number of Subscription shares in issue at 30 September 2017 is nil (2016 - 3,895,938).

 

During the year, nil (2016 - 1,005,000) Ordinary shares were issued for a total consideration of £nil (2016 - £4,489,000).  

 

13.   Net asset value per share

The net asset value per share and the net assets attributable to Ordinary shares at the end of the year calculated in accordance with the Articles of Association were as follows:

 

 

2017

2016

Basic

 

 

Total shareholders' funds (£'000)

237,273

199,730

Number of Ordinary shares in issue at year end1

49,162,782

45,282,829

Net asset value per share

482.63p

441.07p

Diluted

 

 

Total shareholders' funds assuming exercise of Subscription shares (£'000)

237,273

212,197

Number of potential Ordinary shares in issue at year end1

49,162,782

49,178,767

Net asset value per share

482.63p

431.48p

 

The diluted net asset value per Ordinary share has been calculated in accordance with guidelines issued by the Association of Investment Companies and assumes that nil (2016 - 3,895,938) Subscription shares were converted into Ordinary shares at the year end.

 

The Subscription shares lapsed on the last business day of December 2016 therefore there is no dilution effect in year ended 30 September 2017.

 

1 Excludes shares in issue held in treasury where applicable.

 

14.   Analysis of changes in net debt

 

At 30 September

2016

£'000

Cashflow

£'000

Currency movements

£'000

At 30 September

2017

£'000

Cash at bank and in hand

287

(125)

(1)

161

Money market funds

10,754

(7,338)

-

3,416

Bank loan

(26,000)

(1,000)

-

(27,000)

Net debt

(14,959)

(8,463)

(1)

(23,423)

 

15.   Financial instruments

Risk management

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

 

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

 

The Board regularly reviews and agrees policies for managing each of these risks. The Manager's policies for managing these risks are summarised below and have been applied throughout the year.

 

(i)    Market risk

The fair value or future cash flows of a financial instrument held by the Company may fluctuate because of changes in market prices.

 

This market risk comprises three elements - interest rate risk, currency risk and other price risk.

 

Interest rate risk

Interest rate movements may affect:

 

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

•      the level of income receivable on cash deposits;

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

 

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

 

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

 

Interest rate profile

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

 

 

Weighted average period for which rate is fixed

Years

Weighted average interest rate

%

Fixed rate

£000

Floating

rate

£000

As at 30 September 2017

 

 

 

 

Assets

 

 

 

 

Money market funds

-

0.30

-

3,416

Cash deposits

-

-

-

161

Total assets

-

0.29

-

3,577

Liabilities

 

 

 

 

Bank loans

-

1.10

27,000

-

Total liabilities

-

1.10

27,000

-

As at 30 September 2016

 

 

 

 

Assets

 

 

 

 

Money market funds

-

0.43

-

10,754

Cash deposits

-

-

-

287

Total assets

-

0.42

-

11,041

Liabilities

 

 

 

 

Bank loans

-

1.12

26,000

-

Total liabilities

-

1.12

26,000

-

 

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

 

All financial liabilities are measured at amortised cost.

 

Maturity profile

The Company did not hold any assets at 30 September 2017 or 30 September 2016 that had a maturity date. As detailed in note 11, the £27m loan drawn down had maturity date of 4 October 2017 at the Statement of Financial Position date. (2016: £25m on 5 October 2016; £1m on 24 October 2016).

 

Interest rate sensitivity

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

 

If interest rates had been 100 basis points higher or lower and all other variables were held constant, the Company's:

•      profit for the year ended 30 September 2017 would increase / decrease by £234,000 (2016: increase / decrease by £150,000). This is mainly attributable to the Company's exposure to interest rates on its fixed rate borrowings and floating rate cash balances.

 

Currency risk

All of the Company's investments are in Sterling. The Company can be exposed to currency risk when it receives dividends in currencies other than Sterling. The current policy is not to hedge this risk but this policy is kept under constant review by the Board. 

 

Other price risk

Other 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.

 

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

 

Other price risk sensitivity

If market prices at the Statement of Financial Position date had been 10% higher or lower while all other variables remained constant, the return attributable to ordinary shareholders and equity for the year ended 30 September 2017 would have increased/decreased by £26,192,400 (2016 - increase/decrease of £21,402,400). 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.

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 and overdraft facilities (note 11).

 

(iii) Credit risk

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

 

The risk is not significant, and 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;

 

•      investment transactions are carried out with a large number of brokers, whose credit-standing and credit rating is reviewed periodically by the investment manager, and limits are set on the amount that may be due from any one broker;

 

•      cash and money invested in AAA money market funds are held only with reputable banks.

 

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

 

Credit risk exposure

In summary, compared to the amount in the Statement of Financial Position, the maximum exposure to credit risk at 30 September was as follows:

 

 

2017

2016

 

Statement of Financial Position

£'000

Maximum exposure

£'000

Statement of Financial Position

£'000

Maximum exposure

£'000

Current assets

 

 

 

 

Debtors

1,330

1,330

1,259

1,259

Money market funds (indirect exposure)

3,416

3,416

10,754

10,754

Cash and short term deposits

161

161

287

287

 

4,907

4,907

12,300

12,300

 

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

 

Fair values of financial assets and financial liabilities

The fair value of borrowings is not materially different to the accounts value in the financial statements of £27,000,000 (note 11). 

 

16.   Fair Value hierarchy

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

 

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

 

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

 

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

 

The quoted equities and money market funds held by the Company at 30 September 2017 and 30 September 2016 were all Level 1.

 

17.   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 income and capital return to its equity shareholders through an appropriate balance of equity capital and debt. The Board normally seeks to limit gearing to 15% of net assets. At the year end the Company had gearing of 9.9% of net assets (2016 - 7.5%)

 

The Board monitors and reviews the broad structure of the Company's capital on an ongoing basis. This review includes the nature and planned level of gearing, which takes account of the Manager's views on the market and the extent to which revenue in excess of that which is required to be distributed should be retained.

 

The Company's objectives, policies and processes for managing capital are unchanged from the preceding accounting period. Any year end positions are presented in the Statement of Financial Position.

 

18.   Contingent liabilities

As at 30 September 2017 there were no contingent liabilities.

 

19.   Segmental Information

The company is engaged in a single segment of business, which is to invest in equity securities. All of the Company's activities are interrelated and each activity is dependent on the others. Accordingly, all significant operating decisions are based on the Company as one segment.

 

20.   Related Party Transactions and Transactions with the Manager

Fees payable during the year to the Directors and their interests in shares of the Company are considered to be related party transactions and are disclosed within the Directors' Remuneration Report. The balance of fees due to Directors at the year end was £nil (2016 - £nil).

 

Standard Life Investments (Corporate Funds) Limited received fees for its services as investment manager. Further details are provided in Note 3.

 

Additional notes

This Annual Financial Report is not the Company's statutory accounts. The statutory accounts for the year ended 30 September 2016 have been delivered to the Registrar of Companies. The statutory accounts for the years ended 30 September 2016 and 30 September 2017 received an audit report which was unqualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report and did not include a statement under either section 498(2) or 498(3) of the Companies Act 2006. 

 

The statutory accounts for the financial year ended 30 September 2017 have been approved and audited but will not be filed with the Registrar of Companies until after the Company's Annual General Meeting which will be held on Thursday, 18 January 2018 at 11.30am at the Company's registered office at 30 St Mary Axe, London EC3A 8EP.

 

The Annual Report will be posted to shareholders in December 2017 and copies will be available from the Manager or by download from the Company's webpage hosted by the Manager www.standardlifeequityinvestmenttrust.co.uk.

 

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

 

For Standard Life Equity Income Trust Plc

Maven Capital Partners UK LLP, Company Secretary

 

For further information please contact:

 

Hilda Stewart/Sara Reed

Press Office, Aberdeen Standard Investments

Tel: 0131 245 3409 / 0131 245 2750

 

Evan Bruce-Gardyne

Head of Investment Companies, Standard Life Investments                

Tel: 0131 245 0571

 

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
END
 
 
FR FSDFALFWSEEE
Close


London Stock Exchange plc is not responsible for and does not check content on this Website. Website users are responsible for checking content. Any news item (including any prospectus) which is addressed solely to the persons and countries specified therein should not be relied upon other than by such persons and/or outside the specified countries. Terms and conditions, including restrictions on use and distribution apply.

 


Annual Financial Report - RNS