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RNS
Aberdeen Standard Eq  -  ASEI   

Annual Financial Report

Released 07:00 21-Nov-2018

RNS Number : 9614H
Aberdeen Standard Equity Income Tst
21 November 2018
 

ABERDEEN STANDARD EQUITY INCOME TRUST PLC

(FORMERLY STANDARD LIFE EQUITY INCOME TRUST PLC)

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 30 SEPTEMBER 2018

 

Strategic Report

 

Chairman's Statement

 

Performance

I am pleased to report solid results for the year to 30 September 2018. Our Net Asset Value Total Return was 5.5%, only a little less than the 5.9% of our benchmark, the FTSE All-Share Index. The result for the year masks considerably short-term variations in the performance of the portfolio and the benchmark. In the six months to 31 March 2018, we reported an underperformance relative to the benchmark and so it is largely thanks to strong relative performance in the last couple of months of the period that the return for the year is less than 0.5% lower than the FTSE-All Share Index. Over the year the discount on our shares has narrowed slightly, from 4% to 2.5%, resulting in a Share Price Total Return of 7.1%, modestly ahead of the benchmark.

 

These results, though by no means spectacular, are, in the Board's view, reassuring, having been produced in a year which saw the putting into effect of the merger of Standard Life, the parent of our Manager, and Aberdeen Asset Management. The Board was concerned that a merger of this size and complexity could have had adverse consequences for investment and administrative performance, particularly with respect to the way in which our portfolio might be managed. I am glad to say that we have not experienced these to any significant extent. The assurances on this matter which we received from the senior management of Aberdeen Standard Investments, which I referred to in my Statement a year ago, have been fully lived up to.

 

Our longer-term performance numbers over the last five years remain satisfactory, with the Net Asset Value Total Return 50.9% and the Share Price Total Return 47.9% both slightly better than the 43.5% of the FTSE All-Share Index. Since Thomas Moore took over as Portfolio Manager in November 2011, the Net Asset Value Total Return has been 118.2% and the Index return 85.3%. It must be admitted, though, that our results in the last two years have not been able to make up for the poor outcome in 2016, when we were badly caught out by the result of the Brexit referendum, so that our three year figures trail the index by a sizeable amount.

 

Earnings and Dividend

2018 has been an outstanding year on the revenue front. Earnings per share were 22.06p, up 14.7% on last year's figure of 19.23p, despite a noticeable reduction in special dividends received. This illustrates the effectiveness of our Manager's investment process in identifying companies with underappreciated earnings and dividend prospects. This has meant that we were able to pay dividends of 13.7p per share for the first three quarters of the year, an increase of 18.1% on the same period in 2017 and the Board is now recommending a final dividend of 5.5p, to give a total dividend for the year of 19.2p, an increase of 12.3% on last year. For comparison the Retail Prices Index over the year to 30 September 2018 has increased by 3.3%. Subject to Shareholder approval at the Annual General Meeting to be held on 17 January 2019, this dividend will be paid on 21 January 2019 to Shareholders on the Register on 21 December 2018, with an associated ex-dividend date of 20 December 2018. This level of final dividend will leave the Company with Revenue Reserves of 16.5p per share, compared to 13.7p in 2017.

 

This is the eighteenth successive increase in annual dividend and the Board continues to aim to build on this track record. It is unreasonable to expect earnings to rise this year at anything like the rate we experienced in 2018, but nonetheless the Board anticipates being able to increase the dividend in 2019 to a minimum of 20.2p, representing a 5.2% increase on the current year distribution.

 

Key Performance Indicators (KPIs)

During the year the Board has carried out a detailed review of the appropriateness of the KPIs which are used to measure the Manager's performance, with a view to ensuring that they remain the most relevant to the achievement of the Company's objectives.

 

The four KPIs we are now going to report to you are as follows:

 

1. NAV Total Return relative to the FTSE All-Share Index (unchanged)

The table below illustrates the performance of the Company over various time frames up to 30 September 2018. It shows that while the returns for the year were just behind the FTSE All-Share Index and the three year returns also lagged the index, largely because of the performance around the time of the Brexit referendum in 2016, the longer-term returns have exceeded those produced by the Index.

 

Total Returns to 30 September 2018

Company Net Asset Value

FTSE All-Share Index

1 year

5.5%

5.9%

3 years

23.0%

38.4%

5 years

50.9%

43.5%

10 years

176.9%

138.5%

Source: Refinitiv & Aberdeen Standard Investments as at 30 September 2018

 

2. Premium or discount to net asset value compared to the unweighted average of the discount of the peer group (unchanged)

The chart on page 7 of the Annual Report compares the discount of the Company's share price to its NAV when compared to the unweighted average discount of the other investment trusts in the UK Equity Income sector. It shows that the Company has traded on a significantly narrower discount than the average of the other trusts for most of the last year, and has done so consistently since early 2018.

 

3. Dividend growth compared to the Retail Price Index (RPI) (new)

In eight of the last ten years the dividend growth of the portfolio has exceeded inflation, as measured by the RPI, indicating that Shareholders have received real growth in the dividends paid by the Company.

 

4. Ongoing charges relative to comparator investment vehicles (new)

The Ongoing Charges Ratio for the year is 0.87%. This compares to the unweighted average for the UK Equity Income sector as a whole of 0.81% and to the prior year ratio for the Company of 0.87%. The ratio is unchanged because the rise in the asset base has been matched by an increase in costs. Details on the changes to the cost base are shown in Notes 3 and 4 to the accounts.

 

Ongoing Charges Ratio

2018

%

2017

%

Aberdeen Standard Equity Income Trust

0.87

0.87

Unweighted sector average

0.81

0.82

Source: Aberdeen Standard Investments & JP Morgan Cazenove 30 September 2018

 

The Board reviews the data behind the KPIs on a regular basis, and analyses the results over a range of different timeframes. As the Board understands that the Company is held by investors for the long term, it focuses particularly on the results for those periods.

 

Gearing

The Company has had funding in the form of a £30m Revolving Credit Facility from Scotiabank (Ireland) Ltd which is due to be repaid on 17 December 2018.  The Board has reviewed the funding requirements of the Company and concluded that it valued the flexibility of a Revolving Credit Facility. It has negotiated to refinance the funding with a £40m facility from Banco Santander, S.A., London Branch at a rate of 1% over LIBOR. The facility is for 5 years and has an option to increase the funding by a further £20m should the Board require it.

 

Manager

As mentioned above, the investment operations of Standard Life and Aberdeen Asset Management have been successfully integrated over the last twelve months. In light of this and the satisfactory results that have been achieved, 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, the Board's 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.

 

Name Change

When the Company was launched in 1991 by Morgan Grenfell, the merchant bank, it was called "Morgan Grenfell Equity Income Trust plc" and when Morgan Grenfell, which had been acquired by Deutsche Bank, decided to discontinue its investment trust business in 2005 and the management contract was transferred to Standard Life, it changed its name to "Standard Life Equity Income Trust plc". As Aberdeen Standard Investments is the investment division created as a result of the merger of Standard Life plc and Aberdeen Asset Management PLC, the Board has decided that in these circumstances another change of name would be appropriate. Accordingly, as provided for in the Company's Articles of Association, the Company's name was changed by Board resolution to "Aberdeen Standard Equity Income Trust plc", with effect from 1 November 2018. Please note that the ticker used by some systems and dealing platforms to identify the Company has changed from SLET to ASEI.

 

Governance

You will recall that in February this year we announced that due to health issues Jo Dixon had temporarily stepped down from her position as Chair of the Audit Committee, though she would continue as a Director. I am very pleased to report that Jo has made a good recovery and has been able to resume her position as Audit Chair since the beginning of September.

 

AGM

The Annual General Meeting of the Company will be held at the Company's Registered Office, Bow Bells House, 1 Bread Street, London EC4M 9HH on Thursday, 17 January 2019. 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. The Notice of the Annual General Meeting can be found on page 62 within the Annual Report.

 

Outlook

The last year has seen reasonable economic growth around the world, with the United States being the best of the developed economies, which has led to a significant rise in interest rates there, both at short and long maturities. This has not happened to any great extent in either Europe or the UK, no doubt because growth has been much less strong, but it does seem probable that the 35 year period of falling British interest rates, which saw long gilt yields decline from 16% to below 3% and was one of the main drivers of the equity market, is over. Brexit is due in little more than four months and it is still not clear if an exit deal approved by Parliament can be struck.

 

All this means that the investment outlook is at least as uncertain as it was twelve months ago, but the Board holds to its view that the index-agnostic approach to investing, which the Company has pursued for many years, is likely to produce good long term returns and sustainable dividend growth in the future, as it has done in the past. Careful and skilful stock selection remains the key to investment success.

 

Richard Burns

Chairman

 

20 November 2018

 

 

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 Manager

The Company's Investment Manager is Standard Life Investments (Corporate Funds) Limited (the AIFM), a wholly owned subsidiary of Standard Life Aberdeen plc (SLA). Investment management services are provided to the Company by Aberdeen Standard Investments (ASI), the investment division of SLA. Thomas Moore has been the Portfolio Manager since 2011.

 

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 ASI. 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. Over 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 Portfolio Manager to take a view at a thematic level, concentrate the portfolio's holdings in certain areas and avoid others completely. 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 risks and uncertainties 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, revenue forecasts 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 Investment 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. Failure of controls and poor performance of any service provider could lead to disruption, reputational damage or loss to the Company. 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 merger of Standard Life plc and Aberdeen Asset Management PLC created 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 of any changes to personnel or process.

 

•      Governance Risk The Directors recognise the impact that an ineffective board, unable to discuss, review and make decisions, could have on the Company and its Shareholders. The Board is aware of the importance of effective leadership and board composition and this is ensured through a regular Board and Chairman performance evaluation 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 for Shareholders. In particular, a wide discount 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 a complex regulatory environment and faces a number of regulatory risks. Breaches of regulations, including but not limited to, the Companies Act 2006, the Corporation Tax Act 2010, the FCA Listing Rules, the FCA Disclosure Guidance and Transparency Rules, the Market Abuse Regulation, the Foreign Account Tax Compliance Act, the Common Reporting Standard, the Packaged Retail and Insurance based Investment Product (PRIIPs) Regulation, the Markets in Financial Instruments Directive II (MiFID II) and the General Data Protection Regulation (GDPR), could lead to a number of detrimental outcomes and reputational damage.

 

There is also a regulatory risk in ensuring compliance with the Alternative Investment Fund Managers Directive (AIFMD). In accordance with the requirements of AIFMD, the Company appointed Standard Life (Corporate Funds) Limited as its AIFM and BNP Paribas Securities Services as its Depositary. The Board receives regular reporting from the AIFM and the Depositary to ensure both are meeting their regulatory responsibilities in relation to the Company.

 

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 2019 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 20 November 2018 and signed on its behalf by:

 

Richard Burns

Chairman

 

20 November 2018

 

 

 

Investment Manager's Report

 

For the 12 months ending 30 September 2018, the NAV total return was 5.5% against the FTSE All-Share Index total return of 5.9%. Over the year, we experienced underperformance relative to the benchmark in the last weeks of the sell off in March 2018, which was largely offset by outperformance from mid-July to mid-September. Given the index-agnostic approach we adopt in managing the portfolio, it is to be expected that the portfolio will be driven by the performance of individual holdings, and may not move absolutely in line with the wider market.

 

UK Market Review

The UK equity market delivered a positive return during the 12 month period, although the uneven course of this return reflected unusually high levels of political uncertainty. Continued growth in the global economy, led by the US, provided a supportive backdrop for corporate profits. Investor optimism was tempered by the threat of tightening monetary policy and the rise of economic nationalism. The US Dollar strengthened against Sterling during the period, reflecting both the pace of US interest rate hikes and continued uncertainty over the outcome of Brexit negotiations.

 

Robust US economic growth drove the Federal Reserve to raise interest rates four times during the period. This put upward pressure on the US dollar, squeezed global liquidity and weighed on Emerging Market stocks. The prospect of further interest rate hikes saw the 10-year US Treasury yield breach the 3% level during the second half of the period. While strengthening global economic growth is welcome, the magnitude and pace of US Federal Reserve tightening remains a major focus for investors.

 

While UK economic growth was more subdued, the strong labour market and resultant acceleration in wage growth convinced the Bank of England to increase interest rates twice during the period. Policymakers appeared confident that a slowdown in the UK economy in early 2018, attributed to harsh weather conditions, was temporary. The Bank looks set to adopt a wait-and-see approach to any future rises while Brexit negotiations play out.

 

Politics was a more significant driver of equity markets than usual. Brexit negotiations remained centre stage throughout the period. Negotiations towards the ultimate 'end state' were at times bruising for investor sentiment, with the Northern Ireland border emerging as the major point of contention. It is as yet unclear whether compromises will be found that will allow a deal to be struck. The threat of a trade war between the US and China also intensified during the period, with each side imposing a series of retaliatory tariffs on a variety of goods. The US approach appears to reflect President Trump's political aims of confronting China economically and strategically, while restoring jobs in domestic manufacturing.

 

Portfolio Performance

At the sector level, Financial Services was the biggest single contributor to performance during the period. The portfolio's holdings in small cap asset management companies Premier Asset Management and AFH Financial Group were among the biggest stock contributors as the market responded to evidence of sustained growth in assets under management. Both stocks highlight the potential of our index-agnostic approach to broaden the investment universe and in so doing identify attractively valued, high growth smaller companies. Also within this sector, performance benefited from our holding in infrastructure business John Laing Group whose NAV growth surpassed expectations.

 

The portfolio benefited from its holding in cinema operator Cineworld whose shares soared on encouraging results that appeared to vindicate the recent acquisition of Regal Entertainment. The US business grew revenues and earnings at a double-digit pace, resulting in substantial upgrades to analyst forecasts.

 

The holding in small cap natural gas producer Diversified Gas & Oil contributed to performance as the share price responded positively to results highlighting stronger than expected production and cash generation. Management's focus is on acquiring and managing producing assets, rather than exploring and drilling. This provides far greater visibility on dividend-paying ability than other listed oil and gas companies.

 

The largest detractor to performance during the period was inter-dealer broker TP ICAP whose share price was hit by a downgrade in guidance on cost synergies from the recent merger between Tullett Prebon and ICAP's voice broking business. This does not change the logic of the merger which makes TP ICAP the market leader with very strong cash generation potential. We therefore added to our holding.

 

Performance was also hit by the holding in software business Micro Focus whose shares slid after a profit warning attributed to operational issues relating to its acquisition of HPE Software. We retained the position as we saw this as a short-term hiccup and continued to believe that Micro Focus has the ability to identify attractively valued legacy software businesses, stabilise profitability and return cash to shareholders.

 

The holding in Saga dragged on performance after it issued a disappointing trading update in which management pointed to lower customer retention because of more competitive insurance markets. We added to our holding as we believe that Saga's gradual diversification of revenues away from insurance and towards travel will harness its strong brand by cross-selling products to existing customers.

 

Performance was also hit by the holding in annuities business Just Group whose shares fell on fears of higher capital requirements following the publication of a Prudential Regulation Authority (PRA) consultation paper aimed at developing the regulatory approach to the equity release mortgage sector. 

 

Revenue Account

The dividend income received by the portfolio was up 17% on 2017. Encouragingly, much of the increase came from recurring rather than special dividends, which were down by almost 40%. This lack of reliance on special dividends is useful when it comes to projecting the revenue of the portfolio in the coming years, as we have greater visibility of earnings in future if it is not sourced from special dividends.

 

The increase in the revenue can be attributed to two principal factors; increased dividend distributions from the majority of the existing portfolio holdings and a shift within the portfolio towards stocks trading on higher than average dividend yields. This reflects the focus of our investment approach on identifying companies with strong fundamentals that offer the prospect of valuation re-rating and also gives us confidence that the revenue account is well positioned to deliver growth in 2019.

 

The table below shows that only 6 of the top 10 dividend payers during the year were in the FTSE 100 Index.

 

Top 10 dividend contributors

% of total dividend income received/receivable

Aviva

4.7

Royal Dutch Shell

4.0

BP

3.8

Rio Tinto

3.7

Direct Line Insurance

3.5

River & Mercantile

3.5

Galliford Try

3.1

HSBC

3.1

John Laing

2.4

Close Brothers

2.4

 

Activity

 

Purchases

We bought a holding in share registrar business Equiniti which has a strong market position in the UK, delivering stable recurring revenues and strong cash generation. In addition, Equiniti's recent acquisition of Wells Fargo Shareowner Services provides a new pillar to the revenue growth story.

 

We also bought shares in Tullow Oil which has set out a credible plan on production growth, potentially doubling its volumes and generating a significant increase in free cash flow, some of which is likely to be paid out to shareholders in the form of dividends.

 

Sales

Within the tobacco sector, we switched from Imperial Brands to British American Tobacco which we believe offers superior revenue growth prospects thanks to more favourable geographical and product positioning.

 

We sold our holding in insurance underwriter Beazley whose valuation had risen to a level that more fully prices in its strong prospects, leaving little scope for any deterioration in trading. Similarly we sold our holding in soft drinks maker Britvic following a sharp rise in the valuation. We sold our holding in insurance business Direct Line which is exposed to weakening trends in the UK motor and home insurance market. We also sold shares in TUI having performed strongly following impressive results.

 

Outlook

 

Our Focus on Change investment approach looks to identify companies with a combination of:

 

•      improving fundamentals (e.g. cash flows, earnings) that will enable them to deliver positive dividend growth

 

•      attractive valuation with the potential for valuation re-rating as the market observes positive inflection in company fundamentals.

 

The market backdrop evolved during the period under review. For much of the period, market leadership was dominated by growth stocks, resulting in an unusually wide divergence in valuations between growth stocks and value stocks. Given the importance of valuation in our investment process, this was a challenging environment as many of our stocks were left behind and the intrinsic strengths of the businesses were overlooked. We saw an asymmetry in the market's response to company results as earnings upgrades were often ignored while earnings downgrades were often hit hard. Towards the end of the period, the portfolio benefited from a shift in the market's focus towards valuation and fundamentals. Performance rebounded as many of our holdings started to respond positively to strong results. If sustained, this environment provides a more benign backdrop for our investment approach as investors reflect improving fundamentals in higher valuations.

 

The recent market sell-off is a reminder of the importance of remaining disciplined on valuation. An exciting growth story does not always make a good investment if the valuation is excessive. Conversely some of the best investments can be found within unloved sectors by identifying inexpensive stocks with the potential to deliver better fundamentals than the rest of the market expects. We see many such stocks within unloved sectors such as Financials, Consumer and Resources. It is partly as a result of the uncertain economic and political outlook that these opportunities exist. We remain mindful of "event risk", in particular the potential of a no-deal Brexit to impact the portfolio's domestically-focused stocks. The portfolio is roughly evenly split between domestic revenues and overseas revenues. Although this represents a heavier weighting in UK domestic stocks than the FTSE All-Share Index as a whole, we believe it is the index that is skewed (due to a small number of mega-cap stocks) rather than our portfolio which we construct using an index-agnostic approach. This risk of a no-deal Brexit needs to be seen in the context of very low valuations among UK stocks that have a domestic bias, reflecting a consensual bearish view on these stocks. Markets move on news that is unexpected hence the next market crisis is rarely the one that people are already worrying most intensely about. Any Brexit outcome that is less extreme than no-deal offers the prospect of material valuation re-rating for many of our stocks.

 

We are encouraged by the strength of the portfolio's income generation which is one of the key benefits of our index-agnostic approach to UK equity income. Looking ahead, we remain confident in the continued delivery of income growth and we would also expect this to result in NAV growth as share prices respond to positive company announcements.

 

Thomas Moore

Portfolio Manager

 

20 November 2018

 

 

Key Financial Highlights

 

Total return for periods to 30 September 2018(3)

 

NAV (1)

1 Year

+5.5%

3 years

+23.0%

5 years

+50.9%

Share Price

+7.1%

+20.8%

+47.9%

 

Capital return for the year ended

30 September 2018

As at 30 September 2018

NAV per Share(3)

Share Price

Discount(3)

Dividend Yield

485.0p

+1.3%(2)

473.0p

+2.9%

2.5%

4.1%

(2017: 478.6p) (2)

(2017: 459.6p)

(2017: 4.0%)(2)

(2017: 3.7%)

 

As at 30 September 2018

Market Cap

Net Assets

Net Gearing(3)

£232.5 million

+2.9%

(2017: £226.0m)

£238.4 million

+1.3%

(2017: £235.3m)(2)

 

12.0%

(2017: 9.9%)

 

For year ended 30 September 2018

Dividend per Share (DPS)

Revenue Earnings per Share (EPS)

Ongoing Charges Ratio(3)

19.2p

+12.3%

(2017: 17.10p)

22.06p

+14.7%

(2017: 19.23p)

 

0.87%

(2017: 0.87%)

(1) The Net Asset Value Total Return assumes that all dividends are reinvested on the date the shares go ex-dividend.

(2) The comparative Net Asset Value (NAV) as at 30 September 2017 differs from the NAV reported in the Statement of Financial Position. The 2017 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 the current year numbers. The comparative discount is derived from this NAV.

(3) Alternative Performance Measure - see Glossary in the Annual Report. 

 

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 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. The next continuation vote will take place at the AGM expected to be held in January 2022.

 

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 from 30 September 2018. 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 as they fall due. The Board, with the assistance of the Manager, has carried out a robust assessment of the principle risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. The Board draws attention to the following points which it 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 £30m, which represents 12.0% of the Company's net assets.

 

     The loan is due to be repaid on 17 December 2018 and will be refinanced by a new £40m facility to be provided by Banco Santander.

 

d)   The Company's cash balance (including money- market funds) at 30 September 2018 was £1.4m.

 

e)   The Board has considered the principal risks and uncertainties faced by the Company, together with the steps taken to mitigate them, as detailed in the Strategic Report, the Statement of Corporate Governance and Note 14 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 Board takes any potential risks to the Company's ongoing success 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.

 

When considering risks, the Board reviewed the impact of stress testing on the portfolio, including the effects of any substantial future falls in investment values. The Board has also had regard to matters such as significant economic or stock market volatility, a substantial reduction in the liquidity of the portfolio or changes in investor sentiment, all of which could have an impact on the Company's prospects and viability in the future. The results of the stress tests have given the Board comfort over the viability of the Company.

 

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.

 

Statement of Directors' Responsibilities

The Directors are responsible for preparing the Annual Report and Financial Statements in accordance with applicable law and regulations.

 

Company law requires the Directors to prepare Financial Statements for each financial year. Under that law they are required to prepare the Financial Statements in accordance with UK accounting standards, including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland.

 

Under company law the Directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of its profit or loss for that period. In preparing these Financial Statements, the Directors are required to:

 

•      select suitable accounting policies and then apply them consistently;

 

•      make judgements and estimates that are reasonable and prudent;

 

•      state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the Financial Statements;

 

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

 

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

 

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its Financial Statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of Financial Statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

 

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

 

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

 

Responsibility statement of the Directors in respect of the Annual Financial Report

 

We confirm that to the best of our knowledge:

 

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

 

•      the Strategic Report 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 it faces.

 

We consider the Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for Shareholders to assess the Company's position and performance, business model and strategy.

 

Richard Burns

Chairman

 

20 November 2018

 

 

 

Statement of Comprehensive Income

 

For the year ended 30 September 2018

 


 

Notes

2018

2017

Revenue

£'000

Capital

£'000

Total

£'000

Revenue

£'000

Capital

£'000

Total

£'000









Net gains on investments at fair value

9

-

3,213

3,213

-

23,248

23,248

Currency gains/(losses)


-

5

5

-

(1)

(1)

Income

2

11,893

-

11,893

10,173

-

10,173

Investment management fee

3

(514)

(1,200)

(1,714)

(483)

(1,127)

(1,610)

Administrative  expenses

4

(362)

-

(362)

(324)

-

(324)

NET RETURN BEFORE FINANCE COSTS

AND  TAXATION


11,017

2,018

13,035

9,366

22,120

31,486









Finance costs

5

(121)

(282)

(403)

(91)

(213)

(304)

RETURN BEFORE TAXATION


10,896

1,736

12,632

9,275

21,907

31,182









Taxation

6

(50)

-

(50)

(42)

-

(42)

RETURN AFTER TAXATION


10,846

1,736

12,582

9,233

21,907

31,140









RETURN PER ORDINARY SHARE:

8

22.06p

3.53p

25.59p

19.23p

45.61p

64.84p

 

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 2018


 

Notes

2018

2017

£'000

£'000

£'000

£'000

 

FIXED ASSETS






 

Investments at fair value through profit or loss

9


266,742


261,924

 







 

CURRENT ASSETS






 

Debtors

10

1,886


1,330


 

Money-market funds


1,350


3,416


 

Cash and short-term deposits


35


161


 



3,271


4,907


 







 

CREDITORS: AMOUNTS FALLING DUE

WITHIN ONE YEAR






 

Bank loan

11

(30,000)


(27,000)


 

Other creditors

11

(1,564)


(2,558)


 



(31,564)


(29,558)


 

NET CURRENT LIABILITIES



(28,293)


(24,651)

 

NET ASSETS



238,449


237,273

 







 

CAPITAL AND RESERVES






 

Called-up share capital

12


12,295


12,295

 

Share premium account



52,043


52,043

 

Capital redemption reserve



12,616


12,616

 

Capital reserve



150,675


148,939

 

Revenue reserve



10,820


11,380

 

EQUITY SHAREHOLDERS' FUNDS



238,449


237,273

 







 

NET ASSET VALUE PER ORDINARY SHARE:

13


485.02p


482.63p

 

 

The Financial Statements were approved by the Board of Directors and authorised for issue on 20 November 2018 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 2018

 


Notes

Share capital

£'000

Share premium account

£'000

Capital redemption

reserve

£'000

Capital reserve

£'000

Revenue reserve

£'000

Total

 

£'000

Balance at 30 September 2017


12,295

52,043

12,616

148,939

11,380

237,273

Return after taxation


-

-

-

1,736

10,846

12,582

Dividends paid

7   

-

-

-

-

(11,406)

(11,406)

BALANCE AT 30 SEPTEMBER 2018


12,295

52,043

12,616

150,675

10,820

238,449

 

 

For the year ended 30 September 2017

 


Notes

Share capital

£'000

Share premium account

£'000

Capital redemption

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

 

The capital reserve at 30 September 2018 is split between realised £121,773,000 and unrealised £28,902,000 (30 September 2017 is split realised £111,074,000 and unrealised £37,865,000).

 

The revenue and capital reserves represent the amount of the Company's reserves distributable by way of dividend.

 

The accompanying Notes are an integral part of the Financial Statements.

 

 

Notes to the Financial Statements

 

For the year ended 30 September 2018

 

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' issued in November 2014 and updated in February 2018 with consequential amendments.

 

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 within the Annual Report.

 

As an investment fund the Company has the option, which it has taken, not to present a cash flow statement. A cash flow statement is not required when an investment fund meets all the following conditions: substantially all of the entity's investments are highly liquid, substantially all of the entity's investments are carried at market value, and the entity provides a Statement of Changes in Equity. The Directors have assessed that the Company meets all of these conditions.

 

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.

 

(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


2018

£'000

2017

£'000

Income from investments



UK investment income



Ordinary dividends

9,376

7,661

Special dividends

574

744


9,950

8,405

Overseas and Property Income Distribution investment income



Ordinary dividends

1,700

1,329

Special dividends

-

206


1,700

1,535


11,650

9,940

Other income



Money-market interest

12

17

Stock dividends

215

212

Underwriting commission

16

4


243

233

Total income

11,893

10,173

 

 

3.    Investment management fee


2018

£'000

2017

£'000

Charged to revenue reserve

514

483

Charged to capital reserve

1,200

1,127


1,714

1,610

 

The Company has an agreement with Standard Life Investments (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 15 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 total assets), payable quarterly in arrears and is chargeable 30% to revenue and 70% to capital (see Note 1(e)).

 

 

4.    Administrative expenses


2018

£'000

2017

£'000

Directors' fees

115

114

Employers' National Insurance

(2)

10

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



- for the audit of the annual financial statements

25

24

Professional fees

20

31

Depositary fees

51

47

Other expenses

153

98


362

324

 

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 within the Annual Report.

 

The Company has no employees.

 

 

5.    Finance costs


2018

£'000

2017

£'000

On bank loans and overdrafts:



Charged to revenue reserve

121

91

Charged to capital reserve

282

213


403

304

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

 

6.    Taxation

 


2018

£'000

2017

£'000


Revenue £'000

Capital £'000

Total £'000

Revenue £'000

Capital £'000

Total £'000

(a) Analysis of charge for the year







Overseas withholding tax

50

-

50

42

-

42

(b) Factors affecting current tax charge for the year







The corporation tax rate was 19% (2017: 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

10,896

1,736

12,632

9,275

21,907

31,182

Return at an effective rate of corporation tax 19.0% (2017: effective rate 19.5%)

2,070

330

2,400

1,808

4,272

6,080

Effects of:







UK dividends

(1,928)

-

(1,928)

(1,718)

-

(1,718)

Non-taxable overseas dividend

(266)

-

(266)

(166)

-

(166)

Currency gains

-

(1)

(1)

-

-

-

Gains on investments not taxable

-

(610)

(610)

-

(4,533)

(4,533)

Expenses not deductible for tax purposes

3

-

3

-

-

-

Excess management expenses

121

281

402

76

261

337

Irrecoverable overseas withholding tax

50

-

50

42

-

42

Total taxation

50

-

50

42

-

42

 

At 30 September 2018, the Company had unutilised management expenses and loan relationship losses of £25,291,000 (2017: £23,172,000). 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


2018

£'000

2017

£'000

Amounts recognised as distributions to equity holders in the year:



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

1,967

-

Final dividend for 2017 of 5.50p per share (2016: 5.00p)

2,704

2,264

First interim dividend for 2018 of 4.40p per share (2017: 3.80p)

2,163

1,868

Second interim dividend for 2018 of 4.40p per share (2017: 3.80p)

2,163

1,868

Third interim dividend for 2018 of 4.90p per share (2017: 4.00p)

2,409

-


11,406

6,000

 

The third interim dividend for the year to 30 September 2017 was declared on 1 September 2017 with an ex-dividend date of 14 September 2017. This dividend of 4.00p per share was paid on 6 October 2017 and was not included as a liability in the previous year's financial statements.

 

The proposed final dividend for 2018 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.

 


2018

£'000

2017

£'000

First interim dividend for 2018 of 4.40p per share (2017: 3.80p)

2,163

1,868

Second interim dividend for 2018 of 4.40p per share (2017: 3.80p)

2,163

1,868

Third interim dividend for 2018 of 4.90p per share (2017: 4.00p)

2,409

1,967

Proposed final dividend for 2018 of 5.50p per share (2017: 5.50p)

2,704

2,704


9,439

8,407

 

 

8.    Return per Ordinary share


2018

2017


£'000

p

£'000

p

 

Basic





 

Revenue return

10,846

22.06

9,233

19.23

 

Capital return

1,736

3.53

21,907

45.61

 

Total return

12,582

25.59

31,140

64.84

 






 

Weighted average number of Ordinary shares in issue1


49,162,782


48,025,624

 






 

Shares in issue


49,162,782


48,025,624

 

 

The calculation of the revenue and capital returns per Ordinary share are carried out in accordance with IAS 33, "Earnings per Share".

 

1 Calculated excluding shares held in treasury where applicable.

 

 

9.    Investments

 


2018

£'000

2017

£'000

Fair value through profit or loss



Opening book cost

224,059

176,720

Opening fair value gains on investments held

37,865

37,304

Opening fair value

261,924

214,024

Movements in the year:



Purchases at cost

89,625

135,378

Sales - proceeds

(88,020)

(110,726)

          - realised gains on sales

12,176

22,687

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

(8,963)

561

Closing fair value

266,742

261,924




Closing book cost

237,840

224,059

Closing fair value gains on investments held

28,902

37,865

Closing fair value

266,742

261,924




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



Realised gains on sales

12,176

22,687

(Decrease)/ increase in fair value gains on investments held

(8,963)

561


3,213

23,248

Transaction costs

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


2018

£'000

2017

£'000

Purchases

350

675

Sales

59

110

Total

409

785

 

 

10.   Debtors: amounts falling due within one year


2018

£'000

2017

£'000

Amounts due from brokers

816

498

Net dividends receivable

842

631

Other debtors

228

201


1,886

1,330

 

 

11.        Creditors: amounts falling due within one year


2018

£'000

2017

£'000

Bank loan

30,000

27,000

Other creditors



Amounts due to brokers

1,028

1,979

Investment management fee payable

435

430

Sundry creditors

101

149


1,564

2,558

 

As at 30 September 2018, the Company had drawn down £30 million (2017: £27 million) of the £30 million (2017: £30 million) loan facility arranged with Scotiabank (Ireland) Ltd, maturing on 10 October 2018, at an interest rate of 1.57463%. Subsequent to the year end, the £30 million was rolled over on a monthly basis, maturing on 12 November 2018, at an interest rate of 1.570%.

 

The loan facility provided by Scotiabank (Ireland) Ltd is due to be repaid on 17 December 2018 and will be refinanced by a £40 million facility, to be provided by Banco Santander, at a rate of 1% over LIBOR.

 

12.   Called up share capital


2018

£'000

2017

£'000

Issued and fully paid:



Ordinary shares of 25p each



Opening balance of 49,162,782 (2017: 45,282,829) Ordinary shares

12,291

11,321

Issue of nil (2017: 3,895,938) Ordinary shares on conversion of Subscription shares

-

974

Buyback of nil (2017: 15,985) Ordinary shares

-

(4)

Closing balance of 49,162,782 (2017: 49,162,782) Ordinary shares

12,291

12,291

Treasury shares



Opening balance of 15,985 (2017: nil) treasury shares

4

-

Buyback of nil (2017: 15,985) Ordinary shares to treasury

-

4

Closing balance of 15,985 (2017: 15,985) treasury shares

4

4


12,295

12,295

 

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.

 

The final Subscription share exercise and conversion of the remaining Subscription shares took place on 15 January 2017 and as a result, no Subscription shares were converted during the year. (2017: 3,895,938 for a total consideration of £12,467,000).

 

During the year, nil Ordinary shares (2017: 15,985) were repurchased for a consideration of £nil (2017: £64,000). The total shares held in treasury is 15,985 (2017: 15,985).

 

There were no Ordinary shares issued in 2018 or 2017.

 

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:

 


2018

2017

Basic



Total Shareholders' funds (£'000)

238,449

237,273

Number of Ordinary shares in issue at year end1

49,162,782

49,162,782

Net asset value per share

485.02p

482.63p

1 Excludes shares in issue held in treasury.

 

14.   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 interest rate

%

Fixed

rate

£000

Floating

rate

£000

As at 30 September 2018




Assets




Money-market funds

0.76

-

1,350

Cash deposits

-

-

35

Total assets

0.76

-

1,385

Liabilities




Bank loans

1.57

30,000

-

Total liabilities

1.57

30,000

-

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

-

 

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 2018 or 30 September 2017 that had a maturity date. As detailed in Note 11, the £30m loan drawn down had a maturity date of 10 October 2018 at the Statement of Financial Position date. (2017: £27m on 4 October 2017).

 

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 2018 would decrease/increase by £286,000 (2017: decrease/increase by £234,000). 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 2018 would have increased/decreased by £26,674,000 (2017: increase/decrease of £26,192,400). 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-rated 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:

 


2018

2017


Statement of Financial Position

£'000

Maximum exposure

£'000

Statement of Financial Position

£'000

Maximum exposure

£'000

Current assets





Debtors

1,886

1,886

1,330

1,330

Money-market funds (indirect exposure)

1,350

1,350

3,416

3,416

Cash and short-term deposits

35

35

161

161


3,271

3,271

4,907

4,907

 

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 £30,000,000 (Note 11).

 

15.   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 equity investments held by the Company at 30 September 2018 and 30 September 2017 were all Level 1.

 

16.   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 12.0% of net assets (2017: 9.9%)

 

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.

 

17.   Contingent liabilities

As at 30 September 2018 there were no contingent liabilities.

 

18.   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.

 

19.   Related Party Transactions and Transactions with the Manager

Fees payable during the year to the Directors and their interests in shares of the Company are considered to be related party transactions and are disclosed within the Directors' Remuneration Report in the Annual Report. The balance of fees due to Directors at the year end was £nil (2017: £nil).

 

Standard Life Investments (Corporate Funds) Limited received fees for its services as investment manager. Further details are provided in Note 3.  The balance of investment management fee payable to the Manager at the year end was £435,000 (2017: 430,000).

 

Additional notes

This Annual Financial Report does not constitute the Company's statutory accounts for the years ended 30 September 2018 or 2017 but is derived from those accounts. The statutory accounts for the year ended 30 September 2017 have been delivered to the Registrar of Companies and those for 2018 will be delivered in due course. The statutory accounts for the years ended 30 September 2017 and 30 September 2018 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 2018 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, 17 January 2019 at 11.30am at the Company's Registered Office at Bow Bells House, 1 Bread Street, London, EC4M 9HH. The Annual Report will be posted to Shareholders in due course and copies will be available from the Manager or by download from the Company's webpage at http://www.aberdeenstandardequityincometrust.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 Aberdeen Standard Equity Income Trust plc

Maven Capital Partners UK LLP, Company Secretary

 

For further information please contact:

 

Hilda Stewart

Press Office, Aberdeen Standard Investments

Tel: 0131 245 3409

 

Evan Bruce-Gardyne

Client Director, Investment Trusts, Aberdeen Standard Investments

Tel: 0131 245 0571

 

 


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Annual Financial Report - RNS