Regulatory Story
Go to market news section View chart   Print
RNS
Aberdeen Standard Eq   -  ASEI   

Annual Financial Report

Released 07:00 27-Nov-2019

RNS Number : 7570U
Aberdeen Standard Equity Income Tst
27 November 2019
 

ABERDEEN STANDARD EQUITY INCOME TRUST PLC

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 30 SEPTEMBER 2019

 

 

FINANCIAL HIGHLIGHTS

 

·      Net Asset Value total return* for the year was -10.8%, share price total return was -15.1% against the FTSE All-Share Index total return of 2.7%

·      Total dividend for the year of 20.5p (2018: 19.2p) - 6.8% increase versus a rise in the Retail Price Index of 2.4%

·      This is the 19th successive year in the annual dividend and the Board anticipates being able to increase the dividend for a 20th time in the coming financial year

·      Over ten years the Net Asset Value total return* is 120.1%, the share price total return 128.7%  versus the FTSE All-Share total return of 121.0%

 

* Alternative Performance Measure. See Alternative Performance Measures for more detail. 

 

STRATEGIC REPORT

 

CHAIRMAN'S STATEMENT

 

PERFORMANCE

After a performance in 2018 which I described as "solid", our results this year have come as a considerable disappointment. The Net Asset Value total return for the year was -10.8% against the FTSE All-Share Index positive result of 2.7%, an underperformance of 13.5%. Unsurprisingly our discount widened from 2.5% to 7.4% and our share price total return was -15.1%.

 

This is a very poor result and there is no point in pretending otherwise. It is true that the market background over the year has been unhelpful to the Manager's investment style. The performance of the index has been largely driven by large capitalization stocks whose profits predominantly arise outside the United Kingdom and whose shares have appeared to us too highly rated - names such as Diageo, Unilever and RELX. The index-agnostic investment process of our Manager seeks to find undervalued companies where positive changes are underway which have not yet been recognised by the market. This has produced a domestically-orientated portfolio with an overweighting in mid and small capitalisation stocks. This has been quite the wrong positioning relative to the index over the last year. This unrewarding investment stance has not been mitigated, as might have been hoped, by successful stock picking; indeed the reverse is very much the case. Attribution analysis reveals a significant negative contribution from stock selection, largely the result of several serious disasters, such as Kier Group and Staffline, which are discussed in greater detail in the Manager's Report. Sadly, these were not offset to any significant degree by big successes.

 

These results mean that our long-term performance numbers, which have for several years been running ahead of our benchmark, are now lagging significantly.

 

EARNINGS AND DIVIDEND

It should be remembered that yours is a company which has as its objective "to provide shareholders with an above average income from their equity investment, while also providing real growth in capital and income". We have achieved most of this objective this year, though obviously not "real growth in capital", but we have fully achieved the objective over three, five and ten years.

 

During the year to 30 September 2018 our earnings grew by 14.7% to 22.06p, which was well above trend. We expected earnings growth to be much slower in the year to 30 September 2019 and in the event, largely due to dividends being cut or passed by some of our worst performing holdings, earnings actually fell almost 1.5%, to 21.74p. Nevertheless we have been able to pay dividends totalling 14.7p for the first three quarters of the year. As the forecast for next year's earnings is looking encouraging, the Board is recommending a final dividend of 5.8p, up from the 5.5p initially proposed. This will give a total dividend for the year of 20.5p, which will represent an increase of 6.8% on last year's 19.2p. For comparison, the Retail Price Index for the year to 30 September 2019 rose by 2.4%.

 

Subject to shareholder approval at the Annual General Meeting to be held on 23 January 2020, this dividend will be paid on 27 January 2020 to shareholders on the Register on 27 December 2019 with an associated ex-dividend date of 24 December 2019. After paying the final dividend, the Company will have Revenue Reserves of 17.9p per share compared to 16.5p in 2018.

 

This is the nineteenth successive increase in the annual dividend and the Board aims to build on this track record.

At this stage the income prospects for the year ahead look promising and the Board anticipates being able to increase the dividend in 2020, for the twentieth successive year, to a minimum of 21.4p, representing an increase of 4.4% on the 2019 distribution.

 

KEY PERFORMANCE INDICATORS

The four KPIs used by the Board to monitor the performance of the portfolio and the Manager are as follows:

 

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

While the Manager does not manage the portfolio with direct reference to any particular index, the Board does review the performance against that of the FTSE All-Share Index to provide context for the performance delivered.

 

The table below illustrates the performance of the Company over various time frames up to 30 September 2019. The poor performance of the portfolio in the year has resulted in the longer-term performance of the Company being less than that of the index. The Board has spent time with the Manager looking into the causes of this, and continues to believe in the underlying premise that over the longer term the index-agnostic approach should deliver superior performance.

 

Total Returns to 30 September 2019

NAV Total Return*

FTSE All-Share Index

1 year

-10.8%

2.7%

3 years

8.2%

21.0%

5 years

25.5%

38.9%

10 years

120.1%

121.0%

 

* Alternative Performance Measure. See Alternative Performance Measures for more detail. 

 

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

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 from the start of 2019, the discount drifted out and traded wider than the unweighted sector average as the performance was weak.

 

* Alternative Performance Measure. See Alternative Performance Measures for more detail. 

 

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

In the last eight 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. The two years in which the growth lagged RPI were before the current process was introduced.

 

4.       Ongoing charges relative to comparator investment vehicles

The Ongoing Charges Ratio for the year is 0.91%. This compares to the unweighted average for the UK Equity Income sector as a whole of 0.80% and to the prior year ratio for the Company of 0.87%. The 12% reduction in average net assets was a significant contributor, which did lead to a reduction in the management fees charged, but this was offset by an increase in the marketing spend as the Company joined the Manager's marketing programme.

 

 

2019

2018

Ongoing Charges Ratio*

%

%

Aberdeen Standard Equity Income Trust

0.91

0.87

Unweighted sector average

0.80

0.81

 

* Alternative Performance Measure. See Alternative Performance Measures for more detail. 

 

GEARING

The Company has funding in the form of a £40m Revolving Credit Facility from Banco Santander,S.A., London Branch at a rate of 1% over LIBOR. The facility is for 5 years from 17 December 2018, with an option to increase the funding by a further £20m. Throughout the year £30m of the facility was drawn at a weighted average interest and commitment fee cost of 2.0%.

 

The Board is responsible for arranging the facility and the Manager for deploying it. The Board recognises that borrowing will enhance returns to shareholders when the portfolio is rising in value but that where values are falling the borrowing will work to exacerbate declines.

 

SHARE BUYBACKS

The Board monitors the discount of the share price to the cum-income NAV both in absolute terms and relative to the discounts of other UK equity income investment trusts. In light of the width of the discount in September 2019 and the confidence that the Manager has in the portfolio, the Board bought back 241,654 shares (0.5% of the shares in issue) at a weighted average price of £3.68 and a weighted average discount of 9.0%. At 30 September 2019, the discount was 7.4%. The Company last bought back shares in January 2017.

 

MANAGER

In light of this year's poor results, the Board has given careful consideration to the Manager's performance. We continue to have confidence in the investment process which has generated the Company's returns over the last eight years, in particular the excellent record of dividend growth of a compound average rate of 6.5% since 2011, while inflation has grown on average by 2.6% per annum. The Manager has commented in detail on some of the mistakes which have been made recently, in particular not taking decisive action to sell stocks where the investment case was not working out and businesses were actually deteriorating. We believe that Thomas Moore and his supporting team have learnt from this experience and will get back on track. We are encouraged by the fact that our net asset value has outperformed in both September and October.

 

In all other respects, the Manager's execution of its duties has been satisfactory and the Board believes that the appointment of the Manager continues to be in the long-term interest of shareholders.

 

FEES

The fourth of our KPIs is our Ongoing Charges Ratio and how it compares to similar investment vehicles. The biggest single component of these charges is the fee we pay the Manager for running the Company and its investment portfolio and the Board has been keen to reduce the level of this fee. I am pleased to say that we have negotiated a change in the basis on which the fee is calculated. From 1 October 2019 the fee will be charged on net, rather than gross, assets. Furthermore, the asset figure at which the fee drops from 0.65% per annum to 0.55% has been reduced from £250m to £175m. This will produce an immediate benefit to shareholders and one which will increase over time if, as we trust will be the case, the value of the Company's portfolio rises over the years ahead.

 

BOARD

Josephine Dixon will be retiring at the AGM, having served nine years as a Director and seven years as Chairman of the Audit Committee. She has been a stimulating and highly effective colleague and we wish her continuing success in the years ahead.

 

We have been very fortunate to recruit Sarika Patel to succeed Josephine. She has had wide and varied experience in her career and currently sits on a number of influential boards and committees. She stands for election at the AGM and we are very much looking forward to working with her.

 

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, 23 January 2020. 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 in the Annual Report.

 

OUTLOOK

My forecast a year ago, that long-term interest rates in Britain had probably bottomed out and were likely to rise, has proven wide of the mark with yields having declined still further.  More accurate, however, was my prediction that striking a Brexit deal which could obtain Parliamentary approval was far from certain . Worldwide economic activity is still growing but it has decelerated considerably during the last twelve months and business sentiment surveys are becoming increasingly gloomy. In Britain we face a general election whose outcome seems likely to be in doubt right up until the moment the votes are counted.

 

When shareholders meet Board and Manager at the AGM on 23 January 2020, the political uncertainty should be

somewhat reduced and Brexit might only be days away from happening. Whether that will be good or bad for British financial markets remains to be seen.

 

In the meantime, our Manager will be working hard to ensure that the severe disappointment of 2019 is left in the past and that the more positive trend of the last two months is being built on. I hope, therefore, to be able to report on a more rewarding year in twelve months' time.

 

 

Richard Burns

Chairman

26 November 2019

 

 

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 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 Board delegates investment management services to Aberdeen Standard Investments ("ASI"), the investment division of Standard Life Aberdeen PLC. The team within ASI managing the Company's portfolio of investments has been headed up by Thomas Moore since 2011.

 

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 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 its future prospects and the markets in which it operates. 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 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 often looks very different from 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 Index.

 

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 & UNCERTAINTIES

 

The Board and Audit Committee has an ongoing process for identifying, evaluating and managing the principal risks and uncertainties of the Company. The Audit Committee has adopted a risk matrix as part of that review. The assessment of risks and their mitigation is an area of significant focus. 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 has carried out a robust assessment of these risks, which include those that would threaten the Company's business model, future performance, solvency or liquidity, and 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 has also considered the outcome and potential impact on the Company of the UK General Election scheduled to take place on 12 December 2019 and the resulting impact on the UK Government's Brexit discussions with the European Union. The outcome and potential impact of the General Election and Brexit are still unclear at the time of writing, and this remains an increased risk for the Company and its investee companies.

 

-    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 internal 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.

 

-    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. During the financial year, shares have been bought back at a discount by the Company.

 

-    Legal and Regulatory Risk The Company operates in a complex legal and regulatory environment. As a UK company with shares publicly quoted on the London Stock Exchange, as an alternative investment fund and an investment trust, there are several layers of risks of this nature.

 

Failure to adhere to the different rules associated with this environment could result in a number of detrimental outcomes for the Company and its Directors individually.

 

The actions the Board takes to mitigate these extensive risks are to ensure that there is breadth and depth of expertise within the Board and the companies to which the Company has delegated responsibilities. There are also authorities whereby the Board or individual Directors can take further advice by employing experts should that ever be considered necessary.

 

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. For full details of the Manager's Environmental, Social & Governance Investment Principles and Policy Guidelines and its compliance with the UK Stewardship Code, please visit the Manager's website www.aberdeenstandard.com/en/responsible-investing. 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.

 

 

INVESTMENT MANAGER'S REPORT

 

The financial year was marked by persistent anxiety over economic stagnation and geopolitical tensions. This drove a wide divergence in share price performance within the UK equity market which was unhelpful for our performance. The portfolio suffered from its heavy exposure to small/ mid-cap stocks which were out of favour for most of the period. It was also hit by its limited exposure to large-cap defensive/growth stocks and some company-specific disappointments. Looking ahead, low valuations and robust dividend prospects make us positive on the outlook for the portfolio.

 

UK market review

The slight advance in the UK equity market over the 12 month period masks considerable volatility along the way as political events, notably the US-China trade war and Brexit, hit investor sentiment. In this environment, company-specific developments took a back seat to macro events, causing large-cap defensive sectors to lead the market and small and mid-cap cyclical sectors to lag.

 

The financial year started on a sour note, with the FTSE All-Share Index delivering a double-digit percentage decline in the last quarter of 2018; its weakest quarterly performance since the depths of the Eurozone crisis in Q3 2011. The weakness in global stock markets coincided with the inversion of government bond yield curves, meaning that long-dated bonds yielded less than short-dated bonds. These market signals indicated growing expectations of a global economic recession. Central bank policy responded by turning increasingly dovish in order to support economic growth. The US Federal Reserve shifted its policy stance first to pause and subsequently to cut rates in July and September. This helped to lift global stock markets.

 

Politics remained the primary focus in the UK, with Prime Minister Theresa May being forced to delay the UK's departure from the EU and then to resign. Her successor, Boris Johnson, took a more hard-line approach to negotiations, emphasising his willingness to allow the UK to leave the EU without a deal. This political whipsawing was reflected in a weakening in the value of sterling against the US dollar and the underperformance of the FTSE 250 Index and Small Cap Index against the FTSE 100 index. Weak sterling enhances the earnings of companies with significant overseas sales, a feature of the large-cap FTSE 100 Index, which derives around 80% of its revenues from outside the UK, in contrast with smaller companies, whose revenues tend to be far more weighted towards the domestic economy.

 

Since the year end, investors have become more sanguine about the global outlook, helped by a thawing in US-China trade relations at the same time as a continuation of dovish Federal Reserve policy and signs of a bottoming in US economic data. In the UK, Prime Minister Boris Johnson has managed to negotiate a fresh Brexit deal and will fight for an overall majority in the forthcoming General Election. While there remain multiple different potential political outcomes, the probability of a no-deal Brexit is now considered to be much reduced. This has helped to broaden the performance of the stock market beyond the large-cap defensive sectors that dominated during the year under review.

 

Portfolio performance

The weak performance of the portfolio during the year can be attributed to a combination of market conditions that were unfavourable to our investment process and some company-specific disappointments. The impact of these two drivers on performance was exacerbated by our index-agnostic portfolio construction which differentiates the Company from our peer group. This approach has delivered superior returns for shareholders in the past, but this was not the case last year. We remain confident in the ability of our investment process to identify companies that will deliver outperformance relative to our peer group and the wider market.

 

In an environment characterised by fear, the portfolio suffered from the persistent poor performance of many of its cyclicals and financials holdings, particularly small and mid-cap stocks where lower levels of liquidity tend to amplify the magnitude of share price moves. Examples of these holdings include Premier Asset Management, Chesnara, Equiniti, Wood Group and Bodycote. With the benefit of hindsight, we went into the year with too much exposure to such stocks. We under-estimated the extent to which the slowdown in global growth and the flare-up in geopolitical concerns would hit their valuations. While this is frustrating, we do not believe that it is justified by the fundamentals of the companies affected and we have taken the opportunity to add to many of our holdings during the course of the year as we confidently expect them to rebound strongly once anxiety levels diminish. Our under-performance was amplified as the overall market's performance was driven by a handful of large-cap defensive/ growth stocks, like AstraZeneca, Diageo, Unilever and Compass, which we considered to be overly expensive in relation to their fundamentals. Around half of our underperformance was caused by the combination of our heavy weightings in small and mid-cap cyclicals and our limited exposure to defensive/growth stocks.

 

Most regrettably, the year was also characterised by a spate of company-specific disappointments. Notable detractors included recruitment business Staffline which announced a rights issue following a profit warning as employers pre-emptively shifted from temporary workers to permanent workers ahead of Brexit; construction business Kier Group which also announced a rights issue due to rising working capital requirements; and consumer business Saga, after it issued a disappointing trading update in which management pointed to lower customer retention because of intense competition in insurance markets. Our exposure to such stocks caused the rest of our under-performance.

 

Partially offsetting these holdings, the portfolio benefited from owning financial services businesses Ashmore which announced very strong inflows; John Laing Group whose NAV growth surpassed expectations; and Litigation Capital Management which rose over 40% following its IPO in December 2018 on evidence of success in signing new litigation projects. The portfolio also benefited from owning retailer Dunelm which bucked the trend of the wider sector by announcing a very strong trading update. While such holdings were welcome contributors to performance, they were insufficient to offset the negatives described above.

 

Top 5 contributors to performance

Total Return

(%)

Contribution to Return

(%)

John Laing Group

20.4

0.9

Ashmore Group

45.5

0.8

Rio Tinto

21.5

0.6

Litigation Capital Management

41.0

0.5

Dunelm

51.8

0.5

 

Bottom 5 contributors to performance

Total Return

(%)

Contribution to Return

(%)

Virgin Money UK

-54.2

-0.8

Saga

-59.8

-1.1

Kier Group

-87.8

-1.2

John Wood Group

-47.7

-1.2

Staffline

-92.7

-1.3

Source: Aberdeen Standard Investments

 

Revenue Account

Total income, including stock dividends, received by the portfolio during the year was £11.8m, which was 1.0% or £102k less than last year. Just under 95% of the dividend income came from recurring rather than special dividends, which provides reassurance that the income is sustainable in the future.

 

55% of the income received by the portfolio in the year came from twenty positions, which represented 46% of the

portfolio. The contributors differ markedly from the largest income stocks in the FTSE All-Share Index. Twelve of the portfolio's largest contributors are not in the FTSE 100, which reflects the diversification benefit that results from our index-agnostic investment approach as we use our investment research resource to identify high conviction ideas from across the market cap spectrum of the UK market.

 

Stock                              

Total income received / receivable (%)

Closing portfolio weight

(%)

Royal Dutch Shell

4.9

4.3

BP

4.0

3.5

Aviva

3.9

2.7

Rio Tinto

3.5

1.3

Galliford Try

3.3

1.9

Diversified Gas & Oil

3.1

2.0

HSBC

2.9

0.9

British American Tobacco

2.6

2.9

Close Brothers

2.6

3.0

John Laing

2.5

4.5

Top 10

33.3

27.0

 

Stock                              

Total income received / receivable (%)

Closing portfolio weight

(%)

Premier Asset Management

2.5

2.3

River & Mercantile

2.4

1.9

GVC

2.4

2.7

NewRiver REIT

2.3

1.2

BHP Billiton

2.3

2.5

Chesnara

2.3

1.6

Glencore

2.1

1.7

Tyman

1.9

1.7

Real Estate Investors

1.9

1.4

MJ Gleeson

1.9

1.9

Top 20

55.3

45.9

 

Source: Aberdeen Standard Investments

Companies in bold are constituents of the FTSE100 Index

 

Our forecasts for the year ahead indicate healthy growth in the revenue account in the year to September 2020 which should ensure that the Company can look forward to delivering a 20th consecutive year of dividend growth in the coming year.

 

Activity

 

Purchases

During the financial year we identified a range of stocks that met the criteria of our investment process - attractively valued stocks with the potential for positive change in their fundamentals - within both defensive and cyclical sectors. The largest purchase was a defensive stock, GlaxoSmithKline, where we see valuation attractions following the announcement of the intention to split the group. Stripping out the Consumer Health division at a peer group multiple, the pharmaceuticals business trades at a significant discount to its peers. We bought a new holding in utility business SSE. The decision of the management team to divest its domestic energy supply business will leave the company with an attractive mix of networks and renewable assets with appealing growth opportunities in both areas. Similar businesses trade at higher valuations in other markets; therefore we see valuation re-rating potential once political uncertainty eases. We bought into Imperial Brands where we believe the market is too fearful about the impact of new competition on earnings and dividends.

 

In addition to these defensive stocks, we also identified some attractive opportunities among cyclical stocks. Towards the end of the financial year we added to our holding in mining business BHP Billiton which has a well- diversified low-cost asset base with potential to grow volumes. The strength of BHP's cash flows, coupled with improved capital discipline, underpins confidence in the robustness of the balance sheet and the dividend. We bought shares in mining business Glencore which has a diversified portfolio with stable marketing revenues in addition to high quality mining assets. Its management is highly incentivised to deliver improved performance. We also bought back into DS Smith which has a track record of producing consistent organic growth, with tailwinds from its exposure to internet retail and the shift away from plastics. We saw its weak share price, caused by investor anxiety over debt levels, as an opportunity.

 

Sales

During the financial year we took profits in some holdings where share price strength had driven valuations to levels that reduced valuation upside. We sold Anglo American which had performed well as the market gained confidence in the management team's focus on capital discipline and returns. Also within the mining sector, we reduced our holding in Rio Tinto whose shares had risen sharply on a spike in the iron ore price caused by disruption to Brazilian iron ore production. While Rio Tinto is a well-managed business, its heavy dependence on this one commodity makes it vulnerable to any deterioration in sentiment towards Chinese demand. We took profits in Legal & General where management's strategy has been successful in addressing growth opportunities by linking the company's investing, annuities, investment management and insurance businesses. However, this is now better understood by the wider market, as reflected in the valuation which has moved ahead of its peers after a period of very strong share price performance. We also took profits in Dunelm where the investment case had played out and the valuation had moved ahead of its closest competitors. We reduced our holding in HSBC which is taking sensible actions to invest in growth, particularly in China and the UK, but new headwinds have emerged in the form of slower trade volumes, lower bond yields and higher capital requirements, all of which reduce the potential for dividend growth and share buybacks going forward.

 

Outlook

The portfolio's disappointing performance in the financial year has not shaken our conviction in the merits of our investment process. We continue to believe that the best way to deliver for shareholders in the long term is to identify stocks whose potential for improvement is not priced into their valuations.

 

The prolonged period of intense investor pessimism we have experienced has led to a polarised stock market in which stocks perceived as low risk are trading at very high valuations while stocks regarded as higher risk are trading at very low valuations. This valuation divergence is the most extreme it has been for more than 10 years and we therefore see it as an opportunity to build positions in robust businesses that will ultimately deliver strong performance as risk aversion subsides.

 

Past performance is, of course, no guide to the future, but when we have observed a similar situation in the past, we have recovered strongly once investors become less anxious and shift their focus away from momentum investing and back to corporate fundamentals. Increased confidence levels would benefit many of our holdings, in particular those stocks whose earnings and valuation multiples are linked to global economic growth, such as resources, industrials and financials. Specifically, the political uncertainty relating to Brexit and the US-China trade war has weakened activity levels and depressed valuation multiples across many of our holdings. We would expect share prices to respond very positively to any resolution to these political matters. In addition, we remain confident in the sustainability of the portfolio's income generation and expect the portfolio to deliver solid revenue growth in 2020. We have seen some evidence of a change in mindset since the beginning of September at which point conditions have become noticeably more benign for our investment process. Although uncertainty is still elevated, investors are showing signs of becoming less nervous, particularly in relation to the risk of a no-deal Brexit. We have also benefited from a noticeable increase in the number of holdings meeting or beating consensus analyst expectations and a reduction in the number of stocks missing expectations.

 

Our focus in the year ahead remains to ensure that the portfolio generates solid cash flows and dividends, which we expect will deliver improved share price performance. The portfolio starts the new fiscal year from a position of low valuations, with the median stock in the portfolio yielding around 5% and trading at a valuation of around 11x earnings (a discount of more than 20% to the median rating of all the companies in the FTSE 350 ex Investment Trusts Index), suggesting there is considerable scope for valuations to re-rate. We remain positive on the dividend prospects of the companies within the portfolio given robust fundamentals and our forecasts for the year ahead indicate healthy growth in the revenue account. While investor sentiment may remain choppy, the foundations of solid corporate fundamentals and low valuations are in place for a recovery in your Company's performance.

 

Thomas Moore

Portfolio Manager

 

26 November 2019

 

 

KEY FINANCIAL HIGHLIGHTS

 

Total return for periods to 30 September 2019

 

 

1 year

3 years

5 years

Net Asset Value per share (NAV) (1)

-10.8%

+8.2%

+25.5%

Share Price (1)

-15.1%

+5.3%

+18.1%

 

 

Capital return for the year ended

30 September 2019

As at 30 September 2019

NAV

Share Price

Discount(1)

Discount yield(1)

411.8p

-15.1%

(2018: 485.0p)

381.5p

-19.3%

(2018: 473.0p)

7.4%

 

(2018: 2.5%)

5.4%

 

(2018: 4.1%)

 

 

As at 30 September 2019

 

Market Cap

Net Assets

Net Gearing(1)

£186.7m

-19.7%

(2018: £232.5m)

£201.5m

-15.5%

(2018: £238.4m)

13.7%

 

(2018: 12.1%)

 

 

For year ending 30 September 2019

 

Revenue Earnings per Share (EPS)

Dividend per Share (DPS)

Ongoing Charges Ratio(1)

21.74p

-1.5%

(2018: 22.06p)

20.5p

+6.8%

(2018: 19.2p)

0.91%

 

 (2018: 0.87%)

 

(1)              Alternative Performance Measure. See Alternative Performance Measures for more detail.     

 

 

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 2019. 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 principal 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)    All of the Company's investments are traded on major stock exchanges 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 (2018: £30m), which represents 13.1% of the Company's investment portfolio. This is a £40m revolving credit facility with Banco Santander S.A., London Branch, which has replaced the £30m funding which had previously been provided by Scotiabank (Ireland) Limited up to 17 December 2018. This new facility was in use from that date and £30m was drawn at the end of the financial year end at a weighted average interest and commitment fee cost of 2.0%.

d)    The Company's cash balance, including money-market funds, at 30 September 2019 was £1.7m (30 September 2018: £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.

 

Despite the challenging short term performance as detailed in the Manager's Report, 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, the Company's long-term performance is

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, 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 IN RESPECT OF THE ANNUAL REPORT AND THE FINANCIAL STATEMENTS

 

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

 

Company law requires the Directors to prepare financial statements for each financial year. Under that law they 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;

 

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

 

We consider the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.

 

 

 

Richard Burns

Chairman

26 November 2019

 

 

 

 

STATEMENT OF COMPREHENSIVE INCOME

For the year ended 30 September 2019

 

 

 

Notes

2019

2018

Revenue

£'000

Capital

£'000

Total

£'000

Revenue

£'000

Capital

£'000

Total

£'000

Net (losses)/gains on investments at fair value

9

-

(35,337)

(35,337)

-

3,213

3,213

Currency (losses)/gains

 

-

(9)

(9)

-

5

5

Income

2

11,791

-

11,791

11,893

-

11,893

Investment management fee

3

(461)

(1,076)

(1,537)

(514)

(1,200)

(1,714)

Administrative expenses

4

(424)

-

(424)

(362)

-

(362)

NET RETURN BEFORE FINANCE COSTS AND TAXATION

 

10,906

(36,422)

(25,516)

11,017

2,018

13,035

 

 

 

 

 

 

 

 

Finance costs

5

(179)

(417)

(596)

(121)

(282)

(403)

RETURN BEFORE TAXATION

 

10,727

(36,839)

(26,112)

10,896

1,736

12,632

 

 

 

 

 

 

 

 

Taxation

6

(40)

-

(40)

(50)

-

(50)

RETURN AFTER TAXATION

 

10,687

(36,839)

(26,152)

10,846

1,736

12,582

 

 

 

 

 

 

 

 

RETURN PER ORDINARY SHARE

8

21.74p

(74.95p)

(53.21p)

22.06p

3.53p

25.59p

 

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 this announcement.

 

 

STATEMENT OF FINANCIAL POSITION

As at 30 September 2019

 

 

Notes

2019

2018

£'000

£'000

£'000

£'000

 

 

 

 

 

 

 

 

FIXED ASSETS

 

 

 

 

 

 

Investments at fair value through profit or loss

9

 

229,277

 

266,742

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

Debtors

10

4,411

 

1,886

 

 

Money market fund

 

1,262

 

1,350

 

 

Cash at bank and in hand

 

389

 

35

 

 

 

 

6,062

 

3,271

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

Creditors: amounts falling due within one year

 

 

 

 

 

 

Bank loan

11

(29,867)

 

(30,000)

 

 

Other creditors

11

(4,000)

 

(1,564)

 

 

 

 

(33,867)

 

(31,564)

 

 

NET CURRENT LIABILITIES

 

 

(27,805)

 

(28,293)

 

NET ASSETS

 

 

201,472

 

238,449

 

 

 

 

 

 

 

 

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

 

 

112,940

 

150,675

 

Revenue reserve

 

 

11,578

 

10,820

 

EQUITY SHAREHOLDERS' FUNDS

 

 

201,472

 

238,449

 

 

 

 

 

 

 

 

NET ASSET VALUE PER ORDINARY SHARE

13

 

411.83p

 

485.02p

 

 

This announcement was approved by the Board of Directors and authorised for issue on 26 November 2019.

 

The accompanying notes are an integral part of this announcement.

 

 

STATEMENT OF CHANGES IN EQUITY

For the year ended 30 September 2019

 

 



Notes


Share
capital

Share
premium
account

Capital
redemption
reserve


Capital
reserve


Revenue
reserve



Total

 

 

£'000

£'000

£'000

£'000

£'000

£'000

Balance at 30 September 2018

 

12,295

52,043

12,616

150,675

10,820

238,449

Return after taxation

 

-

-

-

(36,839)

10,687

(26,152)

Purchase of own shares for treasury

 

-

-

-

(896)

-

(896)

Dividends paid

7

-

-

-

-

(9,929)

(9,929)

BALANCE AT 30 SEPTEMBER 2019

 

12,295

52,043

12,616

112,940

11,578

201,472

 

 

 

 

 

 

 

 

For the year ended 30 September 2018

 



Notes


Share
capital

Share
premium
account

Capital
redemption
reserve


Capital
reserve


Revenue
reserve



Total

 

 

£'000

£'000

£'000

£'000

£'000

£'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

                       

 

The capital reserve at 30 September 2019 is split between realised £118,671,000 and unrealised (£5,731,000) (30 September 2018 is split realised £121,773,000 and unrealised £28,902,000).

 

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

 

The accompanying notes are an integral part of this announcement.

 

 

NOTES

 

For the year ended 30 September 2019

 

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. 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 that the Company has adequate financial resources to continue its operational existence for a period of not less than 12 months from the date of approval of the Financial Statements.

 

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)      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

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 Company invests in a AAA money-market fund, Aberdeen Standard Liquidity Sterling Fund, which is managed by Aberdeen Standard Fund Managers 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, 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 cash at bank and in hand and on the money-market fund 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. This reserve is not distributable.

 

Share premium account

The share premium account represents the premium above nominal value received by the Company on issuing shares net of issue costs. This reserve is not distributable.

Capital redemption reserve

The capital redemption reserve represents the nominal value of Ordinary shares repurchased and cancelled. This reserve is not distributable.

 

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 and relevant finance costs are charged to this reserve. Any associated tax relief is also credited to this reserve. The part of this reserve represented by realised capital gains is available for distribution by way of dividend and for the purpose of funding share buybacks.

 

Revenue reserve

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

 

(h)      Taxation

The tax expense represents the sum of the tax currently payable and deferred tax. Tax payable is based on the taxable profit for the year. Taxable profit differs from profit before tax as reported in the Statement of Comprehensive Income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the Statement of Financial Position date.

 

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.

 

(k)      Treasury shares

When the Company purchases its Ordinary shares to be held in treasury, the amount of the consideration paid, which includes directly attributable costs, is net of any tax effect, and is recognised as a deduction from the capital reserve. When these shares are sold subsequently, the amount received is recognised as an increase in equity, and any resulting surplus on the transaction is transferred to the share premium account and any resulting deficit is transferred from the capital reserve.

 

 

2.       Income

 

2019
£'000

2018
£'000

Income from investments

 

 

UK investment income

 

 

Ordinary dividends

9,032

9,376

Special dividends

390

574

 

9,422

9,950

Overseas and Property Income Distribution investment income

 

 

Ordinary dividends

1,746

1,700

Special dividends

209

-

 

1,955

1,700

 

11,377

11,650

Other income

 

 

Money-market interest

43

12

Stock dividends

361

215

Underwriting commission

10

16

 

414

243

Total income

11,791

11,893

 

 

3. Investment management fee

 

2019£'000

201£'000

Charged to revenue

461

514

Charged to capital

1,076

1,200

 

1,537

1,714

 

The Company has an agreement with Aberdeen Standard Fund Managers Limited for the provision of management services. The contract is terminable by either party on not less than six months notice.

 

During the period the fee was based on 0.65% on the first £250m of total assets, reduced to 0.55% over and above £250m of total assets, payable quarterly in arrears and is chargeable 30% to revenue and 70% to capital (see note 1(e)). The balance of fees due at the year end was £770,000 (2018-£435,000).

 

 

4.       Administrative expenses

 

2019
£'000

2018
£'000

Directors' fees

118

115

Employers' National Insurance

7

(2)

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

 

 

- for the audit of the annual financial statements

23

25

Professional fees

47

20

Depositary fees

46

51

Other expenses

183

153

 

424

362

 

The Company has an agreement with Aberdeen Standard Fund Managers Limited for the provision of promotional activities. Fees paid and payable under the agreement during the year were £49,000 (2018-£nil). The balance due at the year end was £49,000 (2018-£nil).

 

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 in the Annual Report.

 

The Company has no employees.

 

 

5.       Finance costs

 

2019
£'000

2018
£'000

On bank loans and overdrafts:

 

 

Charged to revenue reserve

179

121

Charged to capital reserve

417

282

 

596

403

 

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

 

 

6.       Taxation

 

2019

2018

 

Revenue
£'000

Capital
£'000

Total
£'000

Revenue
£'000

Capital
£'000

Total
£'000

(a)      Analysis of charge for the year

 

 

 

 

 

 

Overseas withholding tax

40

-

40

50

-

50

(b)     Factors affecting current tax charge for the year

 

 

 

 

 

 

The corporation tax rate was 19% (2018 - same). The tax assessed for the year differs from 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

10,727

(36,839)

(26,112)

10,896

1,736

12,632

Return at an effective rate of corporation tax 19% (2018 - same)

2,038

(6,999)

(4,961)

2,070

330

2,400

Effects of:

 

 

 

 

 

 

UK dividends

(1,718)

-

(1,718)

(1,928)

-

(1,928)

Non-taxable overseas dividends

(397)

-

(397)

(266)

-

(266)

Currency losses/(gains)

-

2

2

-

(1)

(1)

Losses/(gains) on investments not taxable

-

6,714

6,714

-

(610)

(610)

Expenses not deductible for tax purposes

1

-

1

3

-

3

Excess management expenses

76

283

359

121

281

402

Irrecoverable overseas withholding tax

40

-

40

50

-

50

Total taxation

40

-

40

50

-

50

 

At 30 September 2019, the Company had unutilised management expenses and loan relationship losses of £27,183,000 (2018 - £25,291,000). 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

 

2019
£'000

2018
£'000

Amounts recognised as distributions to equity holders in the year:

 

 

Third interim dividend for 2017 of 4.00p per share

-

1,967

Final dividend for 2018 of 5.50p per share (2017 - 5.50p)

2,704

2,704

First interim dividend for 2019 of 4.90p per share (2018 - 4.40p)

2,409

2,163

Second interim dividend for 2019 of 4.90p per share (2018 - 4.40p)

2,409

2,163

Third interim dividend for 2019 of 4.90p per share (2018 - 4.90p)

2,407

2,409

 

9,929

11,406

 

The proposed final dividend for 2019 is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements.

 

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 year to 30 September 2017 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.

 

 

2019
£'000

2018
£'000

First interim dividend for 2019 of 4.90p per share (2018 - 4.40p)

2,409

2,163

Second interim dividend for 2019 of 4.90p per share (2018 -4.40p)

2,409

2,163

Third interim dividend for 2019 of 4.90p per share (2018 - 4.90p)

2,407

2,409

Proposed final dividend for 2019 of 5.80p per share (2018 - 5.50p)

2,837

2,704

 

10,062

9,439

 

8.       Return per Ordinary share

 

 

2019

2018

 

£'000

p

£'000

p

Basic

 

 

 

 

Revenue return

10,687

21.74

10,846

22.06

Capital return

(36,839)

(74.95)

1,736

3.53

Total return

(26,152)

(53.21)

12,582

25.59

 

 

 

 

 

Weighted average number of Ordinary shares in issue1

 

49,152,006

 

49,162,782

 

 

 

 

 

Shares in issue

 

48,921,128

 

49,162,782

 

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.

 

 

9.       Investments at fair value through profit or loss

 

2019
£'000

2018
£'000

Fair value through profit or loss

 

 

Opening book cost

237,840

224,059

Opening fair value gains on investments held

28,902

37,865

Opening fair value

266,742

261,924

Movements in the year:

 

 

Purchases at cost

67,648

89,625

Sales - proceeds

(69,776)

(88,020)

- realised (losses)/gains on sales

(704)

12,176

Current year fair value losses on investments held

(34,633)

(8,963)

Closing fair value

229,277

266,742

 

 

 

Closing book cost

235,008

237,840

Closing fair value (losses)/gains on investments held

(5,731)

28,902

Closing fair value

229,277

266,742

 

 

 

(Losses)/gains on investments held at fair value through profit or loss

 

 

(Losses)/gains on sales

(704)

12,176

Decrease in fair value gains on investments held

(34,633)

(8,963)

 

(35,337)

3,213

 

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 losses on investments in the Statement of Comprehensive Income. The total costs were as follows:

 

 

2019
£'000

2018
£'000

Purchases

285

350

Sales

50

59

Total

335

409

 

 

10.     Debtors: amounts falling due within one year

 

2019
£'000

2018
£'000

Amounts due from brokers

3,672

816

Net dividends and interest receivable

570

842

Other debtors

169

228

 

4,411

1,886

 

11.     Creditors: amounts falling due within one year

 

2019
£'000

2018
£'000

Bank loan

30,000

30,000

Unamortised loan arrangement expenses

(133)

-

 

29,867

30,000

Other creditors

 

 

Amounts due to brokers

3,061

1,028

Investment management fee payable

770

435

Sundry creditors

169

101

 

4,000

1,564

 

The loan facility provided by Scotiabank (Ireland) Ltd was repaid on 17 December 2018 and refinanced by a £40m facility provided by Banco Santander S.A., London Branch. The facility consists of a five year revolving facility which has a maturity date of 20 November 2023.

 

The facility agreement contains the following covenants:

 

-    The Company's gross assets will not be less than £150,000,000 at any time.

-    The Company's total net debt will not exceed 25% of net asset value at any time.

 

All covenants were complied with throughout the year.

 

At 30 September 2019, £30m had been drawn down, maturing on 21 October 2019, (30 September 2018 - £30m) at an interest rate of 1.714380% (30 September 2018 - 1.57463%).

 

At the time of writing, the £30m has been rolled over until 21 February 2020 at an interest rate of 1.797750%.

 

 

12.     Called up share capital

 

2019
£'000

2018
£'000

Issued and fully paid:

 

 

Ordinary shares of 25p each

 

 

Opening balance of 49,162,782 (2018 - 49,162,782) Ordinary shares

12,291

12,291

Buyback of 241,654 (2018 - nil) Ordinary shares

(60)

-

Closing balance of 48,921,128 (2018 - 49,162,782) Ordinary shares

12,231

12,291

Treasury shares

 

 

Opening balance of 15,985 (2018 - 15,985) treasury shares

4

4

Buyback of 241,654 (2018 - nil) Ordinary shares to treasury

60

-

Closing balance of 257,639 (2018 - 15,985) treasury shares

64

4

 

12,295

12,295

 

During the year, 241,654 Ordinary shares (2018 - nil) were repurchased for a consideration of £896,000 (2018 - £nil). The total shares held in treasury is 257,639 (2018 - 15,985).  No Ordinary shares have been repurchased since the financial year end.

 

There were no Ordinary shares issued in 2019 or 2018.

 

 

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:

 

 

2019

2018

Basic

 

 

Total shareholders' funds (£'000)

201,472

238,449

Number of Ordinary shares in issue at year end1

48,921,128

49,162,782

Net asset value per share

411.83p

485.02p

 

 

 

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 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 2019

 

 

 

 

Assets

 

 

 

 

Money-market fund

-

0.83

-

1,262

Cash at bank and in hand

-

-

-

389

Total assets

-

0.83

-

1,651

Liabilities

 

 

 

 

Bank loan

-

1.71

29,867

-

Total liabilities

-

1.71

29,867

-

As at 30 September 2018

 

 

 

 

Assets

 

 

 

 

Money-market fund

-

0.76

-

1,350

Cash at bank and in hand

-

-

-

35

Total assets

-

0.76

-

1,385

Liabilities

 

 

 

 

Bank loan

-

1.57

30,000

-

Total liabilities

-

1.57

30,000

-

 

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 the bank loan is based on the interest rate payable, weighted by the total value of the loan.

 

The floating rate assets consist of the money-market fund 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 2019 or 30 September 2018 that had a maturity date. The £30 million loan drawn down had a maturity date of 21 October 2019 at the Statement of Financial Position date. (2018 - £30 million on 10 October 2018).

 

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 2019 would decrease / increase by £282,000 (2018 - decrease / increase by £286,000). 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 Annual 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 2019 would have increased/decreased by £22,928,000 (2018 - increase/decrease of £26,674,000). This is based on the Company's equity portfolio held at each year end.

 

(ii)   Liquidity risk

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

 

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 institutions.

 

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:

 

 

2019

2018

 

Statement
of Financial
Position
£'000 

Maximum
exposure
£'000
 

Statement
of Financial
Position
£'000

Maximum
exposure
£'000
 

Current assets

 

 

 

 

Debtors

4,411

4,411

1,886

1,886

Money market fund (indirect exposure)

1,262

1,262

1,350

1,350

Cash at bank and in hand

389

389

35

35

 

6,062

6,062

3,271

3,271

 

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

 

Fair values of financial assets and financial liabilities

The fair value of the bank loan is not materially different to the accounts value in the financial statements of £29,867,000 (2018 - £30,000,000) (note 12).

 

 

15.     Fair Value Hierarchy

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

 

-    Level 1: unadjusted quoted prices in an active market for identical assets or liabilities that the entity can access at the measurement date.

-    Level 2: inputs other than quoted prices included within Level 1 that are observable (ie developed using market data) for the asset or liability, either directly or indirectly.

-    Level 3: inputs are unobservable (ie for which market data is unavailable) for the asset or liability.

 

All of the Company's investments are in quoted equities (2018 - same) that are actively traded on recognised stock exchanges, with their fair value being determined by reference to their quoted bid prices at the reporting date. The total value of the investments (2019: £229,277,000; 2018: £266,742,000) have therefore been classified as 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 net gearing of 13.7% of net assets (2018 - 12.1%)

 

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 2019 there were no contingent liabilities (2018 - nil).

 

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 £29,000 (2018 - £nil).

 

Aberdeen Standard Fund Managers Limited received fees for its services as investment manager and for the provision of promotional activities. Further details are provided in notes 3 and 4.

 

20.     Subsequent events

Following a review of management fee terms, on 22 October 2019, the Company announced that with effect from 1 October 2019, the fees payable to ASFML will be calculated at a rate of 0.65% per annum of net assets up to £175 million and at a rate of 0.55% per annum of net assets above this level.

 

21.     Additional notes

This Annual Financial Report does not constitute the Company's statutory accounts for the years ended 30 September 2019 or 2018 but is derived from those accounts. The statutory accounts for the year ended 30 September 2018 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 2018 and 30 September 2019 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 2019 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 23 January 2020 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.

 

 

ALTERNATIVE PERFORMANCE MEASURES

 

Alternative performance measures are numerical measures of the Company's current, historical or future performance, financial position or cash flows, other than financial measures defined or specified in the applicable financial framework. The Company's applicable financial framework includes FRS 102 and the AIC SORP. The Directors assess the Company's performance against a range of criteria which are viewed as particularly relevant for closed-end investment companies.

 

Discount to net asset value per Ordinary share

The premium/(discount) is the amount by which the share price is higher/(lower) than the net asset value per share, expressed as a percentage of the net asset value.

 

 

2019 (p)

2018 (p)

Share price

381.50

473.00

Net Asset Value per share (NAV)

411.83

485.02

Discount

-7.4%

-2.5%

 

 

Dividend yield

The annual dividend per Ordinary share divided by the share price, expressed as a percentage.

 

 

2019 (p)

2018 (p)

Dividend per share declared for the year (DPS)

381.50

473.00

Share price

411.83

485.02

Dividend yield

-7.4%

-2.5%

 

 

Net gearing

Net gearing measures the total borrowings less cash and cash equivalents divided by shareholders' funds expressed as a percentage. Under AIC reporting guidance cash and cash equivalents includes amounts due and to brokers at the year end as well as cash and cash equivalents.

 

 

2019

2018

 

(£000s)

(£000s)

(£000s)

(£000s)

Total Borrowings

 

29,867

 

30,000

Due to brokers

(3,061)

 

(1,028)

 

Due from brokers

3,672

 

816

 

Cash at bank and in hand

389

 

35

 

Investments in money-market funds

1,262

 

1,350

 

Net cash & cash equivalents

 

2,262

 

1,173

Gearing (Borrowings less cash & cash equivalents)

 

27,605

 

28,827

Shareholders funds

 

201,472

 

238,449

Net Gearing (Gearing / shareholders' funds)

 

13.7%

 

12.1%

 

 

Ongoing Charges

The ongoing charges ratio has been calculated in accordance with guidance issued by the AIC as the total of investment management fees and administrative expenses and expressed as a percentage of the average net asset values throughout the year.

 

 

2019

(£000s)

2018

(£000s)

Investment management fees

1,537

1,714

Administrative expenses

424

362

Less: non-recurring charges A

(40)

(14)

Ongoing charges

1,921

2,062

Average net assets

210,698

238,169

Ongoing charges ratio

0.91%

0.87%

 

A Comprises professional fees not expected to recur.

 

The ongoing charges ratio provided in the Company's Key Information Document is calculated in line with the PRIIPs regulations.

 

 

Total return

 

NAV and share price total returns show how the share price or NAV have performed over a period of time in percentage terms, taking into account both capital returns and dividends paid to shareholders. This involves reinvesting the net dividend in the cum income NAV, with debt at fair value, or share price on the date on which the shares go ex-dividend. Returns are calculated to each ex-dividend date and then the return for the year is derived from the product of these individual returns.

 

The table below provides information relating to the NAVs and share prices of the Company on the dividend reinvestment dates during the year and the resultant total return.

 

2019

Dividend rate (p)

NAV (p)

Share price (p)

30 Sep 2018

 

485.00

473.00

20 Dec 2018

5.50

393.98

402.50

21 Feb 2019

4.90

431.85

413.50

30 May 2019

4.90

426.10

411.00

5 Sep 2019

4.90

394.92

360.00

30 Sep 2019

 

411.83

381.50

Total Return

 

10.8%

-15.1%

 

2018

Dividend rate (p)

NAV (p)

Share price (p)

30 Sep 2017

 

478.38

459.63

21 Dec 2017

5.50

494.47

468.88

22 Feb 2018

4.40

468.74

462.00

31 May 2018

4.40

489.14

488.00

6 Sep 2018

4.90

476.50

481.50

30 Sep 2018

 

485.00

473.00

Total Return

 

5.5%

7.1%

 

 

For Aberdeen Standard Equity Income Trust plc

Aberdeen Asset Management PLC, Company Secretary

 

For further information please contact:

 

James Thorneley,

Global Head of Media Relations, Aberdeen Standard Investments

Tel: 0131 372 2200

 

Evan Bruce-Gardyne

Client Director, Investment Trusts, Aberdeen Standard Investments

Tel: 0131 372 2200

 

 


This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
 
END
 
 
FR LLFLDLSLRFIA
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