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RNS

Annual Financial Report

Released 07:00 29-Aug-2019

RNS Number : 4609K
Standard Life UK Small.Co's Tst PLC
29 August 2019
 

STANDARD LIFE UK SMALLER COMPANIES TRUST PLC

 

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 30 JUNE 2019

 

 

STRATEGIC REPORT  

 

Key Financial Highlights

 

Total Returns for periods to 30 June 2019(1)

 

 

1 year

3 years

5 years

10 years

NAV(2)

-1.1%

+62.8%

+94.3%

+460.6%

Share Price

-0.3%

+63.0%

+89.5%

+472.6%

 

 

Capital Return for the year to 30 June 2019

As at 30 June 2019

NAV per Share(2)

Share Price

Discount(1)

Net Gearing(1)

539.54p

-2.4%

491.50p

-1.7%

8.9%

1.5%

(2018: 552.93p)

(2018: 500.00p)

(2018: 9.6%)

(2018: 3.6%)

 

 

As at 30 June 2019

 

Market Cap

Net Assets

Gross Assets

£494.4 million(3)

+33.9%

(2018: £369.2m)

£542.7 million(3)

+32.9%

(2018: £408.3m)

£567.6 million(3)

+31.1%

(2018: £433.1m)

 

 

For the year ended 30 June 2019

 

Revenue EPS

Dividend per Share

Ongoing Charges Ratio(1)

8.80p

+21.5%

(2018: 7.24p)

7.70p

+10.0%

(2018: 7.00p)

 

0.90%

(2018: 1.04%)

 

Source: Refinitiv Datastream

(1) Alternative Performance Measures (as detailed in the Annual Report). Also see the Glossary in the Annual Report.

(2) With debt at par.

(3) The market cap and asset base together with the related percentage increases are affected by the merger with Dunedin Smaller Companies Investment Trust PLC in October 2018, which increased the number of shares in issue by 38.0% and net assets by £147.4m.

 

Chairman's Statement

 

This has really been a year of two halves. The interim report for the six months to 31 December 2018 reported a net asset value ("NAV") total return of -19.5%, which was the worst first  half to a financial year for  the Company since December 2008. However, during the first half of 2019, the NAV total return was 22.9%, which was the strongest second half to a financial year that the Company has delivered since the Manager was appointed in 2003. The net effect of a NAV total return of -1.1% is reassuring in such circumstances.

 

Performance

 

For the year ended 30 June 2019, the Company's NAV total return, calculated on the basis that all dividends received are reinvested in additional shares, was -1.1%. The share price total return, calculated on the same basis, was -0.3%.  By contrast, the total return of the Company's reference index, the Numis Smaller Companies plus AIM (ex investment companies) Index, was -7.2%.

 

While we would obviously rather not report negative numbers, we do recognise that we are investing in equities and if the markets are falling then the portfolio is likely to do so as well.  Having said that, after the challenge of the last 3 months of 2018, it is pleasing to report that, while we are not quite back where we were this time last year in terms of share price or NAV, we are a lot closer to it than the Numis Smaller Companies plus AIM (ex investment companies) Index.

 

Earnings and Dividend

 

The basic revenue return per share for the year ended 30 June 2019 was 8.80p (2018: 7.24p). The merger with Dunedin Smaller Companies Investment Trust PLC ("Dunedin") completed in October 2018 and increased the asset base and the number of shares in issue in line with each other, so that while the absolute value of the assets and revenue received has risen, the per share figures are comparable year on year.

 

Three months into the year, the number of shares in issue increased by 38.0% as a consequence of the merger. These additional shares qualified for both the interim and final dividends, but only contributed to generating income for the Company for approximately three quarters of the year. Despite this asymmetric contribution, the Board is pleased to be able to recommend the largest increase in the annual dividend for three years, by proposing an increased final dividend of 6.1p per share. This will give a total dividend for the year of 7.70p per share and will represent an increase of 10.0% on last year's dividend. It will be covered by current year earnings, which demonstrates the ability of the portfolio to deliver growth across the cycle and the confidence of both the Board and the Manager in the medium-term outlook for the Company.

 

During the year the Board reviewed the dividend policy of the Company. It noted that an increasingly large part of the total dividend paid for the year came in the final dividend. The Board is minded, in normal circumstances, to look to maintain the policy of a progressive dividend, but to distribute around one third of the total expected dividend for the year at the half year end, as compared to just over one fifth as has been the case in recent years. This will take effect from April 2020.

 

Subject to shareholder approval at the Annual General Meeting to be held on Wednesday, 23 October 2019, the final dividend will be paid on 31 October 2019 to shareholders on the register on 4 October 2019 with an associated ex-dividend date of 3 October 2019.

 

Key Performance Indicators ("KPIs")

 

The Board assesses the performance of the Company against the range of KPIs shown below over a variety of timeframes, but has particular focus on the long term, which the Board considers to be at least 5 years. A 10 year record of the KPIs of the Company is also included in the Annual Report.

 

•      NAV total return relative to the Company's reference index and also relative to the performance of its peer group of investment trusts.

 

While the NAV total return is -1.1% for the year, this is a better result than has been achieved by the reference index or the weighted average return of investment trusts investing in UK smaller companies. The returns over both the short (1 year), medium (3 years) and long term (over 5 years) remain ahead of the reference index and the peer group.

 

•       Share price total return relative to the Company's reference index and to the performance of its peer group of investment trusts.

 

The position is the same with the share price total returns, where the 1 year numbers are marginally negative, but ahead of the reference index and peer group. The medium and longer-term returns are also comfortably ahead of the reference index and the peer group.

 

•       Discount or premium of the ordinary share price to the net asset value per share of the Company is compared to the discount of the peer group and also against the threshold of the Company's discount target on a rolling 12 month basis, as outlined in the Annual Report.

 

The discount was under more pressure than in the previous financial year, averaging 7.4% for the year compared to 3.9% for the twelve months to 30 June 2018.

 

The discount has been close to the 8% threshold for much of the year, while remaining narrower than the peer group average. There were a number of factors that may have contributed to the wider discount, including the conversion of the final Convertible Unsecured Loan Stock in April 2018 which resulted in a number of new holders of the Ordinary Shares looking to sell some or all of their holding, and the merger with Dunedin. The fact that the merger occurred just as equity markets started to suffer in October 2018 put further pressure on the share price that ran through into 2019. As the discount has been wider than 8% at times, the Board bought back 1.1m shares, during the year, at a weighted average price of £4.68.

 

•      The on-going charges ratio ("OCR") is monitored against prior years and compared to other similar sized companies in our peer group.

 

The OCR has fallen a further 14 basis points from 1.04% to 0.90% and has reduced in each of the last 4 years. As I reported last year, we expected that that OCR would be lower as result of the proposed merger with Dunedin. The increase in the asset base resulting from the merger coupled with the reduction in the management fee that came into effect on 1 July 2018 meant that the costs of managing the Company have been and will continue to be spread across a greater pool of assets, lowering the unit costs for shareholders.

 

A review of the Company's performance, market background, investment activity and portfolio strategy during the year under review, as well as the Investment Manager's outlook, are provided in the Investment Manager's Report which can be found in the Annual Report.

 

Discount Control and Buy Backs

 

The Board aims to ensure that the discount to the cum-income net asset value does not exceed 8% in normal market conditions. The timing and scale of share buy-backs will be at the discretion of the Board. Full details of the Board's Discount Control Policy can be found in the Annual Report.

 

Gearing

 

The Board has given the Investment Manager discretion to vary the level of gearing between a net cash position of 5% and net gearing of 25% of net assets. During the year, £25m of fixed-rate borrowing was deployed at a fixed cost of 2.349%. The £20m revolving credit facility was not drawn during the year. At the year end, the gross level of borrowings was offset by cash and cash equivalents of £16.5m so that the net gearing of the Company at 30 June 2019 was 1.5%.

 

Merger with Dunedin

 

The board of Dunedin, whose portfolio was also managed by Aberdeen Asset Managers, and your Board announced in June 2018 the proposal to merge the companies. The proposals were approved by shareholders of both companies in late September and early October 2018. Under the terms of the merger, shareholders in Dunedin were issued with shares in the Company in proportion to the relative fair values of the net assets of both companies on 4 October 2018.

 

Dunedin's shareholders were allocated 27.6% of the enlarged company, with existing shareholders in the Company holding the balance. 27,878,842 shares were issued, which were admitted for trading on the London Stock Exchange on 10 October 2018. The transfer of the assets of Dunedin increased the net assets of the Company by approximately 38%.

 

At the instruction of the board of Dunedin, in the run up to the merger, its portfolio was aligned with the portfolio of the Company. This meant that by the time the merger had been approved the Investment Manager was able to incorporate the investments held by Dunedin into the Company's portfolio without any need to adjust the portfolio further. This is covered in more detail in the Investment Manager's Report in the Annual Report.

 

Board Succession

 

Alexa Henderson, who had been on the board of Dunedin, joined the Board of the Company on completion of the merger and was elected to the Board by shareholders at the 2018 AGM.

 

Following a recruitment process that involved an independent consultant, the Board was pleased to announce the appointment of Liz Airey as an independent Non-Executive Director with effect from 21 August 2019. Liz brings a wealth of experience to the Board. She is currently non-executive Chairman of Jupiter Fund Management PLC, a non-executive director of Kirk Lovegrove & Company Limited, a member of the Corporate Governance Committee and Investments Committee of the Institute of Chartered Accountants in England and Wales, and Chair of Trustees of the Rolls-Royce UK Pension Fund.

 

Liz will stand for election at the Annual General Meeting on 23 October 2019.

 

As previously intimated, it is my intention to step down as Chairman and from the Board which I expect to do at some point over the next six to nine months. The Board, with the exception of me, under the leadership of our Senior Independent Director, Tim Scholefield, will decide on my successor and an announcement will be made in due course.

 

Manager

 

The Board believes that the appointment of Aberdeen Standard Investments ("ASI") as Manager continues to be in the interests of shareholders. This conclusion has been reached on the basis of the strength of the long-term returns that the Investment Manager has delivered for the Company and the Board's confidence that the process by which these returns have been generated remains appropriate for the objectives of the Company. Since the Manager was appointed on 1 September 2003, the Company has delivered an annualised diluted net asset value total return of 15.6% and has outperformed the Company's reference index by almost 4.9% per annum.

 

Company Secretary and Registered Office

 

With effect from 6 September 2019, the agreement between Aberdeen Standard Fund Managers Limited ("ASFML") and Maven Capital Partners UK LLP ("Maven") for the provision of company secretary and administrative services will be terminated and these services will in the future be provided by Aberdeen Asset Management PLC ("AAM") under a delegation agreement between ASFML and AAM.

 

This change has been made as a result of the recent merger between Standard Life and AAM, where the Manager now has a larger company secretarial team and is able to provide this service in-house. The Board would like to thank Maven for its support to the Company over recent years.

 

As a result of this change, the registered office of the Company will also change. Details are included in the Annual Report.

 

AGM and Manager's Presentation

 

The Annual General Meeting ("AGM") of the Company will be held at the offices of the Manager, Aberdeen Standard Investments, 1 George Street, Edinburgh EH2 2LL on Wednesday, 23 October 2019. The meeting will start at 12 noon and will include a presentation from the Investment Manager and will be followed by lunch. This is a good opportunity for shareholders to meet the Board and Manager and we would encourage you to attend. For those shareholders unable to attend, we would encourage you to complete and return the proxy form enclosed with the Annual Report so as to ensure that your votes are represented at the meeting. The Notice of Annual General Meeting can be found in the Annual Report.

 

If you hold your shares in the Company via a share plan or a platform and would like to attend and/or vote at the AGM, then you will need to make arrangements with the administrator of your share plan or platform. For this purpose, investors who hold their shares in the Company via the Aberdeen Standard Investments Plan for Children, Share Plan or ISA will find a Letter of Direction enclosed. Shareholders are encouraged to complete and return the Letter of Direction in accordance with the instructions printed thereon. Further details on how to attend and vote at Company Meetings for holders of shares via other share plans and platforms can be found on the AIC's website at: www.theaic.co.uk/aic/shareholder-voting-consumer-platforms.

 

In order to give shareholders in London an opportunity to meet the Board and the Manager, the Board will hold an investor presentation in the Manager's office, Bow Bells House, 1 Bread Street, London EC4M 9HH at 1.00pm on Wednesday, 20 November 2019 which will be followed by lunch. Invitations are included with the Annual Report and a copy can be downloaded from the Company's website www.standardlifeuksmallercompaniestrust.co.uk.

 

Outlook

 

When I consider the outlook for this Company and indeed the wider economy, it seems as though we are stuck in a form of Groundhog Day. This time last year I referred to how the Brexit negotiations and the decisions of Donald Trump continue to influence market movements and the geopolitical backdrop. I think that everyone expected that there would be more clarity with regard to the Brexit position, but as the date of the UK's expected departure from the EU has been moved to 31 October 2019, that has not happened.  Mr Trump continues to influence short-term market sentiment, with frequent pronouncements on changes to tariffs with China being the most significant.

 

Brexit remains at the forefront of our minds; the succession of Boris Johnson as Prime Minister appears to have changed the tone of the conversation that the UK is looking to conduct with the EU, but it remains to be seen whether it has any impact on the EU's stance, which has been very clear and consistent to date. Mr Johnson also needs to manage the House of Commons and there remains a potential disconnect between the position of the majority of MPs and the country at large, as evidenced by the referendum in 2016.

 

This is not a comfortable backdrop for investors and we saw in October 2018 how sensitive markets can be to changing circumstances. However, one of the encouraging things for investors in the Company was how quickly the portfolio recovered the lost ground once the sentiment in the market changed. This is a great illustration of the process that the Manager employs; focusing on individual companies and the strength, experience and ability of their management to deliver on their individual strategies in turbulent market conditions. It also demonstrates how important it is to have a long-term perspective when investing in smaller companies. While the net asset value per share declined marginally this year, the portfolio is positioned to deliver capital growth supported by annual increases in the dividend and we expect this to be the case over the longer term. The emphasis on risk aversion, quality and resilience, growth and momentum remains unchanged.

 

Allister Langlands

Chairman

 

28 August 2019

 

 

Our Strategy

 

Standard Life UK Smaller Companies Trust plc offers an actively managed portfolio of equity shares of smaller and mid-sized companies listed in the UK. Over the long term, smaller company returns have outstripped those of their large-cap peers.

 

Objective

 

To achieve long-term capital growth by investment in UK-quoted smaller companies.

 

Investment policy

 

The Company intends to achieve its investment objective by investing in a diversified portfolio consisting mainly of UK-quoted smaller companies. The portfolio will normally comprise around 50 individual holdings representing the Investment Manager's highest conviction investment ideas. In order to reduce risk in the Company without compromising flexibility, no holding within the portfolio should exceed 5% of total assets at the time of acquisition.

 

The Company may use derivatives for portfolio hedging purposes (i.e. only for the purpose of reducing, transferring or eliminating the investment risks in its investments in order to protect the Company's portfolio).

 

Within the Company's Articles of Association, the maximum level of gearing is 100% of net assets. The Directors have set parameters of between 5% net cash and 25% net gearing (at the time of drawdown) for the level of gearing that can be employed in normal market conditions. The Directors have delegated responsibility to the Investment Manager for the operation of the gearing level within the above parameters.

 

The Investment Manager's investment process combines asset allocation, stock selection, portfolio construction, risk management, and dealing. The investment process has evolved out of the Investment Manager's "Focus on Change" philosophy and is led by Quality, Growth and Momentum. The Investment Manager's stock selection led investment process involves compiling a shortlist of potential investments using a proprietary screening tool known as "The Matrix" which reflects Quality, Growth and Momentum based factor analysis. The final portfolio is research intensive and includes face to face meetings with senior management of these potential investments. This disciplined process has been embedded for many years and has delivered a consistency of performance through economic and market cycles.

 

The Directors have set additional guidelines in order to reduce the risk borne by the portfolio:

 

•      Companies with a market capitalisation of below £50m should not represent more than 5% of total assets.

 

•      Companies involved in "Blue Sky" products should not represent more than 5% of total assets.

 

•      No more than 50% of the portfolio should be invested in companies that are constituents of the FTSE AIM All-Share Index.

 

Investment Process

 

Management

 

In December 2018, the investment management agreement with the Company's Manager was novated from Standard Life Investments (Corporate Funds) Limited to Aberdeen Standard Fund Managers Limited ("ASFML", the "AIFM" or the "Manager"). ASFML is a wholly owned subsidiary of Standard Life Aberdeen plc ("SLA"). The investment management to the Company is provided by Aberdeen Standard Investments (ASI), the investment division of SLA. Harry Nimmo has been the Portfolio Manager since 2003.

 

Investment philosophy and process

 

The Board has identified that ASI has a proven and repeatable investment process, which has delivered strong returns to shareholders over the last 16 years. The investment process adheres to ASI Smaller Companies' Quality, Growth and Momentum led philosophy. The Investment Manager aims to select lower risk smaller companies in growing markets where business momentum is positive, predictable and improving. The Manager has a long-term investment horizon, aiming to maximise returns by running winners in the long term and cutting losers. The investment process embeds ASI's Environmental, Social and Governance principles.

 

The Matrix

 

In managing the investment portfolio of the Company, the Quality, Growth and Momentum philosophy is enhanced by using ASI's proprietary screening tool, 'The Matrix', to focus research efforts and stock selection process. The Matrix is a quantitative screening tool assessing potential and current investments on 13 separate proven indicators of financial performance. It is a powerful tool in helping the Investment Manager identify a shortlist of investable stocks for further analysis and monitor the performance and prospects of the portfolio on an ongoing basis. Stocks that are identified in this way are then subjected to further analysis and may be selected for the portfolio following discussions with company management.

 

Investment characteristics

 

When building a portfolio of smaller companies, the Investment Manager screens stocks using the Matrix and also considers a number of qualitative factors to help identify the best investment opportunities.

 

1.    Sustainable growth

       Companies in the portfolio will often produce niche products or services where demand is forecast to rise as these characteristics are the most predictive of future earnings and dividend growth.

 

2.    Quality

       The strength of each company's relationships with its customers or clients, the existence and importance of long-term contracts and the degree to which the company has any element of pricing power is important as it allows the company to pass on any cost increases and thereby maintain margins. The Investment Manager will typically avoid companies with high or unsustainable levels of debt.

 

3.    Buy for the long term

       Identify the great companies of tomorrow and then hold them for the long term. This reduces the financial drag of high trading volumes.

 

4.    Concentrate the effort

       The Matrix helps identify the likely candidates for inclusion in the portfolio and reduces the risk that effort is spent on stocks that will not fulfil the criteria for inclusion within the portfolio.

 

5.    Management longevity

       Founders retaining positions of authority within the companies after flotation, along with longevity of tenure by CEOs are a positive signal. Four of the top 10 holdings in the portfolio are still run by the company's founder. The significance of this is that founders tend to be much more attuned to the benefits of long-term investing than their successors, probably because of the scale of personal involvement.

 

6.    Valuation is secondary

       Invest in companies which demonstrate positive earnings momentum as they believe that it is a reliable predictor of future performance.

 

Principal Risks and Uncertainties

 

There are a number of risks which, if realised, could have a material adverse effect on the Company and its financial condition, performance and prospects. The risks and uncertainties faced by the Company are reviewed by the Audit Committee in the form of a risk matrix and the assessment of risks and their mitigation is an area of significant focus for the Audit Committee and the Board. The principal risks and uncertainties facing the Company at the current time, together with a description of the mitigating actions the Board has taken, are set out in the table below. The Board has carried out a robust assessment of these risks, which include those that would threaten the Company's business model, future performance, solvency or liquidity.

 

Risk

Mitigating Actions

Strategy - the Company's objectives or the investment trust sector as a whole become unattractive to investors, leading to a fall in demand for the Company's shares.

Through regular updates from the Manager, the Board monitors the discount/premium at which the Company's shares trade relative to the net asset value. It also holds an annual strategy meeting and receives feedback from the Company's broker and updates from the Manager's investor relations team at Board meetings.

Investment performance - the appointment or continuing appointment of an investment manager with inadequate resources, skills or experience, or the adoption of inappropriate strategies in pursuit of the Company's objectives could result in poor investment performance, a loss of value for shareholders and a widening discount.

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

 

The Board sets and monitors the investment restrictions and guidelines and receives regular reports which include performance reporting on the implementation of the investment policy, the investment process, risk management and application of the guidelines.

Share price - failure to manage the discount effectively or an inappropriate marketing strategy could lead to a fall in the share price relative to the net asset value per share.

The Company operates a discount control mechanism and aims to maintain a discount level of less than 8% to the cum-income net asset value under normal market conditions. Details of the discount control mechanism are contained in the Annual Report. The Directors undertake a programme of inviting major shareholders to discuss issues of governance or strategy with the Chairman or Senior Independent Director. In addition, the Company participates in the Manager's investment trust promotional programme where the Manager has an annual programme of meetings with institutional shareholders and reports back to the Board on these meetings.

Financial instruments - insufficient oversight or controls over financial risks, including market price risk, liquidity risk and credit risk could result in losses to the Company.

As stated above, the Board sets investment guidelines and restrictions which are reviewed regularly and the Manager reports on compliance with them at Board meetings.

 

Further details of the Company's financial instruments and risk management are included in note 15 to the financial statements.

Financial obligations - inadequate controls over financial record keeping and forecasting, the setting of an inappropriate gearing strategy or the breaching of loan covenants could result in the Company being unable to meet its financial obligations, losses to the Company and its ability to continue trading as a going concern.

At each Board meeting, the Board reviews management accounts and receives a report from the Depositary detailing any breaches during the period under review. The Board sets gearing limits and monitors the level of gearing and compliance with the main financial covenants at Board meetings. The Company's annual financial statements are audited by the independent auditor.

Regulatory - failure to comply with relevant laws and regulations could result in fines, loss of reputation and potential loss of investment trust status.

The Board receives updates on relevant changes in regulation from the Manager, industry bodies and external advisers and the Board and Audit Committee monitor compliance with regulations by review of checklists and internal controls reports from the Manager. Directors are encouraged to attend relevant external training courses.

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

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

 

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

 

A formal appraisal of the Company's main third party service providers is carried out by the Management Engagement Committee on an annual basis.

Key man risk - a change in the key personnel involved in the investment management of the portfolio could impact on future investment performance and lead to loss of investor confidence.

The Board discusses key man risk with the Manager and Investment Manager on a periodic basis.

 

The Investment Manager employs a standardised investment process for the management of the portfolio. The well-resourced team has grown in size over a number of years. These factors mitigate against the impact of the departure of any one member of the investment team.

Geopolitical - the Company is exposed to the effects of geopolitical instability or change which could have an adverse impact on stock markets and the value of the investment portfolio.

The Board discusses current geopolitical issues with the Manager (including the UK's exit from the European Union) and the steps that the Manager is taking to limit the impact on the Company's portfolio.

 

Discount Control Policy

 

The Board aims to maintain a discount level of less than 8% to the cum-income net asset value under normal market conditions. In pursuit of this objective, the Board closely monitors the level of the discount and buys back shares in the market when it believes it is in the best interests of shareholders as a whole to do so. At each AGM, the Board seeks shareholder approval to buy back up to 14.99% of the Company's share capital.

 

The Company has a tender offer mechanism in place and the Board intends to continue to seek shareholder approval at each AGM to enable it to carry out tender offers on a discretionary basis in circumstances where the Board believes that share buy-backs are not sufficient to maintain the discount at an appropriate level, although it expects that buy-backs should be the primary mechanism for managing the discount.

 

Employee, Environmental and Human Rights Policy

 

As a 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 Investment Manager who 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. 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 net asset value total return for the Company for the year to 30 June 2019 was -1.1% while the share price total return was -0.3%. This compares to the UK smaller companies sector, as represented by the Numis Smaller Companies Index plus AIM (ex investment companies) Index  which was down 7.2% Over the same period the total return of the FTSE 100  Index of the largest UK listed companies was +1.6%. Since our appointment as Manager on 1 September 2003, the Company has delivered a share price total return of 1200% while the total return on our reference index over the same time is 402% The total return of the FTSE All-Share Index over the same period is 244%.

 

Equity Markets

 

The period in question has been one of extraordinary volatility. Whilst stability reigned in the first quarter of the financial year, the markets started to turn in August/ September and October saw some significant selling pressure. From peak to trough in the second half of 2018, the Company's share price fell by almost 24%, only for it to rise by almost 23% from the low to the end of the financial year. It wasn't just the Company or UK smaller companies that were subject to dramatic swings. The growth-oriented US Nasdaq market, home of Apple, Amazon, Alphabet and Facebook was even more volatile, falling by 23% from peak to trough, only to rise by over 29% from that low by the end of June 2019.

 

The catalysts for these gyrations emanate from statements by US Federal Reserve Chairman, Jerome Powell. In congressional evidence on 3 October 2018 his view was that the US economy was strong and that now was the right time to normalise monetary control after years of banking crisis related special measures. This implied rises in US interest rates which in turn undermined prevailing equities market valuations. Other unhelpful market backdrops included the spectre of China-US trade-wars and impending deadlines on Brexit.

 

2019 saw a reversal of fortunes in a good way. The Federal Reserve stepped back from the October 2018 hawkish view on interest rates. Markets in the UK concentrated more on the bottom up micro-picture, looking at individual stocks rather than broad market considerations. The Company's holdings in particular had an extremely strong reporting period during March and April 2019 with the vast bulk of our holdings matching or indeed beating expectations.

 

However, by June 2019 concerns had returned on such issues as trade war and Brexit and these have not been dissipated with the succession of Boris Johnson to the post of Prime Minister, given his markedly harder line on a "no deal Brexit". We expect that this will continue to generate uncertainty at least until the latest Brexit deadline on 31 October 2019 and potentially beyond.

 

It is clear that the period in question saw companies with substantial overseas exposures perform better than UK orientated businesses. Both industrial and consumer demand tailed off into 2019 as the initial Brexit deadline loomed closer. Many industrial manufacturers, particularly in the auto industry, decided actually to close production temporarily at the end of March. Big ticket consumer items saw deferral of demand. Retailers generally faired very badly as high streets and shopping centres came under pressure. The construction and facilities management industries were under the cosh with actual financial stress (Costain, Kier, Interserve). The best sectors were the growth sectors and in particular media, software, healthcare and support services.

 

There was a significant step up in bid activity in the period with 33 significant offers successful or live. 11 came from private equity with significant names being Merlin, BCA Marketplace, Millennium & Copthorne, Inmarsat, Tarsus and Bonmarche with another two companies bought by infrastructure funds (Kcom, Manx Telecom). Trade buyers came in for the rest with seven being US domiciled. The larger trade targets were Dairy Crest, Flybe, Faroe Petroleum, Mucklow, BTG, RPC, Randgold and JLT. No approaches were made for any of the portfolio holdings.

 

New Issues activity on the other hand was quite subdued with 13 in our size range, eight being premium lists and five being on the Alternative Investment Market ("AIM"). The best and the worst performers, post launch, were both premium listings with AJ Bell up 151% and Funding Circle down 71% by 30 June 2019.

 

Oil prices weakened, being down 14% to $63 per barrel with Copper also down 11%. Gold, on the other hand, strengthened 13%, reflecting the higher levels of risk in world markets as the year progressed.

 

Sector highlights included a strong showing from food retailers. The standout stock here was Greggs, benefitting from its promotion of the vegan sausage roll. Media, software and fixed line telecoms were also strong, the latter because of bids for Manx Telecom and Kcom. On the negative side general retailers have generally been poor all year. The retail sector is still facing serious structural issues notably the onslaught of on-line retailing. The sector is large and varied and there are exceptions, such as JD Sports and Dunelm. Commodity sectors Oil & Gas and Mining modestly out-performed. Financial and Real Estate sectors were generally subdued all year, with challenger banks under particular pressure.

 

The AIM market fell sharply in the three months from October 2018, before recovering and then giving up some ground in the last two months of the financial year.

 

Performance

 

On the whole the portfolio performed reasonably well during the year in question given the market conditions. Looking more closely performance was very difficult in the final quarter of 2018 and in particular October when the share price and NAV both fell over 12% in one month and the Company's Net Asset Value (NAV) underperformed the Numis Smaller Companies plus AIM (ex investment companies) Index by 4.5%, making it the worst month of relative performance in the last six years. Indeed, the NAV lost almost 13% in the six trading days between 4 and 11 October inclusive in response to the global macro concerns I referred to earlier. The flip side is that the NAV rose over 13% in March/April 2019. In each of these months the NAV rose by an average of 4.3% relative to the benchmark, more than making up for the relative losses from the calendar fourth quarter. This spectacular performance gratifyingly was driven by a large number of the portfolio's holdings beating expectations in the March/April reporting season.

 

It is actually quite difficult to detect a pattern of sector performance, although the most difficult areas included electronics, where the semi-conductor cycle and trade war concerns impacted stocks within the portfolio (XP Power, Gooch & Housego) and software where a couple of our holdings never really recovered from the extreme weakness in the October to December period. The out-performing stocks came from a wide range of sectors including media, support services, building materials, telecoms, software, healthcare, retail and financials. Media in particular was a standout sector with strong performances from new purchases Future and GlobalData, as well as Next15 Communications and 4imprint Group. These are all however high quality growth businesses with good earnings revisions momentum. Not owning any what we call "blue sky" stocks was positive with the prices of some former darlings of the stock market, such as Purplebricks, IP Group and Blue Prism being particularly affected.

 

Our five leading performers in the period have been as follows:-

 

Marshalls (3.5% ending weight), the block paving company has benefitted from their 20:20 self-improvement efficiency programme which is coming though strongly.

 

Gamma Communications (3.8%) has seen a significant acceleration in its SIP trunking, PBX, Ethernet and a host of other services to business in the UK in competition to BT.

 

Kainos Group (3.2%) is a data services company that provides solutions to Government agencies interacting with the public and business. They are also a major Workday HR software provider. Their business has gone from strength to strength. They are seen as one of the few actual beneficiaries of Brexit

 

RWS Group (3.8%) is an international language translation and intellectual property management business. Their recent Moravia acquisition has surpassed expectations.

 

4imprint Group (2.6%). Based in Oshkosh, Wisconsin, but UK listed, the promotional products company is having great success with its most recent marketing initiatives.

 

Other strong performers include JD Sports Fashion following the success of their Finish Line acquisition and Intermediate Capital Group (ICG), the high yield asset management specialist, Aveva Group, a leading industrial design software company performed well, and like ICG, was inherited from Dunedin Smaller Companies Investment Trust ("Dunedin") following the merger in October 2018. Gratifyingly, new additions Future, GlobalData and Games Workshop performed well.

 

The poorest performer was Accesso Technology, the visitor attractions software company, which ran out of growth. The holding has been sold since the year end. XP Power (portfolio weight: 2.2%), the Far-East-based manufacturer of electronic components and sub- systems was at the wrong end of the semi-conductor cycle. Fevertree (2.5%) saw profit taking in the latter part of calendar 2019. CVS Group, which has been sold suffered through vet salary inflation. First Derivatives (3.2%) likewise traded down towards the tail-end of calendar 2018. Finally, Patisserie Holdings which was one of the nine new holdings acquired by the Company as part of the merger with Dunedin appear to have been the victim of fraudulent accounting practices. Almost as soon as the news broke, we elected to write the holding down and, as the position worsened, we wrote off the entire position. Prior to the revelations, the company represented 0.7% of the portfolio.

 

Dealing and Activity

 

Merger with Dunedin Smaller Companies Investment Trust PLC ("Dunedin")

 

The merger with Dunedin was completed on 8 October 2018. This immediately increased the size of the portfolio of the Company by 38%. In the run up to the date of the merger, with the blessing of the board of Dunedin, we had worked to align the two portfolios to the point where the Dunedin portfolio could be merged seamlessly into the Company's portfolio without any further repositioning being required once the merger had been completed.

 

Even prior to the start of this alignment process there was about 20% of commonality between the portfolios. Eight holdings that we did not want to bring across were sold outright and adjustments were made to weightings of other positions so that there was no need to adjust positions in the portfolio as a direct consequence of the merger.

 

Nine new holdings which had been in the Dunedin portfolio were added to the Company's portfolio at the time of the merger. All nine companies had acceptable Matrix scores.

 

Aveva: is a world market leader in design engineering software, which is benefiting from the recent merger with Schneider Electric.

 

Burford Holdings: is the leader in litigation finance. The holding has since been sold.

 

discoverIE: is a specialist electronic system distributor which is rapidly transforming itself into a manufacturer and boosting margins and returns.

 

Genus: is the world leader in reproductive material for cattle and pigs. This holding has since been sold.

 

Morgan Sindall: is a high quality diversified construction, infrastructure, urban regeneration and social housing company.

 

Patisserie Holdings: owns the Patisserie Valerie chain which, as mentioned above, has been subject to serious mis-statements in their accounts. The value of this holding has been written down to zero. The cost to the portfolio of writing down the position was 0.7%. The loss arising as a result has been more than offset by gains in two other positions acquired from Dunedin: Aveva and ICG.

 

Robert Walters: is the eponymous specialist recruitment company with broad regional exposure particularly to Japan, Hong Kong, the Far East and Australia as well as UK & Europe.

 

Victrex: is the world leader in the manufacture of PEEK, a specialist polymer with wide applications across transport, electronics, oil & gas and healthcare sectors that has very impressive wear, rigidity and weight characteristics across a broad range of applications. The holding has since been sold.

 

Intermediate Capital Group: is an international asset management group specialising in high yield and mezzanine debt. It's the leader in its field and has developed a strong international franchise.

 

The merger led to a net increase in the number of holdings of three. If one also includes the other new holdings the number of holdings increased to 60 during the year. This had been reduced to 54 holdings by the year end and it is anticipated that the number of holdings will reduce further over the coming months.

 

The five largest additions to the portfolio were as follows:-

 

Intermediate Capital Group (Closing weight: 2.8%). This holding was enlarged following the merger with Dunedin (see above).

 

Future (2.6%) has transformed itself from a specialist magazine publisher to an international specialist website and ecommerce business. Following the acquisition of Purch they now derive half their revenues from the USA.

 

Games Workshop (2.4%) the global war gaming company, was added. The new CEO has brought the company into the internet age with a vengeance, reinvigorating revenue and profits growth internationally.

 

AJ Bell (1.7%) is a new issue. It is an investment platform not only for investment advisors but also for end consumers. Their growth is driven by the move from final salary to defined contribution pension schemes.

 

JTC (1.0%) is a specialist fund administrator. It is founder run and based in Jersey. The industry is consolidating and has long term contracts and great visibility.

 

The other two new issues purchased in the year were Trainline, the international train ticket booking website and app and Nucleus Financial, another investment platform specialising for financial advisors as clients. GlobalData, the global market research company was added to the portfolio. We increased our position in three other inherited holdings, discoverIE (electronic subsystems), Robert Walters (recruitment) and Aveva (industrial design software).

 

Our key sales were:

 

The largest sale in the year was NMC Healthcare. This was also the situation last year. We now no longer hold this FTSE100 stock. I am pleased to say that the return was nearly 400% on book cost since the stock was first purchased five years ago. Seven other holdings were sold completely that no longer complied with our investment process. They were CVS Group, Greggs, Alfa Financial, Blue Prism, Hostelworld, Smart Metering Systems and The Gym Group. Two holdings inherited from Dunedin were sold: Victrex and Burford Capital.

 

Sector Exposures: Our key sector exposures remain growth orientated. They include the software, healthcare, media, food & drink, support services and retail sectors. The growth in healthcare and software is perhaps self-evident. Support services is a catch-all sector that covers a range of interesting growth markets which, in the case of the portfolio, includes fund administration (Sanne & JTC), RWS (specialist language translation and intellectual property management) and Midwich in audio-visual displayers. Food & drink covers smaller companies that are exposed to the growth themes of choice, provenance and premiumisation through Fevertree, Cranswick, Hotel Chocolat and Hilton Foods. Retailers, a sector that has been under a lot of pressure in recent years, did however provide a clear winner in JD Sports Fashion who are benefiting from the boom in "athleisure".

 

The media sector has seen a significant increase in exposure as Future and GlobalData were added to the portfolio. The other two media stocks, Next15 Communications and 4imprint performed strongly.

 

I'd again like to highlight another theme which is showing through. One could call it focusing on customer satisfaction in industries where customer satisfaction is thin on the ground. Firstly, Dart Group, the operator of the Jet2 airlines business.  It now ranks in the top ten world's best airlines according to TripAdvisor. This is showing through in their superlative trading performance. Secondly Motorpoint which is a mould breaker in used car sales… in a good way. Games Workshop also fits this description and in addition like Jet2 they pay all staff a percentage of profits.

 

Income account

 

The total income generated by the portfolio in the year rose by almost 48% and exceeded £10m for the first time. Clearly the increase in the size of the portfolio as a result of the merger with Dunedin is a contributory factor, although the merger happened three months into the year.

 

If we look at the income generated on a per share basis, then we see that total income per share has risen by 10.5%, and that this has come from the recurring dividend income. Indeed, the contribution to the revenue account from special dividends and money market funds has actually declined in 2019. The strength of the revenue account is encouraging, particularly given the volatility of equity markets and the sometimes intolerable strain that some dividend providers have been under. We have largely avoided these pitfalls.

 

While the investment process is more geared to delivering capital growth than a revenue stream, we do consider the willingness of the companies to commit to a dividend policy as a positive signal when investing. As a result, most of the holdings pay a dividend and most of them are building a track record of dividend growth. As a consequence, we expect that the portfolio has the capacity to deliver sustainable levels of income and therefore dividend growth to our shareholders.

 

I referred in the 2016 and 2017 Annual Reports to a natural recycling of assets as some large positions were being sold down. As a consequence of their success they had outgrown the moniker "smaller company" and we managed our exit from them. They have been replaced by the next generation of smaller companies and as these companies flourish, I fully expect that they will contribute to the income account in the future.

 

Outlook

 

It is pleasing that the new issues market in the UK is still producing strong companies like AJ Bell and Trainline. Our investment process still has relevance many years after its introduction with some most useful immediate strong performers in the shape of Future and Games Workshop. The "new wave" of holdings to which I alluded is still delivering strongly with four out of the top five performers from this category. The merger with Dunedin has been positive for both sets of shareholders in many ways and maintains the relevance of the Company when scale and liquidity are increasingly a requirement for many wealth managers and financial advisers.

 

At the risk of repeating myself, the two over-arching "macro" issues going forward remain Brexit and the threat of trade wars. Bad outcomes in both cases could cause mayhem far beyond the realm of UK smaller companies. Investors thus should continue to favour better quality, growing companies with strong business momentum. Our process starts from the bottom-up where picking great companies is central to our process. We feel that it is inappropriate, when investing in small, dynamic and growing companies, to start with a top-down "macro view" of the future. These great companies are well suited to ride out difficult economic conditions if they occur. Given that these two macro-uncertainties are likely to persist for some time I am optimistic that our process will continue to deliver out-performance in potentially troubled times.

 

Smaller company investing should be viewed as a long term investment and we have no doubt that patient investors will be rewarded in the longer term. Our stable process has been seasoned by fully four economic cycles. I remain very optimistic about the future of the Company in the long term.

 

 

Harry Nimmo

Aberdeen Standard Investments, Portfolio Manager

 

28 August 2019

 

 

Going Concern

 

The Company's assets consist of equity shares in companies listed on recognised stock exchanges and are considered by the Board to be realisable within a short timescale under normal market conditions. The Board has set overall limits for borrowing and reviews regularly the Company's level of gearing, cash flow projections and compliance with banking covenants, when applicable.

 

As at 30 June 2019, the Company had a £45 million unsecured loan facility agreement with Royal Bank of Scotland International Ltd which matures on 31 October 2022. This consists of a 5 year, fixed-rate term loan facility of £25 million (2018: £25 million) and a 5 year revolving credit facility of £20 million (2018: £20 million).

 

The Directors are mindful of the Principal Risks and Uncertainties disclosed in the Strategic Report and they 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. They have arrived at this conclusion having confirmed that the Company's diversified portfolio of realisable securities could be used to meet short-term funding requirements were they to arise. They have also reviewed the revenue and ongoing expenses forecasts for the coming year. Accordingly, the Directors believe that it is appropriate to continue to adopt the going concern basis in preparing the Financial Statements.

 

Viability Statement

 

In accordance with Provision C.2.2 of the UK Corporate Governance Code published in April 2016 and Principle 21 of the AIC Code of Corporate Governance published in July 2016, the Board has assessed the Company's prospects for a five year period from 30 June 2019. The Board considers five years to be an appropriate period for an investment trust company with a portfolio of equity investments and based on the financial position of the Company as detailed in the Strategic Report.

 

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

 

a)    The Company's investments are traded on the London Stock Exchange and there is a spread of investments held.

 

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

 

c)    The Company typically has cash balances which, including money market funds, at 30 June 2019 amounted to £16.6 million. These balances allow the Company to meet liabilities as they fall due.

 

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

 

e)    Due to the nature of the business of the Company and the nature of its investments and to the Company's long history, the Board are able to conclude that expenses are predictable and modest in relation to asset values.

 

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

 

As detailed in the Key Financial Highlights in the Annual Report, the Company has performed strongly in relative terms over the past year and since the appointment of the current Investment Manager in 2003. The Directors consider the Company's future prospects to be positive, as highlighted in the Chairman's Statement in the Annual Report.

 

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, 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.

 

 

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 and the Directors' Report includes a fair review of the development and performance of the business and the position of the issuer, together with a description of the principal risks and uncertainties that they face.

 

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.

 

Allister Langlands

Chairman

 

28 August 2019

 

 

Financial Statements

 

Statement of Comprehensive Income

 

For the year ended 30 June 2019

 

 

Notes

2019

2018

 

Revenue

£000

Capital

£000

Total

£000

Revenue

£000

Capital

£000

Total

£000

Net (losses)/gains on investments held at fair value

9

-

(7,037)

(7,037)

-

73,456

73,456

Realised foreign exchange gains


-

2

2

-

-

-

Income

2

10,002

-

10,002

6,765

-

6,765

Investment management fee

3

(891)

(2,673)

(3,564)

(770)

(2,309)

(3,079)

Other administrative expenses

4

(699)

-

(699)

(722)

-

(722)

NET RETURN BEFORE FINANCE COSTS AND TAXATION


8,412

(9,708)

(1,296)

5,273

71,147

76,420









Finance costs

5

(184)

(552)

(736)

(207)

(622)

(829)

RETURN BEFORE TAXATION


8,228

(10,260)

(2,032)

5,066

70,525

75,591









Taxation

6

4

-

4

-

-

-

RETURN AFTER TAXATION


8,232

(10,260)

(2,028)

5,066

70,525

75,591









RETURN PER ORDINARY SHARE:








BASIC

8

8.80p

(10.97p)

(2.17p)

7.24p

100.82p

108.06p









DILUTED

8

8.80p

(10.97p)

(2.17p)

7.00p

95.94p

102.94p

 

The total column of this statement represents the profit and loss account of the Company. The 'Revenue' and 'Capital' columns represent supplementary information prepared under guidance issued by the Association of Investment Companies.

 

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 June 2019


 

Notes

2019

2018

£000

£000

£000

£000

 

NON-CURRENT ASSETS






 

Investments held at fair value through profit or loss

9


550,909


424,194

 







 

CURRENT ASSETS






 

Debtors

10

1,847


1,161


 

Investments in AAA-rated money market funds


15,911


9,559


 

Cash and short term deposits


668


415


 



18,426


11,135


 







 

CURRENT LIABILITIES






 

Creditors: amounts falling due within one year

11

(1,764)


(2,265)


 



(1,764)


(2,265)


 

NET CURRENT ASSETS



16,662


8,870

 

TOTAL ASSETS LESS CURRENT LIABILITIES



567,571


433,064

 







 

Creditors: amounts falling due after more than one year






 

Bank loan

12

(24,877)


(24,790)


 




(24,877)


(24,790)

 

NET ASSETS



542,694


408,274

 







 

CAPITAL AND RESERVES






 

Called-up share capital

13


26,041


19,071

 

Share premium account



170,146


29,693

 

Special reserve



30,977


36,311

 

Capital reserve



304,664


314,924

 

Revenue reserve



10,866


8,275

 

EQUITY SHAREHOLDERS' FUNDS



542,694


408,274

 







 

NET ASSET VALUE PER ORDINARY SHARE:






 

BASIC

14


539.54p


552.93p

 

 

 

The financial statements of Standard Life UK Smaller Companies Trust plc (Company Number SC145455) in the Annual Report were approved by the Board of Directors on 28 August 2019 and were signed on its behalf by:

 

Allister Langlands

Chairman

 

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

 

 

Statement of Changes in Equity

 

For the year ended 30 June 2019


Share capital

 

£000

Share premium account

£000

Equity component CULS 2018

£000

Special reserve

 

£000

Capital reserve

 

£000

Total

 

 

£000

Balance at 30 June 2018

19,071

29,693

-

36,311

314,924

8,275

408,274

Return after taxation

-

-

-

-

(10,260)

8,232

(2,028)

Issue of Ordinary Shares following merger with Dunedin Smaller Companies Investment Trust PLC (see note 20)

 

6,970

 

140,453

 

-

 

-

 

-

 

-

 

147,423

Buyback of Ordinary Shares into Treasury (see note 13)

-

-

-

(5,334)

-

-

(5,334)

Dividends paid (see note 7)

-

-

-

-

-

(5,641)

(5,641)

BALANCE AT 30 JUNE 2019

26,041

170,146

-

30,977

304,664

10,866

542,694

 

 

For the year ended 30 June 2018


Share capital

 

£000

Share premium account

£000

Equity component CULS 2018

£000

Special reserve

 

£000

Capital reserve

 

£000

Revenue reserve

 

£000

Total

 

 

£000

Balance at 30 June 2017

17,907

19,805

1,470

34,109

244,399

6,326

324,016

Return after taxation

-

-

-

-

70,525

5,066

75,591

Issue of Ordinary Shares from Treasury from conversion of 3.5% Convertible Unsecured Loan Stock 2018

 

-

 

-

 

-

 

2,202

 

-

 

-

 

2,202

Issue of Ordinary Shares from maturity of 3.5% Convertible Unsecured Loan Stock 2018

 

1,164

 

9,888

 

(1,470)

 

-

 

-

 

1,470

 

11,052

Dividends paid (see note 7)

-

-

-

-

-

(4,587)

(4,587)

BALANCE AT 30 JUNE 2018

19,071

29,693

-

36,311

314,924

8,275

408,274

 

The capital reserve at 30 June 2019 is split between realised of £122,984,000 and unrealised of £181,680,000 (30 June 2018: realised £108,543,000 and unrealised £206,381,000).

 

The revenue reserve and realised element of the capital reserve represents the amount of the Company's retained reserves distributable by way of dividend.

 

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

 

On 8 October 2017 the Company converted £2,201,462 (10 October 2016: £898,071) nominal amount of 3.5% Convertible Unsecured Loan Stock 2018 into 927,892 (2017: 378,514) Ordinary Shares. Also, on 11 April 2018 (13 April 2017) the Company converted £11,052,427 (2017: £2,124,852) nominal amount of 3.5% Convertible Unsecured Loan Stock 2018 into 4,658,405 (2017: 895,583) Ordinary Shares following the maturity date 31 March 2018. As at 30 June 2018, there was £nil nominal amount of 3.5% Convertible Unsecured Loan Stock 2018 in issue.

 

 

Statement of Cash Flows

 

For the year ended 30 June 2019


Year ended

30 June 2019

£000

Year ended

30 June 2018

£000

OPERATING ACTIVITIES



Net return before taxation

(2,032)

75,591

Adjustment for:



Net losses/(gains) on investments

7,037

(73,456)

Movement in dividend income receivable

(340)

(199)

Movement in interest income receivable

(8)

(7)

Foreign exchange gains

(2)

-

Finance costs

736

829

Increase/(decrease) in other debtors

3

(2)

Increase in other creditors

221

157

Overseas withholding tax

(10)

-

NET CASH INFLOW FROM OPERATING ACTIVITIES

5,605

2,913




INVESTING ACTIVITIES



Purchases of investments

(79,496)

(70,819)

Sales of investments

89,594

50,777

Purchases of AAA-rated money market funds

(74,729)

(68,936)

Sales of AAA-rated money market funds

68,377

66,748

NET CASH INFLOW/(OUTFLOW) FROM INVESTING ACTIVITIES

3,746

(22,230)




FINANCING ACTIVITIES



Bank and loan interest paid

(647)

(928)

Net cash acquired following merger

2,524

-

Repurchase of Ordinary Shares

(5,334)

-

Drawdown of loan

-

25,000

Dividends paid

(5,641)

(4,587)

NET CASH (OUTFLOW)/INFLOW FROM FINANCING ACTIVITIES

(9,098)

19,485

INCREASE IN CASH

253

168




ANALYSIS OF CHANGES IN CASH DURING THE YEAR



Opening balance

415

247

Increase in cash as above

253

168

CLOSING BALANCE

668

415

 

 

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

 

 

Notes to the Financial Statements

 

For the year ended 30 June 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.

 

(b)   Investments

Investments have been designated upon initial recognition as fair value through profit or loss in accordance with IAS 39. As permitted by FRS 102, the Company has elected to apply the recognition and measurement provisions of IAS 39 Financial Instruments (as adopted for use in the EU). This is done because all investments are considered to form part of a group of financial assets which is evaluated on a fair value basis, in accordance with the Company's documented investment strategy, and information about the grouping is provided internally on that basis.

 

Investments are recognised and de-recognised at trade date where a purchase or sale is under a contract whose terms require delivery within the timeframe established by the market concerned, and are measured initially at fair value. Subsequent to initial recognition, investments are valued at fair value. 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 the FTSE All-Share and the most liquid AIM constituents.

 

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

 

(c)   AAA-rated money market funds

The AAA money market funds are used by the Company to provide additional short term liquidity. 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 and loss.

 

(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 in the Statement of Comprehensive Income, according to the circumstances of the underlying payment. Foreign income is converted at the exchange rate applicable at the time of receipt. Interest receivable on short-term deposits and money market funds is accounted for on an accruals basis.

 

(e)   Expenses and interest payable

Expenses are accounted for on an accruals basis. Expenses are charged to the capital column of the Statement of Comprehensive Income 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 25% to revenue and 75% to the capital columns of the Statement of Comprehensive Income 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

Dividends are recognised in the period in which they are paid.

 

(g)   Nature and purpose of reserves

 

Called-up share capital

The Ordinary share capital on the Statement of Financial Position relates to the number of shares in issue and in treasury. Only when the shares are cancelled, either from treasury or directly, is a transfer made to the capital redemption reserve. This reserve is not distributable.

 

Share premium account

The balance classified as share premium includes the premium above nominal value from the proceeds on issue of any equity share capital comprising Ordinary Shares of 25p. This reserve is not distributable.

 

Special reserve

The special reserve arose following court approval for the cancellation of the share premium account balance at 24 June 1999 and on 13 October 2009, Court of Session approval was granted for the cancellation of the Company's entire share premium account and capital redemption reserve and subsequent creation of a special distributable capital reserve. The special reserve is used to record the amount equivalent to the nominal value of any of the Company's own shares purchased and cancelled in order to maintain the Company's capital.

 

Capital reserve

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

 

Revenue reserve

Income and expenses which are recognised in the revenue column of the Statement of Comprehensive Income are transferred to the revenue reserve. The revenue reserve is available for distribution by way of dividend.

 

(h)   Taxation

Tax expense represents the sum of tax currently payable and deferred tax. Any tax payable is based on taxable profit for the period. Taxable profit differs from profit before tax as reported in the Statement of Comprehensive Income because it excludes items of income or expenses 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 year end date.

 

Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the year end 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 year end date measured on an undiscounted basis and based on enacted tax rates. This is subject to deferred tax assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the underlying timing differences can be deducted. Timing differences are differences arising between the Company's taxable profits and its results as stated in the Financial Statements which are capable of reversal in one or more subsequent periods.

 

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

 

(i)    Foreign currency

Non-monetary assets and liabilities denominated in foreign currency carried at fair value through profit or loss are converted into Sterling at the rate of exchange ruling at the year end date. Transactions during the year involving foreign currencies are converted at the rate of exchange ruling at the transaction date. Any gain or loss arising from a change in exchange rates subsequent to the date of the transaction is included as an exchange gain or loss in the Statement of Comprehensive Income.

 

(j)    Judgements and key sources of estimation uncertainty

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

 

(k)   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.

 

(l)    Bank borrowing

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 straight line 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.

 

(m) Merger with Dunedin Smaller Companies Investment Trust PLC ("Dunedin") - Basis of accounting

On 8 October 2018, the Company acquired all the assets and liabilities of Dunedin in exchange for shares in the Company. The transaction was accounted for using the purchase method as required by FRS 102 and further details are set out in note 20. The income and costs for the period to 7 October 2018 and the comparable period to 30 June 2018 reflect the activities of the Company before the acquisition and after that date reflect those of the enlarged Company.

 

2.    Income


2019

£000

2018

£000

Income from investments



UK dividend income

7,672

5,113

Overseas dividend income

1,659

1,117

Special dividends

472

489


9,803

6,719

Other income



Interest from AAA-rated money market funds

199

46


199

46

Total income

10,002

6,765

 

3.    Investment management fee


2019

£000

2018

£000

Investment management fee

3,564

3,079

Charged to capital reserve

(2,673)

(2,309)


891

770

 

The balance due to Aberdeen Standard Fund Managers Limited ("ASFML") at the year end was £1,007,000 (2018: £829,000).

 

For further details see note 18 Transactions with the Manager.

 

4.    Administrative expenses (inclusive of VAT)


2019

£000

2018

£000

Secretarial fees

180

180

Directors' fees

133

104

Promotional activities

28

25

Auditor's remuneration:



       fees payable to the Company's Auditor for the audit of the Company's        annual accounts excluding VAT

22

22

       VAT on audit fees

4

4

Registrar's fees

30

40

Professional fees

60

95

Custody fees

23

17

Depositary fees

91

73

Other expenses

128

162


699

722

 

The Company has an agreement with ASFML for the provision of promotional activities. The total fees payable during the year were £28,300 (2018: £25,000) and the amount due to ASFML at the year end was £72,500 (2018: £44,200).

 

In addition to above, the Auditor received £17,000 + VAT in relation to non-audit services provided as part of the merger with Dunedin. This has been charged to capital reserves as part of the share issue detailed in note 20.

 

The balance due to the Company Secretary at the year end was £44,877 (2018: £44,593).

There were no capital expenses incurred in 2019 (2018: £nil).

The 2018 professional fees include costs associated with the CULS maturity, as well as the loan facility application and the recruitment of a new non-executive director.

The 2018 Other expenses include a payment of £39,000 in relation to the maturity of the 3.5% Convertible Unsecured Loan Stock 2018.

 

5.    Finance costs

 


2019

£000

2018

£000

Notional interest on 3.5% Convertible Unsecured Loan Stock 2018

-

292

Effective interest rate

-

75

Amortisation of 3.5% Convertible Unsecured Loan Stock 2018 issue expenses

-

54

Bank loan interest

589

317

Non-utilisation fees

110

71

Amortisation of loan arrangement expenses

37

20


736

829

Charged to capital reserve

(552)

(622)

Charged to revenue reserve

184

207

 

6.    Taxation


2019

2018


Revenue

£000

Capital

£000

Total

£000

Revenue

£000

Capital

£000

Total

£000

(a) Analysis of charge for year







Overseas taxation

(4)

-

(4)

-

-

-

 

During the period the Company received a recovery of £4,000 of withholding tax, previously written off, on overseas dividend income (30 June 2018 - £Nil).

 

(b)   Provision for deferred taxation

At 30 June 2019, the Company had unutilised management expenses and loan relationship losses of £60,033,000 (2018: £56,035,000). No deferred 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 asset could be deducted.

 

(c)   Factors affecting current tax charge for year

UK corporation tax at a rate of 19.00% (2018: effective rate 19.00%) .

 

The differences are explained below.

 


2019

2018


Revenue

£000

Capital

£000

Total

£000

Revenue

£000

Capital

£000

Total

£000

Net profit on ordinary activities before taxation

8,228

(10,260)

(2,032)

5,066

70,525

75,591

Corporation tax at a rate of 19.00% (2018: effective rate 19.00%)

1,563

(1,949)

(386)

962

13,400

14,362

Effects of:







Non-taxable UK dividend income

(1,547)

-

(1,547)

(1,068)

-

(1,068)

Non-taxable overseas dividends

(155)

-

(155)

(114)

-

(114)

Currency losses

-

(1)

(1)

-

-

-

Expenses not deductible for tax purposes

-

-

-

1

-

1

Excess management expenses and loan relationship losses

139

613

752

219

557

776

Other capital returns (e.g. gains on investments not subject to tax)

-

1,337

1,337

-

(13,957)

(13,957)

Irrecoverable overseas withholding tax

(4)

-

(4)

-

-

-

Total tax charge

(4)

-

(4)

-

-

-

 

7.    Dividends


2019

£000

2018

£000

Amounts recognised as distributions to equity holders in the period:



2018 final dividend of 5.50p per share (2017 - 5.20p) paid on 31 October 2018

4,032

3,549

2019 interim dividend of 1.60p per share (2018 - 1.50p) paid on 12 April 2019

1,609

1,038


5,641

4,587

 

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

 

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 Section 1158 - 1159 of the Corporation Tax Act 2010 are considered. The revenue available for distribution by way of dividend for the year is £8,232,000 (2018: £5,066,000).

 


2019

£000

2018

£000

2019 interim dividend of 1.60p per share (2018 - 1.50p) paid on 12 April 2019

1,609

1,038

2019 final dividend of 6.10p per share (2018 - 5.50p) payable on 31 October 2019

6,117

4,049


7,726

5,087

 

The amount payable for the proposed final dividend is based on the Ordinary Shares in issue as the date of approval of this report, 28 August 2019, which satisfies the requirement of Section 1159 of the Corporation Tax Act 2010.

 

Dividends have been paid out of revenue reserves.

 

8.    Return per ordinary share


2019

2018


p

£000

p

£000

Basic





Revenue return

8.80

8,232

7.24

5,066

Capital return

(10.97)

(10,260)

100.82

70,525

Total return

(2.17)

(2,028)

108.06

75,591






Weighted average number of Ordinary Shares in issue


93,561,542


69,951,113






Diluted





Revenue return

8.80

8,232

7.00

5,171

Capital return

(10.97)

(10,260)

95.94

70,841

Total return

(2.17)

(2,028)

102.94

76,012






Weighted average number of Ordinary Shares in issue


93,561,542


73,837,630

 

The Company has no securities in issue that could dilute the return per Ordinary Share, therefore, for the year ended 30 June 2019, the basic and diluted return per Ordinary Share are the same.

 

The 2018 calculation of the diluted total, revenue and capital returns per Ordinary Share are carried out in accordance with IAS 33. For the purpose of calculating total, revenue and capital returns per Ordinary Share, the number of Ordinary Shares used is the weighted average number used in the basic calculation plus the number of Ordinary Shares deemed to be issued for no consideration on exercise of all 3.5% Convertible Unsecured Loan Stock 2018 (CULS) pro-rated for the period in which the CULS were active.

 

9.    Investments


2019

£000

2018

£000

Fair value through profit or loss



Opening fair value

424,194

329,587

Opening fair value gains on investments held

(206,382)

(153,348)

Opening book cost

217,812

176,239

Transfer of investments from Dunedin at market value

144,899

-

Additions at cost

78,773

71,918

Disposals - proceeds

(89,920)

(50,767)

                - realised gains on sales

17,665

20,422

Closing book cost

369,229

217,812

Closing fair value gains on investments held

181,680

206,382

Closing fair value

550,909

424,194

Gains on investments



Realised gains on sales

17,665

20,422

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

(24,702)

53,034

Net (losses)/gains on investments held at fair value

(7,037)

73,456

 

All investments are equity shares listed on the London Stock Exchange.

 

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:

 


2019

£000

2018

£000

Purchases

368

263

Sales

66

41


434

304

 

10.   Debtors


2019

£000

2018

£000

Amounts due from brokers

326

-

Dividends receivable

1,473

1,133

Tax recoverable

21

6

Other debtors

27

22


1,847

1,161

 

11.   Creditors: amounts falling due within one year


2019

£000

2018

£000

Amounts payable to brokers

432

1,155

Interest payable

98

97

Investment management fee payable

1,007

829

Sundry creditors

227

184


1,764

2,265

 

12.   Creditors: amounts falling due after more than one year


2019

£000

2018

£000

Bank loan

25,000

25,000

Unamortised loan arrangement expenses

(123)

(210)


24,877

24,790

 

On 1 November 2017 the Company entered into a £45 million unsecured loan facility agreement arranged with The Royal Bank of Scotland International Ltd. The facilities consist of a five year fixed-rate term loan facility of £25,000,000 (the "Term Loan") and a five year revolving credit facility of £20,000,000 (the "RCF"). The Term Loan has a maturity date of 31 October 2022.

 

The Company had drawn down £25 million of the Term Loan at the year end, at an interest rate of 2.349% (2018: same). The RCF was undrawn at the year end and at the end of the previous year.

 

The terms of the unsecured loan facility agreement contain covenants that the minimum net assets must not be less than £140 million, the percentage of borrowings against the net assets shall not exceed 30%, and the portfolio contains a minimum of thirty eligible investments (investments made in accordance with the Company's investment policy).

 

The fair value of the Term Loan as at 30 June 2019 was £26,404,000 (2018: £26,467,000), the value being calculated per the disclosure in note 17.

 

13.   Called up share capital


2019

£000

2018

£000

Authorised:




37,500

37,500

Issued and fully paid:



100,585,411 (2018 - 73,837,630) Ordinary Shares of 25p each - equity

25,146

18,459

Held in treasury:



3,579,011 (2018 - 2,447,950) Ordinary Shares of 25p each - equity

895

612


26,041

19,071

 


2019

Ordinary Shares

Number

2018

Ordinary Shares

Number

Opening balance

73,837,630

68,251,333

Conversion of CULS

-

5,586,297

Share issue

27,878,842

-

Share buybacks

(1,131,061)

-

Closing balance

100,585,411

73,837,630

 

During the year the Company issued 27,878,842 Ordinary Shares as part of the merger with Dunedin Smaller Companies Investment Trust PLC.

 

For further details see note 20.

 

During the year the Company repurchased 1,131,061 (2018: nil) Ordinary Shares to treasury at a cost of £5,334,000 (2018: nil).  Subsequent to the year end, a further 313,135 Ordinary Shares were repurchased to treasury at a cost of £1,452,000.

 

14.   Net asset value per share

 

Total shareholders' funds have been calculated in accordance with the provisions of applicable accounting standards. The analysis of total shareholders' funds on the face of the Statement of Financial Position reflects the rights, under the Articles of Association, of the ordinary shareholders on a return of assets.

 


2019

2018

Net asset value per share



Net assets attributable (£000s)

542,694

408,274

Number of Ordinary Shares in issue at year end (excluding shares held in treasury)

100,585,411

73,837,630

Net asset value per share

539.54p

552.93p

 

15.   Financial instruments

 

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. No such transactions took place during the year.

 

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. There was no material currency risk to the Company for the period.

 

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 price 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 and money market funds;

 

·       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.

 

As at 30 June 2019, the Company had drawn down £25 million (2018 - £25 million) of the £45 million (2018: £45 million) unsecured loan facility agreement arranged with The Royal Bank of Scotland plc. The facilities consist of a five year fixed-rate term loan facility of £25 million and a five year revolving credit facility of £20 million.

 

Interest risk profile

The interest rate risk profile of the portfolio of financial assets and liabilities at the year end 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 June 2019





Assets





AAA-rated money market funds

-

0.85

-

15,911

Cash deposits

-

-

-

668

Total assets

-

-

-

16,579

Liabilities





Bank loan

3.33

2.35

25,000

-

Total liabilities

-

-

25,000

-

 

 


Weighted average period for which rate is fixed

Years

Weighted average interest rate

%

Fixed rate

£000

Floating

rate

£000

As at 30 June 2018





Assets





AAA-rated money market funds

-

0.62

-

9,559

Cash deposits

-

-

-

415

Total assets

-

-

-

9,974

Liabilities





Bank loan

4.33

2.35

25,000

-

Total liabilities

-

-

25,000

-

 

The weighted average interest rate is based on the current yield of each asset, weighted by its market value.

 

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

 

All financial liabilities are measured at amortised cost.

 

Interest rate sensitivity

The sensitivity analyses below have been determined based on the exposure to interest rates at the year end 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 June 2019 and net assets would increase / decrease by £166,000 (2018 : increase / decrease by £100,000). This is mainly attributable to the Company's exposure to interest rates on its floating rate cash balances and money market funds.

 

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 mainly listed on the London Stock Exchange.

 

Other price risk sensitivity

If market prices at the year end date had been 10% higher or lower while all other variables remained constant, the return attributable to ordinary shareholders for the year ended 30 June 2019 would have increased / decreased by £55,091,000 (2018 - increase / decrease of £42,419,000). 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 and AAA-rated money market funds, which can be sold to meet funding commitments if necessary. The maturity of the Company's existing borrowings is set out in the credit risk profile section of this note.

 


Expected cash flows

 

£000

Due within

3 months

 

£000

Due between 3 months

and 1 year

£000

Due after

1 year

 

£000

As at 30 June 2019





Bank loan

26,957

148

439

26,370


26,957

148

439

26,370

 


Expected cash flows

 

£000

Due within

3 months

 

£000

Due between 3 months

and 1 year

£000

Due after

1 year

 

£000

As at 30 June 2018





Bank loan

27,548

148

439

26,961


27,548

148

439

26,961

 

(iii)  Credit risk

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

 

The risk is 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 is reviewed periodically by the investment manager, and limits are set on the amount that may be due from any one broker;

 

·       the risk of counterparty exposure due to failed trades causing a loss to the Company is mitigated by the review of failed trade reports on a monthly basis. In addition, both stock and cash reconciliations to the Custodians' records are performed on a daily basis to ensure discrepancies are investigated on a timely basis.

 

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

 

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

 

Credit risk exposure

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

 


2019

2018


Statement of

Financial Position

£000

Maximum exposure

 

£000

Statement of

Financial Position

£000

Maximum exposure

 

£000

Current assets





Debtors

1,847

1,847

1,161

1,161

AAA-rated money markets funds

15,911

15,911

9,559

9,559

Cash and short term deposits

668

668

415

415


18,426

18,426

11,135

11,135

 

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

 

16.   Capital Management

 

The investment objective of the Company is to achieve long term capital growth by investment in UK quoted smaller companies.

 

The Company manages its capital to ensure that it will be able to continue as a going concern while maximising the return to Shareholders through the optimisation of the debt and equity balance.

 

The Company's capital comprises the following:


2019

£000

2018

£000

Equity



Equity share capital

26,041

19,071

Reserves

516,653

389,203

Liabilities



Bank loan

24,877

24,790


567,571

433,064

 

The Company's gearing comprises of the following:


2019

£000

2018

£000

Bank loan

24,877

24,790

Cash and AAA-rated money market funds

(16,579)

(9,974)

Net debt

8,298

14,816

Net assets

542,694

408,274

Gearing (%)

1.5

3.6

 

The Board monitors and reviews the broad structure of the Company's capital on an ongoing basis. This review includes:

 

·       the planned level of gearing which takes account of the Investment Manager's views on the market;

 

·       the level of equity shares;

 

·       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. The Company does not have any externally imposed capital requirements.

 

17.   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: 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: £550,909,000; 2018: £424,194,000) have therefore been deemed as Level 1.

 

The fair value of borrowings as at the 30 June 2019 has been estimated at £26,404,000 (2018: £26,467,000) with a par value per Statement of Financial Position of £24,877,000 (2018: £24,790,000) using the interest rate swap valuation technique.  Under the fair value hierarchy in accordance with FRS 102, these borrowings can be classified at Level 2.

 

18.   Transactions with the Manager

 

The Company has an agreement with Aberdeen Standard Fund Managers Limited for the provision of management services. This agreement was novated from the previous agreement with Standard Life Investments (Corporate Funds) Limited on 10 December 2018.

 

Effective 1 July 2018, the management fee has been charged applying the tiered rate of 0.85% per annum to the first £250m of net assets, 0.65% of net assets between £250m and £550m and 0.55% on net assets above £550m. The contract is terminable by either party on six months notice

 

Previously the management fee was charged applying the rate of 0.85% per annum to the first £250m of total assets, reduced to 0.65% on total assets above this threshold.

 

The Manager also receives a separate fee for the provision of promotional activities as disclosed in note 4.

 

19.   Related party transactions

 

Aberdeen Standard Fund Managers Limited received fees for its services as Manager and Company Secretary. Company Secretarial and administrative services are provided by Maven Capital Partners UK LLP under a separate agreement with the Manager. Further details are provided in notes 3 & 4. The Directors of the Company received fees for their services. Further details are provided in the Directors' Remuneration Report in the Annual Report. The Directors' shareholdings are detailed in the Directors' Remuneration Report in the Annual Report.

 

20.   Merger with Dunedin Smaller Companies Investment Trust PLC ("Dunedin")

 

On 8 October 2018, the Company announced that in connection with the merger of Dunedin, the Company acquired £147.4 million of net assets from Dunedin under the terms of the merger in consideration for the issue of 27,878,842 new Ordinary Shares, based on the respective formula asset values.

 

 


£000

Net assets acquired


Investments

144,899

Current assets: debtors and bank

3,823

Current liabilities

(1,299)

Net assets

147,423

Satisfied by new Ordinary Shares issued

147,423

 

There were no fair value adjustments made to the above figures.

 

Included in the Statement of Comprehensive Income for the year ended 30 June 2019 are income of £4,344,000 and profit after tax of £3,286,000 attributable to Dunedin following the merger. These amounts are estimated and derived from an apportionment of the post-merger return, based on the ratio applied at the time of the merger.

 

Additional notes

 

This Annual Financial Report is not the Company's statutory accounts.  The statutory accounts for the year ended 30 June 2018 have been delivered to the Registrar of Companies.  The statutory accounts for the years ended 30 June 2018 and 30 June 2019 received an audit report which was unqualified, did not include a reference to any matters to which the auditors 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 June 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 at 12 noon on Wednesday 23 October 2019 at the offices of Aberdeen Standard Investments, 1 George Street, Edinburgh, EH2 2LL.

 

The Annual Report will be posted to shareholders in September 2019 and copies will be available from the Manager or by download from the Company's website www.standardlifeuksmallercompaniestrust.co.uk.

 

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

 

 

For Standard Life UK Smaller Companies Trust plc

Maven Capital Partners UK LLP, Company Secretary

 

For further information please contact:

 

James Thorneley

Global Head of Media Relations, Aberdeen Standard Investments           Tel: 020 7463 6323

 

Evan Bruce-Gardyne

Client Director, Investment Trusts, Aberdeen Standard Investments          Tel: 0131 245 0571

 


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Annual Financial Report - RNS