abrdn UK Smaller Cos - Annual Financial Report
05/09/2024 07:00
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RNS Number : 9726C abrdn UK Smaller Cos. Growth Trust 05 September 2024
abrdn UK Smaller Companies Growth Trust plc
Annual Financial Report for the year ended 30 June 2024
Legal Entity Identifier (LEI): 213800UUKA68SHSJBE37
Investment Objective
To achieve long-term capital growth by investment in UK-quoted smaller
companies
Reference Index
The Company's reference index is the Deutsche Numis Smaller Companies plus AIM
(ex investment companies) Index.
Website
www.abrdnuksmallercompaniesgrowthtrust.co.uk
Performance Highlights and Financial Calendar
Net asset total return(AB) Share price total return(AB)
+18.1% +21.0%
2023 -7.4% 2023 -6.8%
Total dividends per share Discount to net asset value(AB)
12.00p 12.5%
2023 11.00p 2023 14.3%
Revenue return per share Ongoing charges ratio(ABC)
13.12p 0.92%
2023 12.44p 2023 0.95%
(A) Considered to be an Alternative Performance Measure.
(B) A Key Performance Indicator ("KPI")..
(C) Calculated in accordance with AIC guidance issued in October 2020 to
include the Company's share of costs of holdings in investment companies on a
look-through basis.
Financial Calendar
Annual General Meeting (Edinburgh) 21 November 2024
Payment of final dividend for year ending 30 June 2024 29 November 2024
Half year end 31 December 2024
Expected announcement of results for the February 2025
six months ending 31 December 2024
Payment of interim dividend for year ending 30 June 2025 April 2025
Financial year end 30 June 2025
Expected announcement of results for year ending 30 June 2025 September 2025
Financial Highlights
30 June 2024 30 June 2023 % change
Capital return
Total assets £453.1m £451.5m 0.3%
Equity shareholders' funds £413.1m £426.6m (3.2%)
Market capitalisation(A) £361.3m £365.7m (1.2%)
Net asset value per share 556.19p 482.95p 15.2%
Share price 486.50p 414.00p 17.5%
Discount to NAV(B) 12.5% 14.3%
Net gearing(B) 5.8% 2.5%
Reference index(C) 5,534.18 5,199.92 6.4%
Dividends and earnings
Revenue return per share(D) 13.12p 12.44p 5.5%
Total dividends per share(E) 12.00p 11.00p 9.1%
Operating costs
Ongoing charges ratio(BF) 0.92% 0.95%
(A) Represents the number of Ordinary shares in issue in the Company
multiplied by the Company's share price.
(B) Considered to be an Alternative Performance Measure.
(C) Deutsche Numis Smaller Companies plus AIM (ex investment companies) Index.
(D) Measures the revenue earnings for the year divided by the weighted average
number of Ordinary shares in issue (see Statement of Comprehensive Income).
(E) The figures for dividend per share reflect the years in which they were
earned (see note 8).
(F) Calculated in accordance with AIC guidance issued in October 2020 to
include the Company's share of costs of holdings in investment companies on a
look-through basis.
For further information, please contact:
Ben Heatley
Evan Bruce-Gardyne
abrdn Fund Managers Limited
0131 372 2200
Please note that past performance is not necessarily a guide to the future and
that the value of investments and the income from them may fall as well as
rise. Investors may not get back the amount they originally invested.
Chairman's Statement
Dear Shareholders
After two years of reporting underperformance, it is with pleasure that I can
report that the past year saw a decisive return to outperformance, such that
at our June year end your Company had outperformed the reference index and the
wider peer group in both NAV and share price terms over the year, albeit it is
still behind on a longer term view. I set out some detail on this below.
Performance
For the year ended 30 June 2024, the Company's net asset value ("NAV") total
return, calculated on the basis that all dividends received are reinvested in
additional shares, was 18.1% (2023: -7.4%). The share price total return,
calculated on the same basis, was 21.0% (2023: -6.8%). In addition to the
absolute returns generated, both the NAV and the share price outperformed the
total return of the Company's reference index, the Deutsche Numis Smaller
Companies plus AIM (ex investment companies) Index (the "reference index"), of
10.0%.
Below is an update of the graph which we included in last year's Annual
Report. This shows the NAV total return of the Company and the total return of
the reference index over the five years to 30 June 2024. Periods in grey
indicate when the NAV was generally outperforming the index. While the graph
shows that over the five year period the Company is behind the reference
index, it shows that the weak performance took place in 2022 and the first
nine months of 2023, and reversed sharply after that, narrowing the gap by the
end of the period. The poor performance in 2022 and the first part of 2023
will continue to act as a drag on the five year performance record, but the
last nine months of the year have shown the investment process recovering
traction and positive contributions to relative performance from both stock
selection and sector allocation.
Last year I reported on the work that the Board had done to further understand
the root causes of the underperformance in 2022, and the conclusion we reached
that this was largely attributable to external factors which were challenging
for the Manager's investment style. It is pleasing to report that, not only
have conditions become more favourable, but also that the portfolio has
outperformed.
Earnings and Dividends
The revenue return per share ("EPS") for the year ended 30 June 2024 was 13.12
pence (2023: 12.44 pence). The rate of increase of 5.5% has settled down to
more reasonable and sustainable levels, following two years where increases
have averaged over 39% per annum. This is in large part down to the recovery
in the prospects of the underlying companies, but there has also been a
contribution from the effect of share buy backs enhancing the EPS and the NAV
per share. Included in the EPS is the enhancement to earnings of 1.21 pence
per share (9.7%) as a result of share buy backs undertaken during the year.
Recurring income is increasingly the predominant source of dividends, with
only 2.5% of total revenue (excluding capital dividends) coming from special
dividends. This can be compared to the position 10 years ago when around 20%
of the revenue generated was classified as special.
The Board is declaring a final dividend for the financial year of 8.3 pence
per share, which will take the full year dividend to 12.0 pence per share, an
increase of 9.1% on the full year dividend paid in 2023. This will permit
around 2.2 pence per share to be transferred to revenue reserves to provide
against any future shortfalls in income generated. Subject to approval by
shareholders at the Annual General Meeting, the final dividend will be paid on
29 November 2024 to shareholders on the register on 1 November 2024, with an
associated ex-dividend date of 31 October 2024.
Ongoing Charges
The ongoing charges ratio ("OCR") for the year ended 30 June 2024 was 0.92%
(2023: 0.95%). During the year, the Company benefited from renegotiated
management fee terms that came into effect on 1 July 2023, including the
removal of the company secretarial fee with effect from 1 January 2024 and a
lower fee for the provision of promotional activities by the Manager.
Discount Control and Share Buy Backs
At the year end the discount of the share price to the NAV was 12.5% (2023:
14.3%).
Over the year, the Board bought back 14.1 million shares, equating to 15.9% of
the Company's issued share capital, at a total cost of £60.5 million and a
weighted average price of 427.66 pence per share. The weighted average
discount at which the shares were repurchased was 13.1%. The Board calculates
that this has added 10.7 pence per share to the NAV for remaining
shareholders.
The Board has remained committed to its discount target of 8% or lower and
will continue to be active in the market when it believes it to be in the best
interests of shareholders. It is, however, slightly frustrated that the
sustained improvement in performance throughout the year, outstripping its
reference index and many of its close peers, is not being reflected in the
share price performance relative to the NAV.
The pace of buy backs meant that the Board convened a General Meeting on 3
June 2024 at which shareholders granted authority for the Company to buy back
a further 14.99% of the issued share capital. The renewed authority will lapse
at the Annual General Meeting, at which time the Board will seek a renewed
authority.
Full details of the Board's discount control policy can be found in the
Strategic Report. It should be noted that the Board has implemented its
discount control policy against an industry backdrop of widening discounts
generally and it will continue to keep the nature of the policy and its level
under review.
Since the end of the financial year, the discount of the share price to the
NAV has continued to trade between 11% and 13% while the Company's performance
continues to outperform the reference index and most of its close peers. The
Board continues to stand behind the share price and the Company has bought
back 543,624 shares since the year end at an average discount of 12.0%. The
rate of buy backs has diminished, but this is largely driven by the lower
volumes traded over the summer months.
Gearing
The Board has given the Investment Manager discretion to vary the level of
gearing between 5% net cash and 25% net gearing (at the time of drawdown). The
Company has a £40 million revolving credit facility which matures in November
2025. At the start of the year the Company had drawn down £25 million of the
facility and, as the Investment Manager became more confident about the
outlook for the UK generally and smaller companies in particular, it drew the
remaining £15 million of the facility in March. At the year end, the gross
level of borrowings was offset by cash and investments in money market funds
of £15.9 million resulting in net gearing of 5.8% (2023: 2.5%).
FRC Review of Annual Report
The Board was informed in February 2024 that the Financial Reporting Council
(the "FRC") had undertaken a review of the 2023 Annual Report and Accounts in
accordance with Part 2 of the FRC Corporate Reporting Review Operating
Procedures. It is the FRC's usual practice to carry out such reviews on the
annual reports of a selection of companies each year. The FRC advised the
Board that the review did not give rise to any questions or queries.
Appointment of New Auditor
As explained in more detail in the Audit Committee's Report, during the year
the Board, led by the Audit Committee, undertook an audit tender process and,
following consideration of the tenders received, the Board decided to appoint
Johnston Carmichael LLP as the Company's Auditor for the year ending 30 June
2025. KPMG LLP will therefore not be seeking re-appointment as Auditor at the
Annual General Meeting and have issued a statutory statement pursuant to
Section 519 of the Companies Act 2006 which is included separately with the
Annual Report. A resolution to appoint Johnston Carmichael LLP as the
Company's Auditor will be proposed at the Annual General Meeting.
Annual General Meeting
The Company's Annual General Meeting ("AGM") will take place at 12 noon on
Thursday 21 November 2024 at abrdn's office at 1 George Street, Edinburgh EH2
2LL. The meeting 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.
Shareholders will be able to submit questions in advance of the AGM at the
following email address: uksmallercompaniesgrowth@abrdn.com. Should you be
unable to attend the AGM, the Investment Manager's presentation will be made
available on the Company's website shortly after the meeting. The results of
the AGM will also be published on the Company's website.
At the meeting, rather than asking shareholders to vote on the resolutions by
a show of hands, as we have done in previous years, voting will be conducted
by a poll. This practice has increasingly been adopted by public companies and
we consider that it is now best practice in corporate governance.
In the meantime, the Board strongly encourages all shareholders to exercise
their votes in respect of the AGM in advance of the meeting, and to appoint
the Chairman of the meeting as their proxy, by completing the enclosed form of
proxy form. This will ensure that your votes are registered.
Outlook
This time last year, I wrote about concerns surrounding high rates of
inflation and the level of interest rates. Roll forward 12 months and we have
seen inflation fall and market conditions for UK smaller companies improve.
Rachel Reeves, the Chancellor of the Exchequer, sees growth as UK's national
mission, however investors are still unsure of the actions likely from Sir
Keir Starmer's government following the landslide victory in July. Markets
wait to see how conflicting positions on budgetary possibilities and growth
agendas are reconciled and whether cutting costs or promoting growth will take
precedence.
At the same time, the forthcoming US Presidential elections have been shaken
up by the decision of President Biden not to stand and to back the campaign of
his Vice President, Kamala Harris. While we should end 2024 with better
visibility as to the political direction of travel, given that over half the
world's population will not have to visit the ballot box for a number of
years, the same cannot be said about the geopolitical landscape, with the
continuing war in Ukraine and the threat of an escalating conflict in Gaza and
the Middle East. The UK, in a global context, looks reassuringly well
positioned, given economic data, employment rates, manageable inflation
levels, and levers on interest rates to use.
The future is by its very nature uncertain, but the Board has been pleased by
the manner in which the Investment Manager has managed the portfolio and
navigated the challenges in the last 12 months. The focus remains on the
resilience of the companies in which the portfolio is invested and the
experience and flexibility of the management teams to adapt their companies to
the changes to the economic environment that are occurring. At the same time,
the Investment Manager continues to see opportunities within the universe of
UK smaller companies - there remains significant catching up to do with
respect to where smaller company valuations sit relative to their long-term
average and to large caps. As a consequence, despite areas of uncertainty
remaining as always, there remains cause for optimism in the sector generally
and the Company specifically.
Liz Airey
Chairman
4 September 2024
Overview of Strategy
Business
The Company is an investment trust and its Ordinary shares are listed on the
London Stock Exchange.
Investment Objective
The Company's objective is 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 between 50-60 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.
Board Investment Limits
The Directors have set additional guidelines in order to reduce the risk borne
by the portfolio:
- Companies with a market capitalisation of below £50 million
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
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 the result of intensive research and includes
face to face meetings with senior management of these potential investments.
This disciplined process has been employed for many years and has delivered
strong long term performance.
Reference Index
The Company's reference index is the Deutsche Numis Smaller Companies plus AIM
(ex investment companies) Index.
Delivering the Investment Objective
The Directors are responsible for determining the Company's investment
objective and investment policy. Day-to-day management of the Company's assets
has been delegated, via the Alternative Investment Fund Manager (the "AIFM"),
to the Investment Manager.
Promoting the Success of the Company
The Board's statement below describes how the Directors have discharged their
duties and responsibilities over the course of the financial year under
section 172 (1) of the Companies Act 2006 and how they have promoted the
success of the Company for the benefit of the members as a whole.
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 five years.
KPI Description
Net asset value ("NAV") total return performance The Board measures the Company's NAV total return performance against the
total return of the reference index (the Deutsche Numis Smaller Companies plus
AIM (ex investment companies) Index) and its peer group of investment trusts.
The figures for this year and for the past three, five and ten years are shown
in the table below.
Share price total return performance The Board measures the Company's share price total return performance against
the total return of the reference index and its peer group of investment
trusts.
The figures for this year and for the past three, five and ten years are shown
in the table below.
Discount/premium to NAV The Board compares the discount or premium of the Ordinary share price to the
NAV per share to the discount of the peer group and also to the threshold of
the Company's discount target on a rolling 12 month basis.
A summary of the discount for the past ten years is included in the table
below. The average discount for the year as a whole was 12.9%.
Ongoing charges The Board monitors the Company's ongoing charges ratio against prior years and
other similar sized companies in the peer group.
A summary of the ongoing charges ratio ("OCR") for the past ten years is
included in the table below. The OCR for the year ended 30 June 2024 was 0.92%
(2023: 0.95%).
Principal and Emerging Risks and Uncertainties
The Board carries out a regular review of the risk environment in which the
Company operates, changes to the environment and individual risks. The Board
also considers emerging risks which might affect the Company. During the year,
the most significant risks were inflation and high interest rates and the
resultant volatility that this has created in global stock markets. In
addition, the continuing conflicts in Ukraine and the Middle East have further
increased market risk and volatility.
There are a number of other risks which, if realised, could have a material
adverse effect on the Company and its financial condition, performance and
prospects. The Board has carried out a robust assessment of the Company's
principal and emerging risks, which include those that would threaten its
business model, future performance, solvency, liquidity or reputation.
The principal risks and uncertainties faced by the Company are reviewed by the
Audit Committee in the form of a risk matrix and the Committee also gives
consideration to the emerging risks facing the Company.
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.
In terms of its appetite for risk, the Board has identified what it considers
to be the key risks to which the Company is exposed and seeks to take a
proportionate approach to the control of these risks. In particular, by
considering the likelihood and impact of a specific risk, if the potential
exposure is rated as Critical or Significant, the Board ensures that
significant mitigation is in place to reduce the likelihood of occurrence
whilst recognising that this may not be possible in all cases.
The principal risks associated with an investment in the Company's shares are
published monthly in the Company's factsheet and they can be found in the
pre-investment disclosure document ("PIDD") published by the Manager, both of
which are available on the Company's website.
Risk Mitigating Action
Strategy - the Company's objectives or the investment trust sector as a whole Through regular updates from the Manager, the Board monitors the discount/
become unattractive to investors, or the Company becomes uncompetitive premium at which the Company's shares trade relative to the NAV (further
(including its size and costs), leading to a fall in demand for the Company's information included in "Share price" below) . It also holds an annual
shares. strategy meeting and receives feedback from the Company's Stockbroker and
shareholders and updates from the Manager's investor relations team at Board
meetings.
Investment performance - the appointment or continuing appointment of an The Board meets the Manager on a regular basis and keeps investment
investment manager with inadequate resources, skills or experience, the performance under close review. Representatives of the Investment Manager
investment style or process being out of favour, or the adoption of attend all Board meetings and a detailed formal appraisal of the Manager is
inappropriate strategies in pursuit of the Company's objectives, could result carried out by the Management Engagement Committee on an annual basis.
in poor investment performance, a loss of value for shareholders and a
widening discount. 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, ESG matters,
risk management and application of the investment guidelines.
Key person risk - a change in the key The Board discusses key person risk and succession planning with the Manager
personnel involved in the investment management of the portfolio could impact on a regular basis.
on future investment performance and
lead to loss of investor confidence. The Investment Manager employs a standardised investment process for the
management of the portfolio. The well-resourced smaller companies 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.
Share price - failure to manage the discount effectively or an inappropriate The Company operates a discount control mechanism and aims to maintain a
marketing strategy could lead to a fall in the share price relative to the NAV discount level of less than 8% to the cum-income NAV under normal market
per share. conditions. Details of the discount control mechanism are contained in the
Strategic 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 As stated above, the Board sets investment guidelines and restrictions which
risks, including market price risk, liquidity risk and credit risk could are reviewed regularly and the Manager reports on compliance with them at
result in losses to the Company. Board meetings.
Further details of the Company's financial instruments and risk management are
included in note 16 to the financial statements.
Financial obligations - inadequate controls over financial record keeping and At each Board meeting, the Board reviews management accounts and receives a
forecasting, the setting of an inappropriate gearing strategy or the breaching report from the Administrator, detailing any breaches in the internal controls
of loan covenants could result in the Company being unable to meet its during the period under review. The Board sets gearing limits and monitors the
financial obligations, losses to the Company and impact its ability to level of gearing and compliance with the main financial covenants at Board
continue trading as a going concern. meetings.
The Audit Committee meets representatives from the Manager's Compliance and
Internal Audit teams on at least an annual basis and discusses any findings
and recommendations relevant to the Company.
Regulatory - failure to comply with relevant laws and regulations could result The Board receives updates on relevant changes in regulation from the Manager,
in fines, loss industry bodies and external advisers and the Board and Audit Committee
of reputation and potential loss of investment trust status. monitor compliance with regulations by review of checklists and internal
control reports from the Manager. Directors keep up to date in a variety of
ways, including attendance at training courses and seminars.
Operational - the Company is dependent on third parties for the provision of The Audit Committee reviews reports from the Manager on its internal controls
all systems and services (in particular those of the Manager and the and risk management (including an annual ISAE Report) and considers assurances
Depositary) and any control failures and gaps in their systems and services from all its other significant service providers on at least an annual basis,
could result in a loss or damage to the Company. including on matters relating to business continuity and cyber security.
Written agreements are in place with all third party service providers.
The Audit Committee meets representatives from the Manager's Compliance and
Internal Audit teams on at least an annual basis and discusses any findings
and recommendations relevant to the Company.
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, and
provides periodic updates to the Board on this work.
A formal appraisal of the Company's main third party service providers is
carried out by the Management Engagement Committee on an annual basis.
Geopolitical - the effects of geopolitical instability or change could have an Current geopolitical risks include the conflicts in Ukraine and the Middle
adverse impact on stock markets and the value of the Company's investment East and the actions taken by governments in relation to climate change. They
portfolio. also include the impact of inflation and higher interest rates, and the
potential impact on investors of tax changes in the UK. The Investment
Manager's focus on quality companies, the diversified nature of the portfolio
and a managed level of gearing all serve to provide a degree of protection in
times of market volatility.
Geopolitical risk is heightened due principally to the increased market risk
caused by the continuing conflicts in Ukraine and the Middle East and also the
potential impact on investors of tax changes in the UK. The risk ratings for
the other headings are not considered to have changed since the previous year.
Promotional Activities
The Board recognises the importance of promoting the Company to prospective
investors both for improving liquidity and enhancing the rating of the
Company's shares. The Board believes one effective way to achieve this is
through subscription to, and participation in, the promotional programme run
by the Manager on behalf of a number of investment trusts under its
management. The Company also supports the Manager's investor relations
programme which involves regional roadshows, promotional and public relations
campaigns. The Manager's promotional and investor relations teams report to
the Board on a quarterly basis giving analysis of the promotional activities
as well as updates on the shareholder register and any changes in the make-up
of that register.
The purpose of the promotional and investor relations programmes is both to
communicate effectively with existing shareholders and to gain new
shareholders, with the aim of improving liquidity and enhancing the value and
rating of the Company's shares. Communicating the long-term attractions of the
Company is key. The promotional programme includes commissioning independent
paid for research on the Company, most recently from Edison Investment
Research Limited. A copy of the latest research note is available from the
Company's website.
The cost to the Company of participating in these programmes is matched by the
Manager through the provision of the necessary resources to carry out the
marketing and promotional activities.
Employees and Human Rights
The Company has no employees as the Board has delegated the day to day
management and administrative functions to the Manager. There are therefore no
disclosures to be made in respect of employees or human rights.
Modern Slavery Act
Due to the nature of its business, being a company that does not offer goods
and services to customers, the Board considers that the Company is not within
the scope of the Modern Slavery Act 2015 because it has no turnover. The
Company is therefore not required to make a slavery and human trafficking
statement. In any event, the Board considers the Company's supply chains,
dealing predominantly with professional advisers and service providers in the
financial services industry, to be low risk in relation to this matter.
The UK Stewardship Code and Proxy Voting
The Company supports the UK Stewardship Code, and seeks to play its role in
supporting good stewardship of the companies in which it invests.
Responsibility for actively monitoring the activities of portfolio companies
has been delegated by the Board to the Manager which has sub-delegated that
authority to the Investment Manager. abrdn plc is a tier 1 signatory of the UK
Stewardship Code which aims to enhance the quality of engagement by investors
with investee companies in order to improve their socially responsible
performance and the long-term investment return to shareholders. While
delivery of stewardship activities has been delegated to the Manager, the
Board acknowledges its role in setting the tone for the effective delivery of
stewardship on the Company's behalf.
The Board has also given discretionary powers to the Manager to exercise
voting rights on resolutions proposed by the investee companies within the
Company's portfolio. The Manager reports on a quarterly basis on stewardship
(including voting) issues. Further details can be obtained on the Manager's
website.
Global Greenhouse Gas Emissions
The Company has no greenhouse gas emissions to report from its operations, nor
does it have responsibility for any other emissions producing sources under
the Companies Act 2006 (Strategic Report and Directors' Reports) Regulations
2013.
Task Force for Climate-Related financial Disclosures ("TCFD")
Under Listing Rule 11.4.22(R), the Company, as a closed ended investment
company, is exempt from complying with the Task Force on Climate-related
Financial Disclosures ("TCFD").
Whilst TCFD is currently not applicable to the Company, the Manager has
produced a product level report on the Company in accordance with the FCA's
rules and guidance regarding the disclosure of climate-related financial
information consistent with TCFD Recommendations and Recommended Disclosures.
These disclosures are intended to help meet the information needs of market
participants, including institutional clients and consumers of financial
products, in relation to the climate-related impact and risks of the Manager's
TCFD in-scope business. The product level report on the Company is available
on its website.
Discount Control Policy
The Board operates a discount control mechanism which targets a maximum
discount of the share price to the cum-income net asset value of 8% 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 Annual General Meeting, the Board seeks shareholder approval to buy back
up to 14.99% of the Company's share capital. Share buy-backs will only be made
where the Board believes it to be in the best interests of shareholders as a
whole and the making and timing of share buy-backs will be at the discretion
of the Board.
The Board considers that, given the backdrop has continued to be unfavourable
for the UK smaller companies sector as a whole, evidenced by outflows in the
open ended sector, it is to be expected that the Company would face discount
pressure in common with most of the peer group. Whilst the Board takes into
account the wider investment trust sector discount levels when implementing
its discount control mechanism, it remains committed to its long term target
of 8% and will continue to be active in the market when it believes it to be
in the best interests of shareholders.
The Company has a tender offer mechanism in place and the Board intends to
continue to seek shareholder approval at each Annual General Meeting 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.
Viability Statement
The Board considers that the Company, which does not have a fixed life, is a
long-term investment vehicle and, for the purposes of this statement, has
decided that five years is an appropriate period over which to consider its
viability. The Board considers that this period reflects a balance between
looking out over a long-term horizon and the inherent uncertainties of looking
out further than five years.
Taking into account the Company's current financial position and the potential
impact of its principal risks and uncertainties, the Directors have a
reasonable expectation that the Company will be able to continue in operation
and meet its liabilities as they fall due for a period of five years from the
date of this Report.
In assessing the viability of the Company over the review period, the
Directors have focused upon the following factors:
- The principal risks and uncertainties detailed above and the steps
taken to mitigate these risks, together with the emerging risks identified by
the Board.
- The Company is invested in listed securities that are
readily-realisable in normal market conditions and there is a spread of
investments held across a diversified range of sectors.
- The Company is closed ended in nature and therefore it is not
required to sell investments when shareholders wish to sell their shares.
- The level of share buy backs undertaken by the Company.
- The Company's long-term performance record as shown below.
- The Company's level of gearing. The Company had net gearing of
5.8% as at 30 June 2024. The Company has a £40 million unsecured loan
facility agreement with The Royal Bank of Scotland International Limited which
expires on 1 November 2025. 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. The Board has also performed stress testing
and liquidity analysis. In the event that the facility is not refinanced,
there is considered to be sufficient portfolio liquidity to enable borrowings
to be repaid.
- The Company has cash and money market funds which at 30 June 2024
amounted to £15.9 million. These balances allow the Company to meet
liabilities as they fall due.
- The level of ongoing charges.
- There are no capital commitments currently foreseen that would
alter the Board's view.
- The robustness of the operations of the Company's third party
service suppliers.
The Directors have also reviewed the revenue and ongoing expenses forecasts
for the coming year and considered the Company's Statement of Financial
Position as at 30 June 2024 which shows net current liabilities of £23.6
million at that date, and do not consider this to be a concern due to the
liquidity of the portfolio which would enable the Company to meet any
short-term liabilities if required.
In assessing the Company's future viability, the Board has assumed that
shareholders will wish to continue to have exposure to the Company's
activities in the form of a closed ended entity and the Company will continue
to have access to sufficient capital.
In making its assessment, the Board is also aware that there are other matters
that could have an impact on the Company's prospects or viability in the
future, including the conflicts in Ukraine and the Middle East, economic
shocks or significant stock market volatility caused by other factors, and
changes in regulation or investor sentiment.
Future Strategy
The Board intends to maintain the strategic direction set out in the Strategic
Report for the year ending 30 June 2025 as it believes that this is in the
best interests of shareholders.
On behalf of the Board
Liz Airey
Chairman
4 September 2024
Promoting the Success of the Company
Introduction
Section 172 (1) of the Companies Act 2006 (the "Act") requires each Director
to act in the way he/she considers, in good faith, would be most likely to
promote the success of the Company for the benefit of its members as a whole.
The Board is required to describe to the Company's shareholders how the
Directors have discharged their duties and responsibilities over the course of
the financial year under that provision of the Act (the "Section 172
Statement"). This statement provides an explanation of how the Directors have
promoted the success of the Company for the benefit of its members as a whole,
taking into account, among other things, the likely long-term consequences of
decisions, the need to foster relationships with all stakeholders and the
impact of the Company's operations on the environment.
The Purpose of the Company and Role of the Board
The purpose of the Company is to act as an investment vehicle to provide, over
time, financial returns (both income and capital) to its shareholders.
Investment trusts, such as the Company, are long-term investment vehicles and
are typically externally managed, have no employees, and are overseen by an
independent non-executive board of directors.
The Board, which at the end of the year, comprised five independent
non-executive Directors with a broad range of skills and experience across all
major functions that affect the Company, retains responsibility for taking all
decisions relating to the Company's investment objective and policy, gearing,
corporate governance and strategy, and for monitoring the performance of the
Company's service providers.
The Board's philosophy is that the Company should operate in a transparent
culture where all parties are treated with respect and provided with the
opportunity to offer practical challenge and participate in positive debate
which is focused on the aim of achieving the expectations of shareholders and
other stakeholders alike. The Board reviews the culture and manner in which
the Manager and Investment Manager operate at its meetings and receives
regular reporting and feedback from the other key service providers. The Board
is very conscious of the ways it promotes the Company's culture and ensures as
part of its regular oversight that the integrity of the Company's affairs is
foremost in the way that the activities are managed and promoted. The Board
works very closely with the Manager and Investment Manager in reviewing how
stakeholder issues are handled, ensuring good governance and responsibility in
managing the Company's affairs, as well as visibility and openness in how the
affairs are conducted.
The Company's main stakeholders have been identified as its shareholders, the
Manager (and Investment Manager), service providers, investee companies, debt
providers and, more broadly, the environment and community at large.
How the Board Engages with Stakeholders
The Board considers its stakeholders at Board meetings and receives feedback
on the Manager's interactions with them.
Stakeholder How We Engage
Shareholders Shareholders are key stakeholders and the Board places great importance on
communication with them. The Board welcomes all shareholders' views and aims
to act fairly to all shareholders. The Manager and Company's Stockbroker
regularly meet with current and prospective shareholders to discuss
performance and shareholder feedback is discussed by the Directors at Board
meetings. Directors meet shareholders at the Annual General Meeting and the
Chairman offers to meet with the Company's larger shareholders to discuss
their views. In addition, during the year the Board held an online shareholder
presentation at which shareholders had the opportunity to ask questions of the
Chairman and Investment Manager.
The Company subscribes to the Manager's investor relations programme in order
to maintain communication channels with the Company's shareholder base.
Regular updates are provided to shareholders through the Annual Report, Half
Yearly Report, monthly factsheets, Company announcements, including daily net
asset value announcements, and the Company's website.
The Company's Annual General Meeting provides a forum, both formal and
informal, for shareholders to meet and discuss issues with the Directors and
Manager. The Board encourages shareholders to attend the Company's Annual
General Meeting and to provide feedback on the Company.
Manager (and Investment Manager) The Investment Manager's Review details the key investment decisions taken
during the year. The Investment Manager has continued to manage the portfolio
and other assets in accordance with the mandate agreed with the Company, with
oversight provided by the Board.
The Board regularly reviews the Company's performance against its investment
objective and the Board undertakes an annual strategy review meeting to ensure
that the Company
is positioned well for the future delivery of its objective for its
stakeholders.
The Board receives presentations from the Investment Manager at every Board
meeting to help it to exercise effective oversight of the Investment Manager
and the Company's strategy.
The Board, through the Management Engagement Committee, formally reviews the
performance of the Manager (and Investment Manager) at least annually.
Service Providers The Board seeks to maintain constructive relationships with the Company's
service providers either directly or through the Manager with regular
communications and meetings.
The Management Engagement Committee conducts an annual review of the
performance, terms and conditions of the Company's main service providers to
ensure they are performing in line with Board expectations, carrying out their
responsibilities and providing value
for money.
Investee Companies Responsibility for monitoring the activities of portfolio companies has been
delegated by the Board to the Manager which has sub-delegated that authority
to the Investment Manager.
The Board has also given discretionary powers to the Manager to exercise
voting rights on resolutions proposed by the investee companies within the
Company's portfolio. The Manager reports on a quarterly basis on stewardship
(including voting) issues.
Through engagement and exercising voting rights, the Investment Manager
actively works with companies to improve corporate standards, transparency and
accountability.
The Board monitors investments made and divested and questions the rationale
for investment and voting decisions made.
Debt Providers On behalf of the Company, the Manager maintains a positive working
relationship with The Royal Bank of Scotland International Limited, the
provider of the Company's loan facility, and provides regular updates on
business activity and compliance with its loan covenants.
Environment and Community The Board and Investment Manager are committed to investing in a responsible
manner and the Investment Manager considers Environmental, Social and
Governance ("ESG") factors as part of the investment decision-making process.
Specific Examples of Stakeholder Consideration During the Year
While the importance of giving due consideration to the Company's stakeholders
is not a new requirement, and is considered during every significant Board
decision, the Directors were particularly mindful of stakeholder
considerations as part of the following decisions made during the year ended
30 June 2024. Each of these decisions was made after taking into account the
short and long-term benefits for stakeholders.
Portfolio and Investment Performance
The Investment Manager's Review details the key investment decisions taken
during the year. The overall shape and structure of the investment portfolio
is an important factor in delivering the Company's stated investment objective
and is reviewed at every Board meeting.
During the year the Management Engagement Committee decided that the
continuing appointment of the Manager is in the best interests of
shareholders.
Management Fee
During the previous year, the Board considered that the existing structure of
fees paid to the Manager made the Company insufficiently competitive relative
to its closest peers. Accordingly, the Board negotiated a lower fee structure
with the Manager which the Board considers is more competitive when compared
to the other similar investment trusts in the sector. The new fee structure
became effective on 1 July 2023 and is set out in detail in the Directors'
Report. .
Dividends
The Board is recommending payment of a final dividend for the year of 8.3p per
Ordinary share. Following payment of the final dividend, total dividends for
the year will amount to 12.0p per Ordinary share, an increase of 9.1% compared
to the previous year. Although the Company has a capital growth objective, the
Board recognises the importance of dividends to shareholders.
Share Buy Backs
In accordance with the discount control policy, during the year the Company
bought back 14.1 million Ordinary shares to be held in treasury, providing an
accretion to the NAV per share and a degree of liquidity to the market at
times when the discount to the NAV per share has widened in normal market
conditions. It is the view of the Board that this policy is in the interest of
all shareholders.
Shareholder Engagement
During the year, the Board met shareholders at the AGM. The AGM was held in
London in 2023 and will be held in Edinburgh this year.
To encourage and promote stronger interaction and engagement with the
Company's shareholders, the Board also held an interactive online shareholder
presentation in May. At the presentation, shareholders received updates from
the Chairman and Investment Manager and there was the opportunity for an
interactive question and answer session.
The Board considers that it is very important to maintain an ongoing dialogue
with shareholders to properly understand their views and to communicate the
actions of the Board.
Consumer Duty
During the previous year, the FCA's Consumer Duty Regulations came into
effect, introducing new rules for FCA regulated firms which manufacture or
distribute products and services to retail customers. The Consumer Duty rules
do not apply to the Company but do apply to the Manager.
During the year, the Board continued to review the methodology employed by the
Manager to assess value of the Company under the Consumer Duty regulations and
will formally review the Manager's assessment of value on an ongoing basis.
On behalf of the Board
Liz Airey
Chairman
4 September 2024
Performance
Performance (total return)
1 year return 3 years return 5 years return 10 years return
% % % %
Net asset value(AB) +18.1 -20.5 +12.3 +118.2
Share price(B) +21.0 -26.0 +8.6 +105.9
Reference Index(C) +10.0 -13.5 +17.6 +57.6
Peer Group weighted average (NAV) +16.8 -8.8 +27.4 +94.8
Peer Group weighted average (share price) +19.0 -13.1 +25.9 +104.8
(A) Cum-income NAV with debt at fair value.
(B) Considered to be an Alternative Performance Measure.
(C) Deutsche Numis Smaller Companies plus AIM (ex investment companies) Index.
Source: Morningstar
Ten Year Financial Record
Year to 30 June 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Per Ordinary share (p)
Net revenue return 6.76 6.76 6.42 7.24 8.80 6.74 6.43 9.07 12.44 13.12
Ordinary dividends paid/proposed 5.80 6.60 6.70 7.00 7.70 7.70 7.70 8.10 11.00 12.00
Net asset value(A) 336.89 345.43 456.60 552.93 539.54 527.73 737.97 530.37 482.95 556.19
Share price 300.00 316.00 431.00 500.00 491.50 482.00 698.00 453.00 414.00 486.50
Discount(%)(A) 10.9 8.5 5.6 9.6 8.9 8.7 5.4 14.6 14.3 12.5
Ongoing charges ratio (%)(B) 1.19 1.13 1.08 1.04 0.90 0.91 0.88 0.82 0.95 0.92
Gearing ratio (%)(C) 4.1 3.6 1.7 3.6 1.5 (0.34) 5.7 5.1 2.5 5.8
Shareholders' funds (£m)(D) 243 241 324 408 543 528 728 499 427 413
Revenue reserves (£m)(E) 5.83 6.50 6.26 8.30 10.87 8.80 7.53 8.81 12.47 13.53
(A) Calculated with debt at par value and diluted for the effect of
Convertible Unsecured Loan Stock conversion from 01 July 2013 until 30 June
2017. From 30 June 2018, net asset value is calculated with debt at par value.
(B) Calculated as an average of shareholders' funds throughout the year and in
accordance with updated AIC guidance issued in October 2020, to include the
Company's share of costs of holdings in investment companies on a look-through
basis.
(C) Net gearing ratio calculated as debt less cash invested in AAA-rated money
market funds and short-term deposits divided by net assets at the year end.
(D) Increase in 2018 included the effect of the merger with Dunedin Smaller
Companies Investment Trust PLC.
(E) Revenue reserves are reported prior to paying the final dividend for the
year.
Investment Manager's Review
The net asset value ("NAV") total return of the Company for the year ended 30
June 2024 was 18.1%, while the share price total return was 21.0%. By
comparison, the UK smaller companies sector as represented by the Deutsche
Numis Smaller Companies plus AIM (ex investment companies) Index (the
"reference index") delivered a total return of 10.0%.
Equity Markets
During the year under review, markets proved healthier after a challenging two
years. The top-down pressure of inflation came under control in the UK and
other regions although, relative to expectations, it is worth noting that
interest rates have remained higher for longer.
The UK stock market, as represented by the FTSE All-Share Index, performed
strongly over the period, with a total return of 13.0%. The FTSE 100 Index's
total return of 12.8% underperformed the FTSE 250 Index, the latter of which
generated a total return of 13.9%. The mid cap universe was therefore the best
performing group within the UK, outperforming the reference index. The FTSE
AIM Index was the laggard, delivering just a 3.4% return. Investors continued
to remain cautious about the UK economic picture, however the GDP data was
somewhat reassuring and, relative to other major economies in Europe, the UK
held up well.
The only real interruption to the performance of the UK market was during
September and October 2023. However, the sharp rebound from the October lows
has delivered a fairly smooth positive return pathway since then. UK consumer
spending has improved given that inflation has receded from its peak and wage
growth remains positive. However, many households continue to have the burden
of higher mortgage rates or rental costs. The domestic labour market has
remained resilient, with employment levels high, and good job availability
across a number of sectors.
The period was dominated by the inflation and interest rate picture, with
inflation subsiding steadily over the period, with some visible steps down in
areas such as energy prices and food. Along with other major economies such as
the US, interest rates in the UK have remained at higher levels for longer
than many economists projected.
Geopolitical tensions remained an ongoing theme during the period; the
continuation of the war in Ukraine, the heightened conflict in Israel since
October, as well as ongoing issues surrounding relations between China and the
West. As we move through the second half of 2024, the outlook is impacted by
the various major elections globally, with well over half of the world's
population expected to be going to the polls during 2024. As always, the US
Presidential Election is the highest profile and is only two months away.
However, as the voting in some international geographies has already
completed, we have seen increased levels of uncertainty and markets have
experienced increased volatility in some regions.
Economists and strategists have noticeably turned more positive on both the UK
and small and mid cap sectors through the final quarter of the financial year.
Attractive valuations have been a key aspect of their investment case,
combined with strong resilience in earnings across company reporting. It
should not be forgotten that, even in the smaller companies space, around half
the revenue of the reference index is generated overseas. With allocations to
the UK and to smaller companies having shrunk over the years, particularly
from UK pension funds, that series of outflows has stabilised and is showing
tentative signs of reversal. With many starting positions at all-time lows,
the more positive view on the asset class could help to drive markets higher.
Mergers and Acquisitions ("M&A") have continued to be a strong feature of
UK markets, not just in the smaller companies sector. As the period
progressed, we saw an increased proportion of the bids being for FTSE 250 and
FTSE 100 companies. Initially this started as a dominance of private equity
bidders but has broadened out in 2024 to include many bids from corporate
buyers. Whilst this has created some headline concerns around shrinkage in the
UK market, we are seeing attractive premiums in these bid situations,
delivering good returns for shareholders. The average bid premium in UK in the
first half of 2024 was 40%. There has been a lot of overseas appetite in
deals, representing about 60% in the first six months of 2024. We have also
seen an increase in IPO activity, which over time should generate fresh
companies in our investable universe.
One final point to highlight is the increasing pressure to introduce changes
to stimulate the market, whether it be through stamp duty changes, lower costs
of listing, lighter regulation, or more control over asset class allocations.
We are confident these voices are now being heard, but we will have to wait
and see what is implemented and the time horizon of these policies.
Performance
Overall through the year, the net asset value ("NAV") grew by 18.1% on a total
return basis, outperforming the reference index total return of 10.0%.
The more stable backdrop we have been waiting for did materialise this year
and the focus of the markets reverted to stock specifics and reporting, rather
than being dominated by top-down factors. The consistency of outperformance
has been one of the most pleasing aspects for us, as portfolio managers, this
year; the Company outperforming the reference index in 9 of the 12 months
(only July 2023, Nov 2023 and April 2024 delivering relative
underperformance).
The style factors driving markets, such as either growth stocks or value
stocks being in favour, has been more settled this period. Value outperformed
growth in the first half of the period, but value and growth both delivered
similar returns in the market in the second half. We would characterise style
factors as a slight headwind to our strategy during the period, but
neutralising as we finished the year. Performance has predominantly been
driven by stock specifics, companies reporting strong trading and earnings
upgrades, with share prices responding appropriately, which is a distinct
improvement on the situation over the last couple of years. Attribution and
style analysis show that the outperformance has been driven by stock
selection, rather than our style of Quality, Growth & Momentum being in
favour.
Whilst we saw four successful bids for companies in the portfolio during the
year, all at attractive premiums, this has not been the main driver of
performance. These companies were Ergomed, Smart Metering Systems, Mattioli
Woods, and Spirent. Overall, those four companies contributed 198 bps of
relative performance during the year.
The five leading positive contributors to relative performance during the year
were as follows:
- Ashtead Technology +153bps (share price performance +104% since
purchase) The company was a new addition to the portfolio during the year and
has delivered very strong performance. The management team has displayed a
strong track record of upgrading earnings, from both organic outperformance
and acquisitions since the IPO in late 2021. The business has benefitted from
supportive end markets in oil and gas, and the green energy transition driving
investment in renewables. Visibility is aided by strong customer backlogs, and
we continue to see increased customer propensity to rent. The company
generates strong free cash flow which the management team is re-investing into
the business, and balance sheet strength provides scope for further M&A.
- Ergomed +102ps (+36%) The shares contributed to performance
following the recommended offer from Permira, the European private equity
firm, at an attractive all-cash price of £13.50 per share.
- Diploma +98bps (+39%) features in the top 5 contributors again
this year, further highlighting its long-term track record. The share price
has been driven by ongoing delivery of the growth strategy, with acquisitions
that position Diploma behind structurally growing end markets, deepening
penetration of its regions, and extending product ranges.
- Cranswick +85bps (+37%) has a long track record for delivering
growth, evidenced by its 34-year unbroken dividend growth history. Over time,
the company has broadened its core protein focus, created new consumer
categories and developed an exemplary reputation with customers. The long-term
success is underpinned by the company's focus on achieving "carcase value
maximisation", requiring a constant understanding of consumer trends and
customer needs, and an ability to invest to provide capacity and maintain its
industry-leading position in efficiency.
- Hilton Food Group +85bps (+44%) has redeemed itself after being a
bottom 5 contributor last year. Hilton is very much back on track of
consistency of delivering, and its market position reaffirmed by the work it
did with customers after the inflationary challenges in 2022. Over the past
year, its organic execution has been strong, and the shares have been buoyed
by the announcement of new customer wins, including Walmart in Canada.
The five weakest contributors to relative performance during the year were as
follows:
- CVS Group -130bp (-49%) The share price was hit badly by the
Competition Markets Authority ("CMA") announcement of a review into the
veterinary industry- focusing on price, consumer visibility and branding. We
expect the outcomes to be manageable for CVS and have retained the position.
Whilst CVS's Australian business is progressing well and UK trading has been
resilient, the CMA review places a near term cap on the share price.
- Big Technologies -115bps (-44%) Performance has been lacklustre,
with a lack of big wins and one contract loss, impacting sentiment. Underlying
growth and new contract wins should help offset that, but nearer term the
business is in a no growth scenario. We continue to have a holding.
- XP Power -75bps (-25%) Despite management's confidence that the
business could trade out of a high net debt position, XP Power then issued a
profit warning. Having had a series of disappointments, our confidence in
the management team diminished. The balance sheet was strained and an equity
issue looked necessary. Together with earnings downgrades, the proposition
deteriorated and we exited the position.
- Team17 -72bps (-24%) The gaming industry has had a challenging
period. While demand dynamics remain attractive, industry-wide unreleased
content backlogs, inflation in intellectual property and content costs and
competition for gaming hours have led to pressure across the sector. With a
change in management and a longer than expected continuation of a challenging
environment, we exited the position.
- discoverIE -72bps (-20%) The shares suffered during the period
from ongoing cyclical weakness impacting forecasts. Management has worked hard
to protect margins, through a combination of pricing resilience, tight cost
control and margin accretive M&A, but the end market weakness has weighed
on the shares, and there has been less opportunity to acquire businesses given
the higher interest rate environment. We continue to hold the shares, but
have reduced our exposure.
Dealing and Activity
Portfolio turnover was around 28%, which is higher than has been the case in
recent years. This is reflective of where we are in the cycle and changing
fortunes of companies. Over the year, we added 13 new positions, and exited 18
holdings. We took part in one IPO, Raspberry Pi.
Raspberry Pi makes single board computers and has sold 60 million units in
just over a decade. It is a founder-run business, having been created as part
of the Raspberry Pi Foundation (its largest shareholder prior to listing)
which focused on driving the interest of Science, Technology Engineering and
Maths ("STEM") subjects to children. Its products are used not just by the
educational and enthusiast markets, but across industrial applications where
they are embedded in products, such as for operating lifts or for automating
manufacturing lines in factories. The company has significant intellectual
property ("IP") which helps create barriers to entry, as well as being able to
deliver attractive margins whilst keeping prices low. We believe this will be
a unique listed asset within the UK market.
Ashtead Technology is a subsea equipment rental business within oil and gas
and renewables markets globally, whilst Hunting is an oil services business
also with global exposures. XPS Pensions, a pensions advisory, administrative
and actuarial business, has been a strong performer and is now one of the top
holdings in the portfolio. Premier Foods (branded food products) has vastly
improved in recent years and becoming unshackled from its pension liabilities
is investing in proposition and brand. Johnson Service is a textile rental
business, emerging from Covid in a strong market position. Cairn Homes, the
Irish housebuilder, is operating in healthier markets and with government
support for the industry and its business. Clarkson is a global leading
shipbroker, whilst Boku is a global mobile payment solutions business with
blue chip customers. Renew Holdings is a provider of essential engineering
services for critical infrastructure, and Volex is a manufacturing specialist
for power products. Jet2 (the only company that had previously been held in
the portfolio) is the package holiday business, which also sells flights only,
which has emerged from Covid with a strong balance sheet, investing for
growth, and with loyal repeat customers. Lastly, Chemring is a market leader
in countermeasures, sensory and logistics for defence, as well as having a
strong cyber business, Roke.
Of the 18 holdings exited over the period, four were companies which were
subject to takeover activity; Spirent (testing and solution for networks),
Mattioli Woods (financial services with focus on wealth management), Smart
Metering Systems (residential utilities metering services, and grid battery
storage), and finally Ergomed (clinical research). Elsewhere, many of our
exits were characterised by businesses which were experiencing cyclical
slowdowns and the recovery had become protracted and with limited visibility.
These included FDM (specialist people resource), Impax (sustainable
investment), Marshalls (landscaping products), Focusrite (hardware for content
production), GB Group (identity verification and fraud detection), Team 17
(video games), Kainos (digitisation programs), Henry Boot (land and property
development), Future (specialist media platform), Motorpoint (second hand car
sales), Safestore (self-storage), Serica (oil and gas production), XP Power
(electronics components for power products) and Watches of Switzerland
(premium watches and jewellery).
Notable top ups during the year include Tatton Asset Management which has
grown assets significantly, and Alpha Group (previously called Alpha FX) where
its expansion into alternative banking solutions has been executed well. We
also topped up AJ Bell which has been showing strong trading and growth,
Volution which has proved resilient through volatile end markets, Diploma
which has shown consistent organic and acquisitive growth, and lastly Paragon
Banking where we believe credit quality and market position will deliver
growth through tougher macro periods.
We have reduced exposure to some companies where they have experienced tougher
periods of trading, all of which are yet to fully recover but are investment
cases we continue to support. These include Robert Walters (global recruitment
specialist), Treatt (flavourings for beverages), Big Technologies (electronic
monitoring), Marlowe (business support services) and Auction Technology
(platform for auction markets).
Gearing
The level of gearing (net of cash) at 30 June 2024 was 5.8% (2023: 2.5%).
Given our improving outlook, we increased the gearing during the year and are
now fully drawn on the £40 million loan facility. We continue to hold cash in
the portfolio to ensure we can participate in market opportunities and are not
liquidity constrained.
Revenue Account
Dividend income generated by the portfolio (excluding capital receipts)
decreased by 9.8% over the year, with the main impact being the effect on the
portfolio of share buy backs undertaken during the year - dividend income
stated on a pence per share basis was marginally higher than last year.
Interest rates remaining high also meant that the Company received £887,000
in interest income during the year.
The dividend outlook for the Company, seen through its income generation from
the underlying holdings, has remained strong. Both the resilience of earnings,
aided by business models and by solid trading, as well as the growth being
exhibited, has helped drive the Revenue Account strength. The ability of
companies to provide dividend returns to shareholders has been supported by
balance sheet strength, a focus of our investment process. Meanwhile, we also
see dividend strength as a reassurance of the confidence of underlying
management teams.
While we consider it a good discipline for an investee company to have a
policy of paying a dividend to shareholders on a regular basis, it is not a
prerequisite for us to invest. There are currently four holdings in the
portfolio which we do not expect to be dividend payers in the near future,
currently re-investing back into their businesses to drive growth; Auction
Technology, Big Technologies, Marlowe and Boku.
There were two revenue special dividends received during the year; Bytes
Technology and Hollywood Bowl, which in aggregate amounted to £315,000 or
2.7% of investment income. This is down on the 7.2% that special dividends
represented in 2023 because companies are more confident in the outlooks and
keen to invest either organically or through bolt on acquisitions.
Outlook
We wrote last year about the overhang of the market waiting for a recession
which didn't really materialise. Since the market turn in October 2023, UK
stock markets have been buoyant and consistent in delivery. We believe a
driver of that turn was the awareness of how cheaply valued UK equities were;
relative to international peers, their own history, and their earnings
prospects. These points still remain true as we go through the second half of
2024 and should continue to support rising markets. This is further evidenced
by the frequency and premium level of bids for UK listed assets. The level of
premiums that companies are being bid for is evidence of the value inherent in
these markets, and the return of a more positive sentiment towards UK equities
that we expect to continue. There will always be examples where shareholders
feel the premium should be higher or they would have rather continued to be
invested for the long term, but overall it is helping to drive awareness of
the returns potential. To combat this market shrinkage we have also seen the
IPO market open up again, with the Raspberry Pi listing (in which we took
part) being heavily oversubscribed by investors. It has been encouraging to
see such a high quality unique asset choosing to list in its home market.
What other catalysts lie ahead for UK markets? The domestic economic data has
continued to turn more positive, both across business and consumer aspects. We
expect to see interest rates come down, and history would suggest this to be
positive, not just for absolute market levels, but in particular for small cap
relative to large cap. The number of elections, particularly the US
Presidential Election, might act as a short-term market overhang, but outcome
dependent this could also drive markets further onwards once the results are
known. In the UK, the new Labour government has made a point of highlighting
its awareness of the need to stimulate the economy. However, it is too early
to predict whether the government or any regulatory body can successfully
enact meaningful changes that will actually stimulate UK markets, something we
would very much support and have been active in sharing views on.
Our screening tool, The Matrix, continues to perform well and identifies
companies it believes are displaying Quality, Growth and Momentum dynamics.
The Matrix will continue to be valuable as we move through economic cycles and
by interacting daily with The Matrix, we believe we can keep our research up
to date. The market is continuing to evidence that earnings momentum, seen
through upgrades to expectations, is a strong driver of share price
performance. There has been more of a flight to quality this year, which
aligns with our investment process, but in particular the market is looking to
avoid poor quality exposures. Quality characteristics have helped companies
thrive in the inflationary environment, protecting margins and investing
consistently even through quieter periods, all helping to capture market
shares. Our investment process has been running for over 25 years in UK
smaller companies and is seasoned through five economic cycles. This gives us
confidence to be able to adapt the portfolio to the prevailing economic and
market conditions. As highlighted earlier, value as a factor is still
performing well in the UK small cap market, and The Matrix helps us evaluate
where those exposures lie; many quality growth companies show value
characteristics given market conditions in recent years.
Markets tend to anticipate improvements, and turning points in the past have
been when the outlook is often close to being at its most pessimistic. The
first half of the period was in that category; inflation was persisting,
interest rates remained high, and the consumer squeeze was ongoing. A
combination of that environment easing and improving, as well as the market
looking towards the future, has helped to drive this turn in markets.
Smaller companies will always be an asset class with relatively high
volatility, but we believe the current time is an attractive entry point for
new capital, where investors are able to take a longer-term investment
horizon.
Despite strong absolute and relative performance during this reporting period,
the Company's discount to NAV remains stubbornly wide. UK smaller companies is
not alone as an asset class in experiencing this. Whilst we have seen a
growing interest in the asset class in recent months, we feel the inflow of
money has yet to be seen. This can be evidenced through open ended funds flow
data which remains lacklustre. Discounts are narrowed by demand, so we would
hope this can be seen during the current 2024/25 financial year given the
brighter outlook.
Abby Glennie and Amanda Yeaman
abrdn
4 September 2024
Investment Portfolio
As at 30 June 2024
Valuation Total Valuation
2024 portfolio 2023
Company Sector £'000 % £'000
Diploma Industrial Support Services 17,512 4.0 13,709
Hill & Smith Industrial Metals and Mining 17,190 3.9 13,317
JTC Investment Banking and Brokerage Services 17,057 3.9 14,562
XPS Pensions Investment Banking and Brokerage Services 16,383 3.8 -
Cranswick Food Producers 15,887 3.6 12,482
Hilton Food Food Producers 15,191 3.5 11,518
Morgan Sindall Construction and Materials 15,099 3.5 10,980
Ashtead Technology Oil, Gas and Coal 15,008 3.4 -
4imprint Media 14,692 3.4 18,408
Paragon Banking Finance and Credit Services 14,351 3.3 8,500
Top ten investments 158,370 36.3
Bytes Technology Software and Computer Services 13,211 3.0 15,071
Alpha Financial Markets Industrial Support Services 12,419 2.8 14,542
Gamma Communications Telecommunications Service Providers 11,531 2.6 12,015
AJ Bell Investment Banking and Brokerage Services 11,361 2.6 5,577
Hollywood Bowl Travel and Leisure 11,242 2.6 9,550
Volution Construction and Materials 10,924 2.5 6,524
Sirius Real Estate Real Estate Investment Trusts 10,837 2.5 6,384
GlobalData Media 10,286 2.4 8,998
Mortgage Advice Bureau Finance and Credit Services 10,192 2.3 7,803
Jet2 Travel and Leisure 10,091 2.3 -
Top twenty investments 270,464 61.9
Games Workshop Leisure Goods 9,265 2.1 14,771
Tatton Asset Management Investment Banking and Brokerage Services 9,232 2.1 4,000
Hunting Oil, Gas and Coal 8,691 2.0 -
Coats General Industrials 8,487 1.9 9,036
Alpha Group Investment Banking and Brokerage Services 8,076 1.9 3,799
Johnson Service Industrial Support Services 7,986 1.8 -
discoverIE Electronic and Electrical Equipment 7,791 1.8 15,023
Craneware Health Care Providers 7,466 1.7 4,510
Premier Foods Food Producers 6,982 1.6 -
Cairn Homes Household Goods and Home Construction 6,819 1.6 -
Top thirty investments 351,259 80.4
Telecom Plus Telecommunications Service Providers 6,724 1.5 11,247
Next 15 Media 6,424 1.5 8,657
CVS Consumer Services 6,391 1.5 13,071
Chemring Aerospace and Defense 6,145 1.4 -
Midwich Industrial Support Services 5,665 1.3 8,420
Boku Industrial Support Services 5,200 1.2 -
Volex Electronic and Electrical Equipment 4,988 1.1 -
Clarkson Industrial Transportation 4,872 1.1 -
Liontrust Asset Management Investment Banking and Brokerage Services 4,849 1.1 3,391
Auction Technology Software and Computer Services 4,775 1.1 8,278
Top forty investments 407,292 93.2
Big Technologies Software and Computer Services 4,245 1.0 11,053
Marlowe Industrial Support Services 4,091 0.9 4,376
Treatt Chemicals 3,749 0.9 7,966
Raspberry Pi Technology Hardware and Equipment 3,610 0.8 -
Ricardo Construction and Materials 3,399 0.8 3,566
LBG Media Media 3,350 0.8 3,064
Robert Walters Industrial Support Services 3,079 0.7 5,943
YouGov Media 2,653 0.6 6,602
Renew Holdings Construction and Materials 1,221 0.3 -
Total portfolio 436,689 100.0
All investments are equity investments.
Sector Distribution of Investments
As at 30 June 2024
Portfolio weighting
2024 2023
% %
Basic Materials 4.8 4.8
Chemicals 0.9 1.8
Industrial Metals and Mining 3.9 3.0
Consumer Discretionary 18.8 23.9
Consumer Services 1.5 3.0
Household Goods and Home Construction 1.6 -
Leisure Goods 2.1 5.6
Media 8.7 11.5
Personal Goods - 1.4
Retailers - 0.2
Travel and Leisure 4.9 2.2
Consumer Staples 8.7 5.4
Food Producers 8.7 5.4
Energy 5.4 1.4
Oil, Gas and Coal 5.4 1.4
Financials 21.0 12.8
Finance and Credit Services 5.6 -
Investment Banking and Brokerage Services 15.4 12.8
Health Care 1.7 3.9
Health Care Providers 1.7 1.0
Pharmaceuticals and Biotechnology - 2.9
Industrials 27.1 23.0
Aerospace and Defense 1.4 -
Construction and Materials 7.1 6.1
Electronic and Electrical Equipment 2.9 1.4
General Industrials 1.9 2.1
Industrial Support Services 12.7 13.4
Industrial Transportation 1.1 -
Real Estate 2.5 4.3
Real Estate Investment and Services - 2.4
Real Estate Investment Trusts 2.5 1.9
Technology 5.9 15.2
Software and Computer Services 5.1 11.4
Technology Hardware and Equipment 0.8 3.8
Telecommunications 4.1 5.3
Telecommunications Service Providers 4.1 5.3
Total 100.0 100.0
Directors' Report (extract)
The Directors present their report and the audited financial statements of the
Company for the year ended 30 June 2024.
Results and Dividends
The financial statements for the year ended 30 June 2024 are contained below.
An interim dividend of 3.70p per Ordinary share was paid on 12 April 2024 and
the Directors recommend a final dividend of 8.3p per Ordinary share, payable
on 29 November 2024 to shareholders on the register on 1 November 2024. The
ex-dividend date is 31 October 2024.
Principal Activity and Status
The Company is registered as a public limited company in Scotland under
company number SC145455, is an investment company within the meaning of
Section 833 of the Companies Act 2006 and carries on business as an investment
trust.
The Company has applied for and has been accepted as an investment trust under
Sections 1158 and 1159 of the Corporation Tax Act 2010 and Part 2 Chapter 1 of
Statutory Instrument 2011/2999. This approval relates to accounting periods
commencing on or after 1 July 2012. The Directors are of the opinion that the
Company has conducted its affairs so as to be able to retain such approval.
The Company intends to manage its affairs so that its Ordinary shares continue
to be a qualifying investment for inclusion in the stocks and shares component
of an Individual Savings Account.
Capital Structure and Voting Rights
The Company's issued share capital at 30 June 2024 consisted of 74,270,535
(2023: 88,329,911) Ordinary shares of 25 pence each and there were 29,893,887
(2023: 15,834,511) Ordinary shares held in treasury.
During the year, 14,059,376 Ordinary shares were bought back into treasury.
Since the year end, the Company has bought back a further 543,624 Ordinary
shares into treasury. Accordingly, as at the date of this Report, the
Company's issued share capital consisted of 73,726,911 Ordinary shares of 25
pence each and 30,437,511 Ordinary shares held in treasury.
Each ordinary shareholder is entitled to one vote on a show of hands and, on a
poll, to one vote for every Ordinary share held.
Management Agreement
The Company has appointed abrdn Fund Managers Limited ("aFML"), a wholly owned
subsidiary of abrdn plc, as its Alternative Investment Fund Manager (the
"Manager"). aFML has been appointed to provide investment management, risk
management, administration and company secretarial services, and promotional
activities to the Company. The Company's portfolio is managed by abrdn
Investment Management Limited (the "Investment Manager") by way of a group
delegation agreement in place between it and aFML. In addition, aFML has
sub-delegated administrative and secretarial services to abrdn Holdings
Limited and promotional activities to abrdn Investments Limited.
With effect from 1 July 2023, the management fee is calculated quarterly in
arrears at a rate of 0.75% per annum on the first £175 million of the
Company's net assets, 0.65% per annum on net assets above this threshold until
£550 million, and 0.55% on net assets above this threshold.
In addition, until 31 December 2023, the Manager received a secretarial and
administration fee of £75,000 plus VAT. From 1 January 2024, the Manager was
no longer entitled to a secretarial and administration fee.
The Manager also receives a separate fee for the provision of promotional
activities to the Company. This fee amounted to £207,500 plus VAT for the
year (2023: £301,000 plus VAT).
Further details of the fees payable to the Manager are shown in notes 4 and 5
to the financial statements.
The management agreement is terminable on not less than six months' notice. In
the event of termination by the Company on less than the agreed notice period,
compensation is payable to the Manager in lieu of the unexpired notice period.
Directors
At the year end, there were five independent non-executive Directors. Liz
Airey is the Chairman and Tim Scholefield is the Senior Independent Director.
Caroline Ramsay retired as a Director on 23 November 2023.
All of the Directors will retire and, being eligible, will offer themselves
for re-election at the Annual General Meeting.
The Directors attended scheduled Board and Committee meetings during the year
ended 30 June 2024 as follows (with their eligibility to attend the relevant
meetings in brackets):
Board Meetings Audit Committee Management
Meetings Engagement Nomination Committee Meetings
Committee
Meetings
Liz Airey 4 (4) - (-)(A) 1 (1) 1 (1)
Ashton Bradbury 4 (4) 2 (2) 1 (1) 1 (1)
Alexa Henderson 4 (4) 2 (2) 1 (1) 1 (1)
Manju Malhotra 4 (4) 2 (2) 1 (1) 1 (1)
Caroline Ramsay(B) 2 (2) 1 (1) - (-) - (-)
Tim Scholefield 4 (4) 2 (2) 1 (1) 1 (1)
( )
(A) Liz Airey is not a member of the Audit Committee but attends the meetings
by invitation
(B) Retired as a Director on 23 November 2023
The Board meets more frequently when business needs require. During the year
ended 30 June 2024 this included a Board meeting to approve share buy backs
and two Board Committee meetings to approve the annual and half yearly
financial statements.
The Board believes that all the Directors seeking re-election remain
independent of the Manager and free from any relationship which could
materially interfere with the exercise of their judgement on issues of
strategy, performance, resources and standards of conduct. The Board believes
that each Director has the requisite high level and range of business,
investment and financial experience which enables the Board to provide clear
and effective leadership and proper governance of the Company. Following
formal performance evaluations, each Director's performance continues to be
effective and demonstrates commitment to the role, and their individual
performances contribute to the long-term sustainable success of the Company.
In addition, all Directors have demonstrated that they have sufficient time to
fulfil their directorial roles with the Company. The Board therefore
recommends the re-election of each of the Directors at the Annual General
Meeting.
External Agencies
The Board has contractually delegated to external agencies, including the
Manager and other service providers, certain services including: the
management of the investment portfolio, the day-to-day accounting and company
secretarial requirements, the depositary services (which include cash
monitoring, the custody and safeguarding of the Company's financial
instruments and monitoring the Company's compliance with investment limits and
leverage requirements) and the share registration services. Each of these
contracts was entered into after full and proper consideration by the Board of
the quality and cost of services offered in so far as they relate to the
affairs of the Company. In addition, ad hoc reports and information are
supplied to the Board as requested.
Board Diversity
The Board recognises the importance of having a range of skilled and
experienced individuals with the right knowledge represented on the Board in
order to allow it to fulfil its obligations. The Board also recognises the
benefits and is supportive of the principle of diversity in its recruitment of
new Board members. The Board will not display any bias for age, gender, race,
sexual orientation, socio-economic background, religion, ethnic or national
origins or disability in considering the appointment of its Directors. In view
of its size, the Board will continue to ensure that all appointments are made
on the basis of merit against the specification prepared for each appointment.
In doing so, the Board will take account of the targets set out in the FCA's
Listing Rules, which are set out in the tables below.
The Board has resolved that the Company's year end date is the most
appropriate date for disclosure purposes. The following information has been
provided by each Director through the completion of questionnaires. There
have been no changes since the year end.
Board Gender as at 30 June 2024
Number of Board members Percentage of the Board Number of senior positions on the Board Number in executive management Percentage of executive management
(note 3)
Men 2 40% 2
n/a n/a
Women 3 60% 3
(note 1)
Not specified/prefer not to say - - -
Board Ethnic Background as at 30 June 2024
Number of Board members Percentage of the Board Number of senior positions on the Board Number in executive management Percentage of executive management
(note 3)
White British or other White 4 80% 4
(including minority-white groups)
n/a n/a
Asian/Asian British 1 20% 1
(note 2)
Not specified/prefer not to say - - -
Notes:
1. Meets target that at least 40% of Directors are women as set out in LR
6.6.6R (9)(a)(i)
2. Meets target that at least one Director is from a minority ethnic
background as set out in LR 6.6.6R (9)(a)(iii)
3. The Company considers that the role of Chairman, Senior Independent
Director ("SID"), and the chairmen of the Audit Committee, Management
Engagement Committee and Nomination Committee are senior positions.
Board's Policy on Tenure
In normal circumstances, it is the Board's expectation that Directors will not
serve beyond the Annual General Meeting following the ninth anniversary of
their appointment. However, the Board takes the view that independence of
individual Directors is not necessarily compromised by length of tenure on the
Board and that continuity and experience can add significantly to the Board's
strength. The Board believes that recommendation for re-election should be on
an individual basis following a rigorous review which assesses the
contribution made by the Director concerned, but also taking into account the
need for regular refreshment and diversity.
It is the Board's policy that the Chairman of the Board will not normally
serve as a Director beyond the Annual General Meeting following the ninth
anniversary of his or her appointment to the Board. However, this may be
extended in certain circumstances or to facilitate effective succession
planning and the development of a diverse Board. In such a situation the
reasons for the extension will be fully explained to shareholders and a
timetable for the departure of the Chairman clearly set out.
The Role of the Chairman and Senior Independent Director
The Chairman is responsible for providing effective leadership to the Board,
by setting the tone of the Company, demonstrating objective judgement and
promoting a culture of openness and debate. The Chairman facilitates the
effective contribution and encourages active engagement by each Director. In
conjunction with the Company Secretary, the Chairman ensures that Directors
receive accurate, timely and clear information to assist them with effective
decision-making. The Chairman acts upon the results of the Board evaluation
process by recognising strengths and addressing any weaknesses and also
ensures that the Board engages with major shareholders and that all Directors
understand shareholder views.
The Senior Independent Director acts as a sounding board for the Chairman and
acts as an intermediary for other Directors, when necessary. Working closely
with the Nomination Committee, the Senior Independent Director takes
responsibility for an orderly succession process for the Chairman, and leads
the annual appraisal of the Chairman's performance. The Senior Independent
Director is also available to shareholders to discuss any concerns they may
have.
Management of Conflicts of Interest
The Board has a procedure in place to deal with a situation where a Director
has a conflict of interest. As part of this process, each Director prepares a
list of other positions held and all other conflict situations that may need
to be authorised either in relation to the Director concerned or his or her
connected persons. The Board considers each Director's situation and decides
whether to approve any conflict, taking into consideration what is in the best
interests of the Company and whether the Director's ability to act in
accordance with his or her wider duties is affected. Each Director is required
to notify the Company Secretary of any potential, or actual, conflict
situations that will need authorising by the Board. Authorisations given by
the Board are reviewed at each Board meeting.
No Director has a service contract with the Company although all Directors are
issued with letters of appointment. Other than the deeds of indemnity referred
to in the Directors' Remuneration Report, there were no contracts during, or
at the end of the year, in which any Director was interested.
The Company has a policy of conducting its business in an honest and ethical
manner. The Company takes a zero-tolerance approach to bribery and corruption
and has procedures in place that are proportionate to the Company's
circumstances to prevent them. The Manager also adopts a group-wide
zero-tolerance approach and has its own detailed policy and procedures in
place to prevent bribery and corruption. Copies of the Manager's anti-bribery
and corruption policies are available on its website.
In relation to the corporate offence of failing to prevent tax evasion, it is
the Company's policy to conduct all business in an honest and ethical manner.
The Company takes a zero-tolerance approach to facilitation of tax evasion
whether under UK law or under the law of any foreign country and is committed
to acting professionally, fairly and with integrity in all its business
dealings and relationships.
Directors' and Officers' Liability Insurance
The Company's Articles of Association provide for each of the Directors to be
indemnified out of the assets of the Company against any liabilities incurred
by them as a Director of the Company in defending proceedings, or in
connection with any application to the Court in which relief is granted. In
addition, the Company has entered into separate deeds of indemnity with each
of the Directors, reflecting the scope of the indemnity in the Articles.
Directors' and Officers' liability insurance cover has been maintained
throughout the financial year at the expense of the Company.
Substantial Interests
Information provided to the Company by major shareholders pursuant to the
FCA's Disclosure, Guidance and Transparency Rules are published by the Company
via a Regulatory Information Service.
The table below sets out the interests in 3% or more of the issued share
capital of the Company, of which the Board was aware as at 30 June 2024.
Shareholder Number of Ordinary shares % held
Interactive Investor 12,166,176 16.4
Hargreaves Lansdown 8,654,658 11.6
1607 Capital Partners 6,393,397 8.6
RBC Brewin Dolphin 5,931,888 8.0
AJ Bell 3,977,428 5.4
Rathbones 2,758,626 3.7
Charles Stanley 2,284,704 3.1
The Company has not been notified of any changes to the above holdings since
the end of the year.
Going Concern
The Company's assets consist mainly 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. The
Board has also performed stress testing and liquidity analysis.
As at 30 June 2024, the Company had a £40 million unsecured revolving credit
facility with The Royal Bank of Scotland International Limited which expires
on 1 November 2025.
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 in operational existence for a period of not
less than 12 months from the date of approval of this Report. They have
arrived at this conclusion having confirmed that the Company's diversified
portfolio of realisable securities is sufficiently liquid and could be used to
meet short-term funding requirements were they to arise, as well as share buy
back commitments. The Directors have also reviewed the revenue and ongoing
expenses forecasts for the coming year and considered the Company's Statement
of Financial Position as at 30 June 2024 which shows net current liabilities
of £23.6 million at that date, and do not consider this to be a concern due
to the liquidity of the portfolio which would enable the Company to meet any
short term liabilities if required.
Taking all of this into account, the Directors believe that it is appropriate
to continue to adopt the going concern basis in preparing the financial
statements.
Accountability and Audit
The Directors who held office at the date of approval of this Directors'
Report confirm that, so far as they are each aware, there is no relevant audit
information of which the Company's Auditor is unaware and each Director has
taken all the steps that they ought to have taken as a Director to make
themselves aware of any relevant audit information and to establish that the
Company's Auditor is aware of that information.
Independent Auditor
As explained in the Audit Committee's Report, following a tender process
conducted during the year, the Board decided to appoint Johnston Carmichael
LLP as the Company's Independent Auditor, in place of KPMG LLP, for the audit
of the financial statements for the year ending 30 June 2025. The Board will
therefore propose resolutions at the Annual General Meeting to appoint
Johnston Carmichael LLP as Independent Auditor for the ensuing year and to
authorise the Directors to determine its remuneration.
Financial Instruments
The financial risk management objectives and policies arising from financial
instruments and the exposure of the Company to risk are disclosed in note 16
to the financial statements.
Relations with Shareholders
The Directors place a great deal of importance on communications with
shareholders. Shareholders and investors may obtain up to date information on
the Company through its website and from the Manager and Company Secretary
(see Contact Addresses).
abrdn Holdings Limited has been appointed Company Secretary to the Company.
Whilst abrdn Holdings Limited is a wholly owned subsidiary of abrdn plc, there
is a clear separation of roles between the Manager and Company Secretary with
different board compositions and different reporting lines in place. The Board
notes that, in accordance with Market Abuse Regulations, procedures are in
place to control the dissemination of information within the abrdn plc group
of companies when necessary. Where correspondence addressed to the Board is
received there is full disclosure to the Board. This is kept confidential if
the subject matter of the correspondence requires confidentiality.
The Board's policy is to communicate directly with shareholders and their
representative bodies without the involvement of the management group
(including the Company Secretary or the Manager) in situations where direct
communication is required. In addition, representatives from the Manager meet
with major shareholders on at least an annual basis in order to gauge their
views, and report back to the Board on these meetings.
The Company's Annual General Meeting provides a forum for communication
primarily with private shareholders and is attended by the Board. The
Investment Manager makes a presentation at the meeting and all shareholders
have the opportunity to put questions to both the Board and the Manager at the
meeting.
The notice of the Annual General Meeting is sent out at least 20 working days
in advance of the meeting. All shareholders have the opportunity to put
questions to the Board and Manager at the meeting.
Additional Information
Where not provided elsewhere in the Directors' Report, the following provides
the additional information required to be disclosed by Part 15 of the
Companies Act 2006.
There are no restrictions on the transfer of, or voting rights attaching to,
Ordinary shares in the Company other than certain restrictions which may from
time to time be imposed by law (for example, the Market Abuse Regulation). The
Company is not aware of any agreements between shareholders that may result in
a transfer of securities and/or voting rights.
The rules governing the appointment of Directors are set out in the Directors'
Remuneration Report. The Company's Articles of Association may only be amended
by a special resolution passed at a general meeting of shareholders.
The Company is not aware of any significant agreements to which it is a party
that take effect, alter or terminate upon a change of control of the Company
following a takeover. Other than the management agreement with the Manager,
further details of which are set out above, the Company is not aware of any
contractual or other agreements which are essential to its business which
could reasonably be expected to be disclosed in the Directors' Report.
Annual General Meeting
The Annual General Meeting ("AGM") will be held at 12 noon on Thursday, 21
November 2024.
By order of the Board
abrdn Holdings Limited
Company Secretary
1 George Street
Edinburgh EH2 2LL
4 September 2024
Statement of Directors' Responsibilities in Respect of the Annual Report and
the Financial Statements
The Directors are responsible for preparing the Annual Report and the
financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law they have elected to prepare the financial
statements in accordance with UK Accounting Standards, including FRS 102 'The
Financial Reporting Standard Applicable in the UK and Republic
of Ireland' and applicable law.
Under company law the Directors must not approve the financial statements
unless they are satisfied that they give a true and fair view of the state of
affairs of the Company and of the profit or loss of the Company for
that period.
In preparing these financial statements, the Directors are required to:
- select suitable accounting policies and then apply them
consistently;
- make judgments and estimates that are reasonable, relevant and
prudent;
- state whether applicable UK accounting standards have been
followed, subject to any material departures disclosed and explained in the
financial statements;
- assess the Company's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern; and
- use the going concern basis of accounting unless they either
intend to liquidate the Company or to cease operations, or have no realistic
alternative but to do so.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and
enable them to ensure that its financial statements comply with the Companies
Act 2006. They are responsible for such internal control as they determine is
necessary to enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error, and have general
responsibility for taking such steps as are reasonably open to them to
safeguard the assets of the Company and to prevent and detect fraud and other
irregularities.
Under applicable law and regulations, the Directors are also responsible for
preparing a Strategic Report, Directors' Report, Directors' Remuneration
Report and Statement of Corporate Governance that comply with that law and
those regulations.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's website, but not
for the content of any information included on the website that has been
prepared or issued by third parties. Legislation in the UK governing the
preparation and dissemination of financial statements may differ from
legislation in other jurisdictions.
Responsibility Statement of the Directors in Respect of the Annual Financial
Report
The Directors confirm that to the best of their knowledge:
- the financial statements have been prepared in accordance with
applicable accounting standards and give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company;
- the Strategic Report and Directors' Report include a fair review
of the development and performance of the business and the position of the
Company, together with a description of the principal risks and uncertainties
that the Company faces; and
- the Annual Report taken as a whole, is fair, balanced and
understandable and it provides the information necessary for shareholders to
assess the Company's position and performance, business model and strategy.
On behalf of the Board
Liz Airey
Chairman
4 September 2024
Statement of Comprehensive Income
Year ended 30 June 2024 Year ended 30 June 2023
Revenue Capital Total Revenue Capital Total
Notes £'000 £'000 £'000 £'000 £'000 £'000
Net gains/(losses) on investments held at fair value 10 - 48,116 48,116 - (46,435) (46,435)
Income 3 12,727 1,474 14,201 13,649 - 13,649
Investment management fee 4 (704) (2,113) (2,817) (848) (2,542) (3,390)
Other administrative expenses 5 (876) - (876) (1,115) - (1,115)
Net return before finance costs and taxation 11,147 47,477 58,624 11,686 (48,977) (37,291)
Finance costs 6 (557) (1,533) (2,090) (315) (945) (1,260)
Return before taxation 10,590 45,944 56,534 11,371 (49,922) (38,551)
Taxation 7 - - - - - -
Return after taxation 10,590 45,944 56,534 11,371 (49,922) (38,551)
Return per Ordinary share (pence) 9 13.12 56.90 70.02 12.44 (54.63) (42.19)
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 As at
30 June 2024 30 June 2023
Notes £'000 £'000
Non-current assets
Investments held at fair value through profit or loss 10 436,689 438,408
Current assets
Debtors 11 2,541 1,637
Investments in AAA-rated money market funds 15,627 14,129
Cash and short term deposits 293 294
18,461 16,060
Current liabilities
Creditors: other amounts falling due within one year 12 (2,097) (2,943)
Bank loan 12 (39,964) (24,938)
(42,061) (27,881)
Net current liabilities (23,600) (11,821)
Total assets less current liabilities 413,089 426,587
Net assets 413,089 426,587
Capital and reserves
Called-up share capital 13 26,041 26,041
Share premium account 170,146 170,146
Capital reserve 14 203,375 217,927
Revenue reserve 13,527 12,473
Equity shareholders' funds 413,089 426,587
Net asset value per Ordinary share (pence) 15 556.19 482.95
The financial statements were approved by the Board of Directors on 4
September 2024 and were signed on its behalf by:
Liz Airey
Chairman
The accompanying notes are an integral part of the financial statements.
Statement of Changes in Equity
For the year ended 30 June 2024
Share
Share premium Capital Revenue
capital account reserve reserve Total
£'000 £'000 £'000 £'000 £'000
Balance at 30 June 2023 26,041 170,146 217,927 12,473 426,587
Return after taxation - - 45,944 10,590 56,534
Buyback of Ordinary shares into Treasury (see note 13) - - (60,496) - (60,496)
Dividends paid (see note 8) - - - (9,536) (9,536)
Balance at 30 June 2024 26,041 170,146 203,375 13,527 413,089
For the year ended 30 June 2023
Share
Share premium Capital Revenue
capital account reserve reserve Total
£'000 £'000 £'000 £'000 £'000
Balance at 30 June 2022 26,041 170,146 293,616 8,808 498,611
Return after taxation - - (49,922) 11,371 (38,551)
Buyback of Ordinary shares into Treasury (see note 13) - - (25,767) - (25,767)
Dividends paid (see note 8) - - - (7,706) (7,706)
Balance at 30 June 2023 26,041 170,146 217,927 12,473 426,587
The capital reserve at 30 June 2024 is split between realised of £110,364,000
and unrealised of £93,011,000 (30 June 2023 - realised £169,058,000 and
unrealised £48,869,000).
The Company's reserves available to be distributed by way of dividends or
buybacks which includes the revenue reserve and the realised element of the
capital reserve amount to £123,891,000 (30 June 2023 - £181,531,000).
The accompanying notes are an integral part of the financial statements.
Statement of Cash Flows
Year ended Year ended
30 June 2024 30 June 2023
£'000 £'000
Operating activities
Net return before taxation 56,534 (38,551)
Adjustment for:
(Gains)/losses on investments (48,116) 46,435
(Increase)/decrease in accrued dividend income (912) 772
Finance costs 2,090 1,260
(Increase)/decrease in other debtors (2) 3
Decrease in other creditors (1,063) (304)
Net cash inflow from operating activities 8,531 9,615
Investing activities
Purchases of investments (116,814) (83,777)
Sales of investments 166,628 122,718
Purchases of AAA-rated money market funds (120,148) (91,974)
Sales of AAA-rated money market funds 118,650 92,259
Net cash inflow from investing activities 48,316 39,226
Financing activities
Bank and loan interest paid (1,862) (1,193)
Repurchase of Ordinary shares into Treasury (60,450) (25,230)
Repayment of loan - (15,000)
Drawdown of loan 15,000 -
Equity dividends paid (9,536) (7,706)
Net cash outflow from financing activities (56,848) (49,129)
Decrease in cash (1) (288)
Analysis of changes in cash during the year
Opening balance 294 582
Decrease in cash as above (1) (288)
Closing balance 293 294
The accompanying notes are an integral part of the financial statements.
Notes to the Financial Statements
For the year ended 30 June 2024
1. Principal activity
The Company is a closed-end investment company, registered in Scotland No
SC145455, with its Ordinary shares being listed on the London Stock Exchange.
2. Accounting policies
a) Basis of accounting and going concern. 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 July 2022. They have also been
prepared on the assumption that approval as an investment trust will continue
to be granted.
The Company's assets consist mainly 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. The
Board has also performed stress testing and liquidity analysis.
As at 30 June 2024, the Company had fully drawn down from a £40 million
unsecured revolving credit facility with The Royal Bank of Scotland
International Limited which expires on 1 November 2025.
The Directors are mindful of the Principal Risks and Uncertainties disclosed
in the Strategic Report on pages 14 to 16 and they believe that the Company
has adequate financial resources to continue in operational existence for a
period of not less than 12 months from the date of approval of this Report.
They have arrived at this conclusion having confirmed that the Company's
diversified portfolio of realisable securities is sufficiently liquid and
could be used to meet short-term funding requirements were they to arise. The
Directors have also reviewed the revenue and ongoing expenses forecasts for
the coming year and considered the Company's Statement of Financial Position
as at 30 June 2024 which shows net current liabilities of £23.6 million at
that date, and do not consider this to be a concern due to the liquidity of
the portfolio which would enable the Company to meet any short term
liabilities if required.
Taking all of this into account, the Directors believe that it is appropriate
to continue to adopt the going concern basis in preparing the financial
statements.
The accounting policies applied are unchanged from the prior year and have
been applied consistently.
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. 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 to be made 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 as 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 under the effective interest method.
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 4 and 6).
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.
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 share buybacks and dividends.
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 including 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 or judgements 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 under the effective interest 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) Treasury shares. When the Company purchases its Ordinary shares to be held in
treasury, the amount of the consideration paid, which includes directly
attributable costs, is net of any tax effect, and is recognised as a deduction
from the capital reserve. When these shares are sold subsequently, the amount
received is recognised as an increase in equity, and any resulting surplus on
the transaction is transferred to the share premium account and any resulting
deficit is transferred from the capital reserve.
3. Income
2024 2023
£'000 £'000
Income from investments
UK dividend income 10,363 10,706
Property income distributions 274 431
Overseas dividend income 888 1,043
Special dividends 315 943
Special dividends - capital 1,474 -
13,314 13,123
Other income
Interest from AAA-rated money market funds 873 516
Bank interest 14 10
Total income 14,201 13,649
4. Investment management fee
2024 2023
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Investment management fee 704 2,113 2,817 848 2,542 3,390
The balance due to abrdn Fund Managers Limited ("aFML") at the year end in
respect of investment management fees was £715,000 (2023 - £1,667,000). For
further details see the Directors' Report on page 49 and note 20 on page 95.
5. Administrative expenses (inclusive of VAT)
2024 2023
£'000 £'000
Secretarial fees(A) 45 90
Promotional activities(A) 249 362
Directors' fees 169 154
Auditor's remuneration:
- fees payable to the Company's Independent Auditor for the audit of the 71 60
annual accounts (excluding VAT)
- VAT on audit fees 12 12
Registrar's fees 29 27
Professional fees 48 89
Custody fees 29 28
Depositary fees 49 56
Other expenses 175 237
876 1,115
(A) During the year the Company had an agreement with aFML for the provision
of secretarial services and promotional activities. It was agreed between the
Company and the Manager that payments under this agreement in relation to
secretarial fees would cease with effect from 1 January 2024. Secretarial fees
payable during the year, inclusive of VAT, were £45,000 (2023 - £90,000) and
the amount due to aFML at the year end was £nil (2023 - £90,000). Costs
relating to promotional activities during the year, inclusive of VAT, were
£249,000 (2023 - £362,000) and the amount due to aFML at the year end was
£119,000 (2023 - £132,000).
6. Finance costs
2024 2023
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Bank loan interest 535 1,466 2,001 282 846 1,128
Non-utilisation fees 15 47 62 25 76 101
Amortisation of loan arrangement expenses 7 20 27 8 23 31
557 1,533 2,090 315 945 1,260
7. Taxation
(a) Analysis of charge for year
2024 2023
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Tax charge - - - - - -
Given the Company's continued investment trust status and there being no
taxable income generated from its operations, no tax has been paid in the year
(2023 - same).
(b) Provision for deferred taxation. At 30 June 2024, the Company had unutilised
management expenses and loan relationship losses of £84,965,000 (2023 -
£80,344,000). A deferred tax asset has not been recognised on the unutilised
management expenses and loan relationship losses as it is unlikely there will
be suitable future taxable profits against which these tax losses could be
deducted. Therefore, it is unlikely that the Company will generate future
taxable revenue that would enable the existing tax losses to be utilised.
(c) Factors affecting the tax charge for the year. The tax charge for the year
is lower (2023 - higher) than the standard rate of UK corporation tax for the
period of 25% (2023 - 20.5%). The differences are explained in the following
table:
2024 2023
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Net return before taxation 10,590 45,944 56,534 11,371 (49,922) (38,551)
Corporation tax at an effective rate of 25% (2023 - 20.5%) 2,648 11,486 14,134 2,331 (10,234) (7,903)
Effects of:
Non-taxable UK dividend income (2,806) (368) (3,174) (2,388) - (2,388)
Non-taxable overseas dividend income (86) - (86) (214) - (214)
Management expenses and loan relationship losses not utilised 244 911 1,155 271 715 986
Non-taxable (gains)/losses on investments - (12,029) (12,029) - 9,519 9,519
Total tax charge - - - - - -
8. Dividends
2024 2023
£'000 £'000
Amounts recognised as distributions to equity holders in the period:
2023 final dividend of 8.00p per share (2022 - 5.40p) paid on 30 November 2023 6,711 5,000
2024 interim dividend of 3.70p per share (2023 - 3.00p) paid on 12 April 2024 2,825 2,706
9,536 7,706
The proposed 2024 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.
Set out below are 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 Taxes Act 2010 are considered. The net revenue
available for distribution by way of dividend for the year is £10,590,000
(2023 - £11,371,000).
2024 2023
£'000 £'000
Interim dividend 2024 of 3.70p per share (2023 - 3.00p) paid on 12 April 2024 2,825 2,706
Proposed final dividend 2024 of 8.30p per share (2023 - 8.00p) payable on 29 6,119 6,907
November 2024
8,944 9,613
The amount payable for the proposed final dividend is based on the Ordinary
shares in issue as the date of approval of this Report, 4 September 2024,
which satisfies the requirement of Section 1159 of the Corporation Tax Act
2010.
9. Return per Ordinary share
2024 2023
p £000 p £000
Basic
Revenue return 13.12 10,590 12.44 11,371
Capital return 56.90 45,944 (54.63) (49,922)
Total return 70.02 56,534 (42.19) (38,551)
Weighted average number of Ordinary shares in issue 80,738,502 91,387,673
10. Investments held at fair value through profit or loss
2024 2023
£'000 £'000
Opening book cost 389,539 429,395
Opening investment holdings gains 48,869 94,742
Opening fair value 438,408 524,137
Additions at cost 116,783 83,423
Disposals - proceeds (166,618) (122,717)
Gains/(losses) 48,116 (46,435)
Closing fair value 436,689 438,408
2024 2023
£'000 £'000
Closing book cost 343,678 389,539
Closing investment holding gains 93,011 48,869
Closing fair value 436,689 438,408
All investments are in equity shares listed on the London Stock Exchange.
The Company received £168,618,000 (2023 - £122,717,000) from investments
sold in the period. The book cost of these investments when they were
purchased was £162,644,000 (2023 - £123,279,000 ). These investments have
been revalued over time and until they were sold any unrealised gains/losses
were included in the fair value of the investments.
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 net
gains/(losses) on investments held at fair value in the Statement of
Comprehensive Income. The total costs were as follows:
2024 2023
£'000 £'000
Purchases 314 235
Sales 44 94
358 329
11. Debtors
2024 2023
£'000 £'000
Amounts due from brokers - 10
Dividends receivable 2,520 1,608
Other debtors 21 19
2,541 1,637
12. Creditors: amounts falling due within one year
2024 2023
£'000 £'000
Amounts payable to brokers - 31
Amounts payable in relation to share buybacks 583 537
Interest payable 427 225
Investment management fee payable 715 1,667
Sundry creditors 372 483
2,097 2,943
2024 2023
Bank loan £'000 £'000
Bank loan 40,000 25,000
Unamortised loan arrangement expenses (36) (62)
39,964 24,938
On 2 November 2022, the Company entered into a three year revolving credit
facility of £40 million (the "RCF") with The Royal Bank of Scotland
International Limited, which will expire on 1 November 2025. The RCF has a
further uncommitted accordion provision allowing the Company to request and
increase, subject to lender's approval, of up to an additional £25 million.
At 30 June 2024, £40 million was drawn down under the RCF at an interest rate
of 6.50%.
The RCF is shown in the Statement of Financial Position net of unamortised
expenses of £36,000 (30 June 2023 - Term Loan - £62,000).
The terms of the RCF contain covenants that the Consolidated Net Tangible
Assets as defined in the agreement must not be less than £200 million, the
percentage of borrowings against the Adjusted Portfolio Value as defined in
the agreement 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 Company complied with all covenants throughout the
year.
13. Called-up share capital
2024 2023
Number £'000 Number £'000
Authorised 150,000,000 37,500 150,000,000 37,500
Issued and fully paid:
Ordinary shares of 25p each 74,270,535 18,568 88,329,911 22,082
Held in treasury: 29,893,887 7,473 15,834,511 3,959
104,164,422 26,041 104,164,422 26,041
Ordinary shares Treasury shares Total
Number Number Number
Opening balance 88,329,911 15,834,511 104,164,422
Share buybacks (14,059,376) 14,059,376 -
Closing balance 74,270,535 29,893,887 104,164,422
During the year the Company repurchased 14,059,376 (2023 - 5,682,136) Ordinary
shares to treasury at a cost of £60,496,000 (2023 - £25,767,000).
14. Capital reserve
2024 2023
£'000 £'000
Opening balance 217,927 293,616
Unrealised gains/(losses) on investment holdings 44,142 (45,873)
Gains/(loss) on realisation of investments at fair value 3,974 (562)
UK dividend income - capital 1,474 -
Management fee charged to capital (2,113) (2,542)
Finance costs charged to capital (1,533) (945)
Buyback of Ordinary shares into treasury (60,496) (25,767)
Closing balance 203,375 217,927
The capital reserve includes investment holding gains amounting to
£93,011,000 (2023 - gains of £48,869,000) as disclosed in note 10 on page
86.
15. 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.
2024 2023
Net assets attributable (£'000) 413,089 426,587
Number of Ordinary shares in issue at year end(A) 74,270,535 88,329,911
Net asset value per share 556.19p 482.95p
(A) Excluding shares held in treasury.
16. 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 given its investing and financing
activities are in the UK.
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.
As at 30 June 2024, the Company had drawn down £40 million (2023 - £25
million) from the £40 million revolving credit facility with The Royal Bank
of Scotland International Limited.
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 Weighted
period for which average Fixed Floating
rate is fixed interest rate rate rate
As at 30 June 2024 Years % £'000 £'000
Assets
Investments in AAA-rated money market funds - 5.33 - 15,627
Cash deposits - 3.70 - 293
Total assets - - - 15,920
Liabilities
Bank loan 0.09 6.49 40,000 -
Total liabilities - - 40,000 -
Weighted average Weighted
period for which average Fixed Floating
rate is fixed interest rate rate rate
As at 30 June 2023 Years % £'000 £'000
Assets
Investments in AAA-rated money market funds - 4.92 - 14,129
Cash deposits - 3.93 - 294
Total assets - - - 14,423
Liabilities
Bank loan 0.09 5.48 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 investments in 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 result for the year ended 30 June
2024 and net assets would increase/decrease by £159,000 (2023 -
increase/decrease by £144,000). 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 on pages 32 to 34, 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 2024 would
have increased/decreased by £43,669,000 (2023 - increase/decrease of
£43,841,000). 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. Subject to
compliance with the terms of the revolving credit facility, including relevant
covenant compliance, the Company has the ability to make future loan drawdowns
during the period until the expiry of the facility on 1 November 2025.The
maturity of the Company's existing borrowings is set out in the credit risk
profile section of this note.
Due between
Expected Due within 3 months Due after
cash flows 3 months and 1 year 1 year
As at 30 June 2024 £'000 £'000 £'000 £'000
Bank loan 40,235 40,235 - -
Due between
Expected Due within 3 months Due after
cash flows 3 months and 1 year 1 year
As at 30 June 2023 £'000 £'000 £'000 £'000
Bank loan 25,124 25,124 - -
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:
- investment transactions are carried out with a 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:
2024 2023
Statement of Maximum Statement of Maximum
Financial Position exposure Financial Position exposure
Current assets £'000 £'000 £'000 £'000
Debtors - - 10 10
Investments in AAA-rated money markets funds 15,627 15,627 14,129 14,129
Cash and short term deposits 293 293 294 294
15,920 15,920 14,433 14,433
None of the Company's financial assets is past due or impaired.
17. Analysis of changes in net debt
At Non-cash At
30 June 2023 Cash flows movements 30 June 2024
£'000 £'000 £'000 £'000
Cash and cash equivalents 294 (1) - 293
Investments in AAA-rated money market funds 14,129 1,498 - 15,627
Debt due in less than one year (24,938) (15,000) (26) (39,964)
(10,515) (13,503) (26) (24,044)
At Non-cash At
30 June 2022 Cash flows movements 30 June 2023
£'000 £'000 £'000 £'000
Cash and cash equivalents 582 (288) - 294
Investments in AAA-rated money market funds 14,414 (285) - 14,129
Debt due in less than one year (39,988) 15,080 (30) (24,938)
(24,992) 14,507 (30) (10,515)
A statement reconciling the movement in net funds to the net cash flow has not
been presented as there are no differences from the above analysis.
18. 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:
2024 2023
£'000 £'000
Equity
Equity share capital 26,041 26,041
Reserves 387,048 400,546
Liabilities
Bank loan 39,964 24,938
453,053 451,525
The Company's net gearing comprises the following:
2024 2023
£'000 £'000
Bank loans (39,964) (24,938)
Cash and investments in AAA-rated money market funds 15,920 14,423
Amounts due from brokers - 10
Amounts payable to brokers - (31)
Net gearing (borrowings less cash and money market fund investments) (24,044) (10,536)
Net assets 413,089 426,587
Net gearing (%) 5.8 2.5
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.
19. 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 has 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 (2023 - 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 (2024 - £436,689,000; 2023 - £438,408,000)
have therefore been deemed as Level 1.
The investment in AAA rated money market funds of £15,627,000 (2023 -
£14,129,000 ) is considered to be Level 2 under the fair value hierarchy of
FRS 102 due to not trading in an active market.
The fair value of the £40 million revolving credit facility loan as at the 30
June 2024 is £40,000,000, due to it being short-term in nature, with a par
value per Statement of Financial Position of £39,964,000. Under the fair
value hierarchy in accordance with FRS 102, these borrowings can be classified
at Level 2.
20. Transactions with the Manager
The Company has an agreement with abrdn Fund Managers Limited for the
provision of management services. The management fee is calculated and payable
quarterly in arrears at a rate of 0.75% per annum on the first £175 million
of net assets, 0.65% per annum on net assets between £175 million and £550
million and 0.55% on net assets above £550 million.
The Company also has an agreement with aFML for the provision of secretarial
services and promotional activities. It was agreed between the Company and the
Manager that payments under this agreement for secretarial services would
cease with effect from 1 January 2024.
21. Related party transactions
The Directors of the Company received fees for their services. Further details
are provided in the Directors' Remuneration Report on page 61. The Directors'
shareholdings are detailed on page 62.
22. Subsequent events
Subsequent to the year end, a further 543,624 Ordinary shares were repurchased
to treasury at a cost of £2,783,000.
Alternative Performance Measures
Alternative performance measures ("APMs") are numerical measures of the
Company's current, historical or future performance, financial position or
cash flows, other than financial measures defined or specified in the
applicable financial framework. The Company's applicable financial framework
includes FRS 102 and the AIC SORP.
The Directors assess the Company's performance against a range of criteria
which are viewed as particularly relevant for closed-end investment companies.
Where the calculation of an APM is not detailed within the financial
statements, an explanation of the methodology employed is provided below:
Discount
A discount is the percentage by which the market price is lower than the Net
Asset Value ("NAV") per share.
30 June 2024 30 June 2023
Share price 486.50p 414.00p
Net Asset Value per share 556.19p 482.95p
Discount 12.5% 14.3%
Net gearing
Net gearing measures the total borrowings less cash and cash equivalents
divided by shareholders' funds, expressed as a percentage. Under AIC reporting
guidance cash and cash equivalents includes amounts due from and to brokers at
the period end as well as cash and short-term deposits.
30 June 2024 30 June 2023
£'000 £'000
Total borrowings (A) (39,964) (24,938)
Cash and short term deposits 293 294
Investments in AAA-rated money market funds 15,627 14,129
Amounts due from brokers - 10
Amounts payable to brokers - (31)
Total cash and money market fund investments(B) 15,920 14,402
Net gearing (borrowings less cash and money market fund investments)(C=A+B) (24,044) (10,536)
Shareholders' funds(D) 413,089 426,587
Net gearing(C/D) 5.8% 2.5%
Ongoing charges ratio
The ongoing charges ratio has been calculated in accordance with guidance
issued by the AIC, which is defined as the total of investment management fees
and recurring administrative expenses and expressed as a percentage of the
average of published daily net asset values throughout the year.
30 June 2024 30 June 2023
£'000 £'000
Investment management fee(A) 2,817 3,390
Administrative expenses(B) 876 1,115
Less: non-recurring charges(C) (5) (40)
Ongoing charges 3,688 4,465
Average daily net assets 402,438 471,984
Ongoing charges ratio (excluding look-through costs) 0.92% 0.95%
Look-through costs(D) - -
Ongoing charges ratio (including look-through costs) 0.92% 0.95%
(A) See note 4 on page 82.
(B) See note 5 on page 83.
(C) Comprises professional fees not expected to recur.
(D) Calculated in accordance with AIC guidance issued in October 2020 to
include the Company's share of costs of holdings in investment companies on a
look-through basis.
The ongoing charges ratio differs from the other ongoing costs figure reported
in the Company's Key Information Document calculated in line with the PRIIPs
regulations, which includes the ongoing charges ratio and the financing and
transaction costs.
Total return
NAV and share price total returns show how the NAV and share price have
performed over a period of time in percentage terms, taking into account both
capital returns and dividends paid to shareholders. NAV total return assumes
reinvesting the net dividend paid by the Company back into the NAV of the
Company with debt at fair value on the date on which that dividend goes
ex-dividend. Share price total return assumes reinvesting the net dividend
back into the share price of the Company on the date on which that dividend
goes ex-dividend.
NAV total return
Year ended 30 June 2024 2024 2023
Opening NAV 482.95p 530.37p
Closing NAV 556.19p 482.95p
Increase/(decrease) in NAV 73.24p -47.42p
% Increase/(decrease) in NAV 15.2% -8.9%
Uplift from reinvestment of dividends(A) 2.9% 1.5%
NAV total return increase/(decrease) 18.1% -7.4%
(A) The uplift from reinvestment of dividends assumes that the dividends of
8.0p in November 2023 and 3.7p in April 2024 (5.4p and 3.0p in 2022/23) paid
by the Company were reinvested in the NAV of the Company on the ex-dividend
date.
Share price total return
Year ended 30 June 2024 2024 2023
Opening share price 414.00p 453.00p
Closing share price 486.50p 414.00p
Increase/decrease in share price 72.50p -39.00p
% Increase/(decrease) in share price 17.5% -8.6%
Uplift from reinvestment of dividends(A) 3.5% 1.8%
Share price total return increase/(decrease) 21.0% -6.8%
(A) The uplift from reinvestment of dividends assumes that the dividends of
8.0p in November 2023 and 3.7p in April 2024 (5.4p and 3.0p in 2022/23) paid
by the Company were reinvested in the shares of the Company on the ex-dividend
date.
Additional Notes to the Annual Financial Report
The Annual General Meeting will be held at 12 noon on Thursday 21 November
2024 at 1 George Street, Edinburgh EH2 2LL.
If approved at the Annual General Meeting, the final dividend of 8.3p per
share will be paid on 29 November 2024 to holders of Ordinary shares on the
register at the close of business on 1 November 2024. The relevant ex-dividend
date is 31 October 2024.
The Annual Financial Report Announcement is not the Company's statutory
accounts. The above results for the year ended 30 June 2024 have been agreed
with the auditor and are an abridged version of the Company's full accounts,
which have been approved and audited with an unqualified report. The 2023 and
2024 statutory accounts received unqualified reports from the Company's
auditor and did not include any reference to matters to which the auditor drew
attention by way of emphasis without qualifying the reports, and did not
contain a statement under s.498(2) or 498(3) of the Companies Act 2006. The
financial information for 2023 is derived from the statutory accounts for 2023
which have been delivered to the Registrar of Companies. The 2024 accounts
will be filed with the Registrar of Companies in due course.
The Annual Report and Accounts will be posted to shareholders in September
2024. Copies will be available during normal business hours from the
Secretary, abrdn Holdings Limited, 1 George Street, Edinburgh EH2 2LL or from
the Company's website, www.abrnuksmallercompaniesgrowthtrust.co.uk
(http://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.
By order of the Board
abrdn Holdings Limited
Company Secretary
4 September 2024
* Neither the Company's website nor the content of any website accessible from
hyperlinks on it (or any other website) is (or is deemed to be) incorporated
into, or forms (or is deemed to form) part of this announcement.
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. END FR DBGDCLDGDGSS
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