abrdn UK Smaller Cos - Half-year Report
27/02/2024 07:00
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RNS Number : 5016E abrdn UK Smaller Cos. Growth Trust 27 February 2024
abrdn UK Smaller Companies Growth Trust plc
HALF YEARLY REPORT FOR THE SIX MONTHS ENDED 31 DECEMBER 2023
Legal Entity Identifier (LEI): 213800UUKA68SHSJBE37
INVESTMENT OBJECTIVE
The Company's objective is 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.
PERFORMANCE HIGHLIGHTS AND FINANCIAL CALENDAR
Net asset value total return(A) Share price total return(A)
Six months ended 31 December 2023 Six months ended 31 December 2023
+7.3% +12.9%
Year ended 30 June 2023 -7.4% Year ended 30 June 2023 -6.8%
Reference Index total return Discount to net asset value(A)
Six months ended 31 December 2023 As at 31 December 2023
+5.5% 10.0%
Year ended 30 June 2023 -2.8% As at 30 June 2023 14.3%
Revenue return per share Ongoing charges ratio(A)
Six months ended 31 December 2023 Forecast year ending 30 June 2024
6.00p 0.91%
Six months ended 31 December 2022 5.32p Year ended 30 June 2023 0.95%
(A) Considered to be an Alternative Performance Measure.
Financial Calendar
Payment of interim dividend for the year ending 30 June 2024 12 April 2024
Online shareholder presentation 21 May 2024
Financial year end 30 June 2024
Announcement of results for year ending 30 June 2024 September 2024
Annual General Meeting November 2024
Payment of final dividend for the year ending 30 June 2024 29 November 2024
Financial Highlights
31 December 2023 30 June 2023 % change
Capital return
Total assets(A) £438.1m £451.5m -3.0%
Equity shareholders' funds £413.2m £426.6m -3.1%
Market capitalisation £371.8m £365.7m +1.7%
Net asset value per share(B) 508.95p 482.95p +5.4%
Share price 458.00p 414.00p +10.6%
Discount to net asset value(C) 10.0% 14.3%
Net gearing(C) 1.9% 2.5%
Reference index 5,404.69 5,199.92 +3.9%
Dividends and earnings
Revenue return per Ordinary share(D) 6.00p 5.32p +12.8%
Interim dividend per share 3.70p 3.00p +23.3%
Operating costs
Ongoing charges ratio(CF) 0.91%(E) 0.95%
(A) Defined as total assets per the Statement of Financial Position less
current liabilities (before deduction of bank loans).
(B) With debt at par value.
(C) Considered to be an Alternative Performance Measure.
(D) Figure for 31 December 2023 is for the six months to that date. Figure for
30 June 2023 is for the six months to 31 December 2022.
(E) The ongoing charges ratio for the current year includes a forecast of
costs, charges and assumes no change in net assets for the six months to 30
June 2024.
(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.
Chairman's Statement
Performance
Many of the geo-political and economic issues that were the focus of our
attention during 2022 continued dominate the headlines throughout 2023; the
war in Ukraine; tension in the Taiwan Strait and the ongoing cost of living
crisis. The horrendous events in Israel and Gaza since October 2023 have
further exacerbated geopolitical tensions. Despite this backdrop, both the
Company and equity markets generated positive returns in the second half of
2023.
In the six months to 31 December 2023, the net asset value ("NAV") total
return was 7.3% while the share price delivered a total return of 12.9% The
difference between these returns is reflected in the movement in the discount,
which narrowed from 14.3% on 30 June 2023 to 10.0% at the end of the period.
The Company outperformed the total return of its reference index, the Deutsche
Numis Smaller Companies plus AIM (ex-investment companies) Index (the
"reference index") which was 5.5%.
The volatility of the market and the NAV increased in the final quarter - the
NAV and the market were both down over 6% in October, but up around 5% in
November and up over 8% in December. By contrast, in the first three months of
the period, monthly returns were never more than +/- 3%. Encouragingly, on a
relative basis, the NAV outperformed the reference index in four out of the
six months.
The Investment Manager's Review provides further information on individual
stock performance and portfolio activity during the period, as well as the
Investment Manager's outlook for the portfolio and the wider smaller companies
sector.
Earnings and Dividend
While net revenue after tax was up 3.2% to £5.1 million, revenue earnings per
share ("EPS") for the six months to 31 December 2023 increased by 12.8% to
6.00p (2022: 5.32p).
At the aggregate level, gross dividend receipts were down 1.5%, partly as a
result of the reduction in the portfolio required to fund the buy backs. The
portfolio also benefited from being able to generate meaningful interest
income from cash balances for the first time in many years. Total income was
up 2.3% to £6.2 million.
The analysis of the income forecast continues to indicate that the revenue
account is in good health. The Board's declared dividend policy is that it
aims to pay around 1/3 of the expected total dividend for the year at the
interim stage, with the balance being paid out once the annual results are
known. Consequently, the Board is declaring an interim dividend of 3.70p per
share (2023: 3.00p per share) which will be paid on 12 April 2024 to
shareholders on the register on 15 March 2024 with an associated ex-dividend
date of 14 March 2024. Based on the current forecast for earnings, the Board
hopes to be able to at least maintain the final dividend for the year at 8.00p
per share thus providing dividend growth for the year as a whole.
Gearing
The Company has a £40 million revolving credit facility ("RCF") with The
Royal Bank of Scotland International which matures in November 2025. At the
end of the period, the level of gearing, net of cash, was 1.9% (30 June 2023:
2.5%), with £25 million drawn down under the RCF at an interest rate of
6.48%.
Total returns to 6 months 1 year 3 years 5 years 10 years
31 December 2023 % % % % %
NAV(A) +7.3 +1.5 -16.2 +25.5 +81.7
Share price(A) +12.9 +1.9 -23.3 +22.6 +63.3
Reference Index(B) +5.5 +3.2 -3.3 +24.0 +50.3
Peer Group weighted average (NAV) +6.6 +4.6 +3.2 +31.0 +77.4
Peer Group weighted average (share price) +9.6 +4.8 -3.4 +31.0 +78.6
(A) Considered to be an Alternative Performance Measure.
(B) Deutsche Numis Smaller Companies including AIM (ex investment companies)
Index, prior to 1 January 2018 Numis Smaller Companies (ex investment
companies) Index.
Source: abrdn and Refinitiv Datastream
Discount Control and Share Buy Backs
At 31 December 2023, the Company's share price was trading at a discount of
10.0% to its NAV per share, including income with debt at fair value. This was
narrower than the 14.3% discount at which the shares were trading at the end
of June 2023. Between these two points there was significant volatility in the
discount, particularly following the events in October, when we saw the
average discount of all investment trusts reach levels not seen since the
depths of the Global Financial Crisis. The performance of equity markets in
the last couple of months of 2023 helped pull the industry back, but discounts
remain wide across the UK smaller companies sector and investment trusts as a
whole. As far as the discount of the Company is concerned, we did witness some
narrowing towards the end of the period, but it remained at a level where the
Board felt it was in the best interests of shareholders as a whole to continue
to buy back shares. Consequently, the Company was active in the market on most
days and bought back 7.1 million shares (8.1% of the opening issued share
capital) at a weighted average price of 411.21p, which equated to an average
discount of 13.2%.
The buy backs acted to enhance the NAV per share by 1.1%.
Investment Manager Investment Programme
The Board notes the announcement by abrdn plc in December that it was
initiating a programme whereby it would invest six months' worth of the
management fees paid to it by the investment trusts it manages in buying
shares of those trusts. We are pleased to welcome abrdn as a shareholder.
Online Shareholder Presentation
In order to encourage as much interaction as possible with our shareholders,
we will be hosting an Online Shareholder Presentation, which will be held at
10.00am on Tuesday 21 May 2024. At this event you will receive a presentation
from the Investment Manager and have the opportunity to ask live questions of
the Chairman and the Investment Manager. For any shareholders unable to
attend, the event will be recorded and made available on the Company's
website.
Full details on how to register for the online event can be found at:
https://bit.ly/UK-Smaller-Companies (https://bit.ly/UK-Smaller-Companies)
Details are also contained on the Company's website.
Outlook
A number of commentators have referred to the perceived value in the UK market
relative to other markets and its own trading range. The sense is that
valuations are so far out of kilter that there must be some reversion towards
what would be considered more "normal" valuations. Such a turnaround does
appear overdue and would undoubtedly be beneficial for UK domestic stocks,
which have been hardest hit. At the same time, the recent release of the Q4
2023 GDP numbers means that the UK has been in a "technical recession", and
this has strengthened the case of the optimists for interest rate cuts which
should be seen as beneficial to equity markets.
However, when one looks further afield, the enthusiasm has to be tempered by
the geopolitical situation; the war in Ukraine and the events in the Middle
East, coupled with the uncertainty of the number of elections that are
forecast to take place in 2024 means that the outlook has to remain very
uncertain. Time will tell as to which factor will dominate over the coming
months and there will doubtless be bumps in the road. There is also the
concern that any recovery in the UK economy could be weak.
With such an outlook, investors should benefit from a quality bias. A slowing
of the global economy has been expected and quality companies can take
measures to protect profits and deliver earnings growth against this backdrop.
With the Investment Manager's focus on such companies, the Board considers
that the Company is well placed to meet its objective of achieving long-term
capital growth for shareholders.
Liz Airey
Chairman
27 February 2024
Interim Management Report
Directors' Responsibility Statement
The Directors are responsible for preparing the Half Yearly Financial Report
in accordance with applicable law and regulations. The Directors confirm that
to the best of their knowledge:
- The condensed set of financial statements has been prepared in
accordance with Financial Reporting Standard 104 'Interim Financial
Reporting';
- The Interim Board Report (constituting the interim management
report) includes a fair review of the information required by DTR 4.2.7R of
the Disclosure Guidance and Transparency Rules, being an indication of
important events that have occurred during the first six months of the
financial year and their impact on the condensed set of financial statements,
and a description of the principal risks and uncertainties for the remaining
six months of the year; and
- The financial statements include a fair review of the
information required by DTR 4.2.8R of the Disclosure Guidance and Transparency
Rules, being related party transactions that have taken place in the first six
months of the financial year and that have materially affected the financial
position or performance of the Company during that period, and any changes in
the related party transactions described in the last Annual Report that could
do so.
Principal and Emerging Risks and Uncertainties
The Board regularly reviews the principal and emerging risks and uncertainties
faced by the Company together with the mitigating actions it has established
to manage the risks. These are set out within the Strategic Report contained
within the Annual Report for the year ended 30 June 2023 and comprise the
following risk categories:
- Strategy
- Investment performance
- Key person risk
- Share price
- Financial instruments
- Financial obligations
- Regulatory
- Operational
- Geopolitical
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. These include the impacts of the conflicts in Ukraine and the
Middle East, as well as continuing tensions between the US and China. The
Board is also conscious of the impact of inflation and higher interest rates
on financial markets. Other than these factors, the Company's principal risks
and uncertainties have not changed materially since the date of the Annual
Report and no material change is foreseen in the principal risks over the
remainder of the financial 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 reviewed stress testing analysis and considered the liquidity
of the portfolio.
As at 31 December 2023, the Company had a £40 million unsecured revolving
credit facility with The Royal Bank of Scotland International Limited which
matures on 1 November 2025. £25 million of the facility was drawn down at
the end of the period.
The Directors are mindful of the Principal Risks and Uncertainties summarised
above 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 Condensed Statement of Financial Position as at 31 December 2023
which shows net current liabilities of £9.7 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.
On behalf of the Board
Liz Airey
Chairman
27 February 2024
Investment Manager's Review
The net asset value ("NAV") total return for the Company for the six months to
31 December 2023 was 7.3% while the share price total return was 12.9%. 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 5.5%.
Equity Markets
We were pleased to deliver outperformance, despite equity markets remaining
volatile and challenging, with macro top down factors continuing to dominate
for much of the period. The second half of 2023 rounded off two years of
dramatic interest rate rises to combat inflation, geopolitical instability,
and fears around the risk of a global recession; although it has yet to
materialise. The end of 2023 looked to signal the end of rising interest
rates, however the pace of reversion is still very much in question, and
"higher for longer" is a possible macro environment. With inflation now at a
more manageable level, that pathway will likely be driven by economic growth
and labour markets. 2024 is also a big year for election voting globally, with
40% of the world's population voting in elections this year, including the
USA, the UK and India.
There is a general consensus that UK equity markets are cheap relative to
others on a variety of metrics and around two UK quoted companies a week are
being acquired either by private equity business or other corporates, as
merger and acquisition ("M&A") activity has increased. It is likely that
this will continue to feature in 2024, as interest rates fall, driving
increasing quoted company M&A activity. Both interest rates and bond
yields are hopefully at, or close to, peaks and fears of a resurgence in
inflation are diminishing. This provides a better backdrop for equity markets,
and for growth investing. It is worth remembering that the UK equity market is
very international in its exposure, and in the portfolio almost 50% of
underlying revenues are generated overseas. This delivers some revenue
diversification for the portfolio.
We have been, and will continue to remain, true to our investment process
which has been consistent through five economic cycles; with company
fundamentals at its core. Throughout the period under review, company results
have been resilient, the quality focus allowing them to protect margins and
profits. We have continued to find new ideas, assisted by our stock screening
tool "the Matrix" which helps us identify quality growth and momentum
companies throughout the cycle.
We hope the stuttering progress of equity markets in 2023 should become
smoother in 2024 as the inflation and interest rates headwinds retreat. This
in turn should encourage a return of net buying by investors and a narrowing
of discounts within the investment trust sector. 2023 was a challenging period
for smaller companies, but the outlook for 2024 looks more favourable.
Performance
The NAV total return for the six month period ended 31 December 2023 was 7.3%,
outperforming the total return of 5.5% from the reference index. Whilst across
the portfolio we have not been totally immune to macro headwinds or earnings
downgrades, we have been very pleased at the earnings resilience of the
Company's investments, particularly the larger holdings. At the time of
writing, in the current top 10 holdings, eight had upgrades to earnings
expectations when they last reported, with the other two expectations
remaining unchanged.
The five leading performers during the period were as follows:
Ergomed (101bps contribution) - There was a recommended cash offer from
private equity group Permira, representing a 28% premium to the prior closing
price. We no longer hold this position.
Ashtead Technology (89bps contribution) - The company continues to trade
strongly and rounded off a year of strong execution with a materially
earnings-enhancing acquisition of ACE Winches that together prompted a 25%
upgrade to FY 24 earnings. The acquisition is consistent with the company's
M&A strategy, consolidating a fragmented mechanical solutions market,
expanding its range of products, services and geographical footprint, and
transitioning an oil and gas focussed business towards offshore renewables.
The outlook for growth remains strong and the company has increased its share
in a growing offshore energy and renewables market. We have continued to add
to this position as the company has shown strong execution.
Hill & Smith (54bps contribution) - The company has enjoyed continued
strong momentum in the US, coupled with resilience in the UK. The US exposure
generates 73% of operating profit, which is driven by a compelling
infrastructure market. Management has a clear strategy of organic revenue
growth, supplemented with M&A, and is executing it well. This continues to
be a top holding in the portfolio.
Hilton Food (54bps contribution) - This was a reassuring period of reporting
for this long-term holding, with the inflation-driven pressures on margins
from 2022 well behind it. The defensive characteristics of the company were
evidenced. The company has also made some interesting new customer wins in
Singapore and Canada, driving further growth opportunities. The share price is
supported by an attractive dividend yield and a resilient earnings profile.
The combination of topping up the holding and strong performance means this
once again is a meaningful position in the top 10.
Paragon Banking (52bps contribution) - The shares demonstrated strength,
particularly near the end of the period, the company having reported in line
with expectations and evidencing its resilient business model and high credit
quality, despite external macro-economic conditions driving some market
concerns. The balance sheet exhibits strength, with support from retail
deposits, and the business continues to deliver attractive returns and cash
generation. The share price valuation remains attractive, with a strong
dividend yield.
Other notable strong performers included:
Smart Metering Systems (49bps contribution) - There was a recommended cash
offer from private equity firm KKR, representing a 40% premium to prior
closing price.
Diploma (48bps contribution) - Diploma's FY23 results showcased a stellar
performance in the face of weaker peer reporting throughout Q3 and a weak
macro backdrop, demonstrating the power of the company's decentralised,
increasingly diversified model. Management gave positive commentary on
expectations into next year and the balance sheet is strong enough to execute
on an active pipeline of M&A opportunities.
Cranswick (40bps contribution) - The barriers to entry for competitors to
Cranswick are increasing due to its high quality customer base, market share
increases, and capital investment that has delivered operational improvement.
The H1 2024 results highlighted these strengths. Cranswick will continue to
pursue investment in capabilities and production expansion, and also partner
with its key customers to deliver growth in underdeveloped opportunities such
as pet food. The company has a strong balance sheet, good cash generation, an
attractive opportunity pipeline, and the ability to invest to widen the
capability gap versus its peers.
The five worst performers during the period were as follows:
Big Technologies (-90bps contribution) - There has been unpredictability in
the timing of contracts and a year of no major wins. This resulted in a pause
in the company's growth rate and downward revisions to earnings estimates. We
reduced the exposure to this company through the period.
XP Power (-74bps contribution) - Management's growing confidence that the
company could trade its way out of a difficult environment had been misplaced,
and in early October it issued an update describing weak orders, a decline in
China demand, and order postponements into 2024. This resulted in substantial
earnings downgrades for this year and a risk of the company breaching its loan
covenants, which made equity issuance likely. This, together with earnings
downgrades, was a deterioration in the investment proposition and we exited
the position.
Team17 (-67bps contribution) - The company issued an unexpected update in
November that disappointed the market, with margins much lower than hoped,
prompting a reset of margin and earnings expectations. 2023 was a challenging
year for video gaming companies, with post-Covid content releases driving
competition and competitive pricing. We exited the position.
Auction Technology (-49bps contribution) - The full year revenues came in
lower than expected, driven by a deterioration in end-market trends. The weak
macro environment led to the business cutting guidance for next year's organic
growth to a range of 5-8%, compared to consensus' mid-teens estimate. Whilst
some areas of the business are proving anti-cyclical as expected, there are
others facing cyclicality and asset price normalisation post Covid which is
compounding these pressures given the revenue model. We continue to believe
the company has a leading market position, and its execution on increasing
take rate through proliferation of value added services is supportive of the
longer term outlook.
CVS (-44bps contribution) - The shares struggled to perform following the
Competitions & Markets Authority ("CMA") review into the vet sector. The
CMA is looking at the rate of inflation in vet services and the ability of
households to access information. Pricing increases for CVS have not been out
of line with its inflationary cost base, and margin resilience has come
through operational self help. CVS has multiple services that it cross-sells,
and different branding across its practices, which is likely to form part of
the CMA review. We are confident the outcome of the review will not be too
damaging or require much operational change for CVS. The results are due in Q1
of 2024. We continue to hold a position in the company.
Dealing and Activity
Seven new holdings were added during the period; Ashtead Technology, Hunting,
XPS Pensions, Volex, Premier Foods, Chemring and Johnson Service.
Aberdeen-based Ashtead Technology provides key survey, mechanical and
monitoring equipment and services for the global offshore energy and
renewables market. It forms an important part of the subsea supply chain, and
the investment case also provides differentiated exposure to global energy
transition. The management team has a good track record of execution as it
scales the business organically and through acquisitions. The company is a
market leader in a thriving sector with strong customer relationships and
pricing power with good margins from value-add services, all serving to drive
strong growth. Momentum has been strong as the company demonstrates the
ability to scale the fleet with growing capital expenditure investment. The
balance sheet has significant fire power for deals and we believe that there
are a number of acquisition options open to the company.
Hunting is a global engineering specialist manufacturer, focusing on high
quality equipment for the energy industry. It manufactures components,
technology systems and precision parts. The company is a high quality business
operating in a cyclical industry, with oil and gas capital expenditure cycles
being an important factor. Hunting has proactively diversified over recent
years, through products, end markets and geographies. That helps the business
control its cyclicality going forwards. Quality aspects come from its leading
market positions, strong reputation, quality products and service and IP
protection. The company has a strong balance sheet with marginal net debt,
giving it flexibility to invest. End markets look to be in supportive
territory after many years of underinvestment.
XPS Pensions is one of the largest pensions consultancy and advisory
businesses in the UK. The nature of its services means its business is highly
recurring and should be non-cyclical. Whilst the company has demonstrated its
ability to grow organically in a lacklustre market, regulatory changes and
pension market volatility have caused an acceleration in activity and demand
from clients. XPS has been taking market share and the supportive end markets
give it additional support to grow revenues, but also to gain new customers.
There is potential for margin expansion from a combination of a more
attractive mix shift in services, control of lower profitability accounts,
implementation of IT administration systems and wage inflation under control;
all providing the business potential for operational leverage.
Volex is a global market leader in performance-critical components and
assemblies for use in specialist demanding solutions. It has transformed its
strategy and management team, and re-positioned the business, and the
refreshed strategy is bearing fruit. The company looks well positioned to
drive more consistent organic growth, complemented by earnings accretive
acquisitions. The mix of customers, geographies and end markets is
continuously improving, reducing the cyclicality and customer concentration.
Growth is supported by structural growth end markets such as data centres,
supply chain regionalisation and electric vehicles. Acquisitions should enable
the company to move further up the value chain, making it more embedded with
its customers.
Premier Foods has made considerable progress over the last five years in
reducing debt, resolving its pension issues and, importantly, generating
consistent growth from its brands. Financial gearing has materially reduced
and is expected to fall further, reflecting the strong cash generative nature
of the business. The company has been investing to support brand growth and
supply chain investments. The combination of strong brands, well defined
domestic and international growth opportunities, and a proven track record in
innovation and execution should serve to sustain the growth and momentum the
business has been delivering.
Chemring is a niche aerospace and defence company with leading positions in
the supply of cyber-security and digital warfare products to UK Defence and
Homeland Security markets. The company has a number one market position in the
supply of countermeasures to military aircraft. It is undergoing an extensive
investment programme to enhance safety and operational efficiency across its
countermeasure and energetics facilities. The business delivers profitable
growth through its differentiators, such as intellectual property, niche
technology and high barriers to entry, enabling attractive margins. These,
along with strong and enduring customer relationships, provide a strong
platform for future growth. The business enjoys good visibility with a strong
order book. Russia's invasion of Ukraine has seen a sea-change in opinion
towards defence spending in the West. The company has also seen a reset in
terms of how the sector is viewed from an ESG perspective. The balance sheet
is robust with strong ongoing operating cash generation, providing a platform
for future investment, both organic and inorganic, and sustainable, growing
dividend payments.
Johnson Service is a UK textile rental and services business. It rents and
launders workwear, hotel linen and tablecloths to commercial customers, across
the industrial and consumer end-markets. In both the workwear and hotels and
restaurants segments of this market, the company is the largest service
provider in the UK. Despite providing a relatively commoditised product and
service, the company has consistently delivered organic growth ahead of both
its market and its largest peers. It has sector-leading margins and returns
comfortably ahead of its cost of capital. Trading was, unsurprisingly,
affected by the Covid pandemic but despite ongoing macro uncertainty the
company is now better placed than it has been at any point since the start of
the pandemic.
We exited 10 positions during the period; Ergomed, FDM, Focusrite, Future, GB
Group, Marshalls, Motorpoint, Team 17, Watches of Switzerland and XP Power.
The decision to exit Watches of Switzerland reflected a change in our
investment case following Rolex's decision to acquire the Swiss retailer
Bucherer. Our investment case was predicated on the company opening stores
across the US and Europe and building sales in all territories. Key to that
was a very close relationship with Rolex, ensuring strong supply as the
partner of choice, and there is now risk associated with this.
We exited the holding in XP Power when we concluded that management's
confidence that the company could trade its way out of its high
net-debt-to-EBITDA ratio was misplaced and an equity issue was necessary.
Along with recent earnings downgrades, this means the value proposition has
deteriorated and we took the decision to sell the holding.
Team17 experienced an unexpected margin reset and poor growth outlook coupled
with a change in CEO.
Future faces short and long-term uncertainties. In the short term it has
limited visibility on the timing of audience recovery, a weak macro
environment which continues to weigh on advertising spend, and its content
portfolio leaves it more exposed to the macro environment than other
publishers. Longer term, there are concerns around the organic growth
prospects and execution risk on the new CEO's strategy for the business.
We also exited positions in FDM, Focusrite, GB Group, Marshalls and Motorpoint
where momentum was lacklustre and we felt that it would take a long time to
return amidst a subdued outlook for the various end markets.
Ergomed received a takeover approach from a private equity business and we
took profits.
Dividends
There was good growth in dividend receipts during the period, aligned with our
sentiment above that the reporting overall in the portfolio, and the earnings
growth being delivered, remain strong.
It is notable that within the current top ten holdings, the rate of dividend
growth has remained attractive. Excluding the outlier of 4imprint, which has
once again delivered exceptional dividend growth, and Ashtead Technology,
which pays a very small dividend, the other eight holdings are averaging 13%
dividend growth forecasts for 2023. Although lower than at the same point in
2022 (assisted by a Covid recovery in dividends), this is a very healthy
growth forecast, especially given the ongoing tougher economic climate. We
believe this is a good signal of management confidence in business outlooks.
Big Technologies, Auction Technology, Marlowe and LBG Media are the only
continuing holdings in the portfolio which do not pay dividends. The
percentage of non-payers has reduced to 4% of the portfolio, from 12% when we
last reported. Given the strength of the income stream from the portfolio as
a whole, we are comfortable with some exposure to non-dividend payers.
Outlook
The prospect of interest rate reductions in the near future and the lowly
valuation of UK equities should offer the potential for sustained market gains
in 2024. One catalyst to support this would be inflows into UK equity funds,
after a long period of outflows and, in the investment trust sector, this
demand helping to narrow discounts. The derating of equities, and in
particular smaller companies in the UK, has already happened. It actually
happened in 2022 in anticipation of a recession in 2023, yet the economy
proved to be more resilient than expected. Small and mid cap companies in
the UK are attractively valued relative to large companies, whilst the UK
market overall remains cheap on a global basis and relative to its own
history.
The recessionary question mark in many geographies still looms as we move
through 2024. A key driver for 2024 is when the downward leg of the interest
rate cycle should begin, with growth now the focus rather than inflation.
Whilst the timing of interest rate reductions are hard to predict, equity
markets have historically risen once interest rates start falling. Whilst
interest rates look to have peaked, the trading environment for companies is
likely to continue to be difficult given lacklustre economic growth
projections.
This is the time in the cycle to stick to 'quality' companies. They are more
likely to be successful in navigating the more difficult macro environments
and can defend earnings. We focused on earnings resilience across the
portfolio throughout the period, however the top-down macro environment has
continued to dominate style dynamics within markets. We have seen that ease in
recent months and, looking into 2024, we hope company fundamentals return to
becoming the more important drivers of returns. The investment process,
including the Matrix, has been helpful at focusing on which companies are
delivering superior growth momentum characteristics through economic cycles,
and the outcomes of this can be seen in the trading activity referenced above.
For investors, there are important elections being held in 2024. The US
Presidential Election in November, and probable General Election here in the
UK. Much can change in a year but, as we move through the summer, we expect
increasing deliberations over what differing scenarios may mean for financial
markets. The importance of the US election is further increased with the US
being the global growth driver, given the recent waning of Chinese
influence. Meanwhile, concerning areas of conflict remain ongoing globally,
which create further tail risks to economies and markets.
The level of discounts we are seeing across the investment trust sector has
been painful for existing shareholders, but it has created an opportunity for
good share price returns when markets recover. We thank shareholders for
having had the patience to sit out this difficult backdrop for our quality,
growth and momentum investing and, while market timing is difficult, we feel
the most challenging top-down macro environment is behind us. The outlook for
smaller companies investing remains strong, particularly given the current
valuation of the market, and the interest rate and inflation environment
suggest a more benign investment background in prospect. We remain optimistic
about the prospects for the portfolio.
Abby Glennie and Amanda Yeaman,
abrdn
27 February 2024
Investment Portfolio
At 31 December 2023
Market Total
value assets
Company Industry £'000 %
Hill & Smith Industrial Metals and Mining 17,851 4.1
Diploma Industrial Support Services 16,285 3.7
Morgan Sindall Construction and Materials 15,017 3.4
Cranswick Food Producers 14,820 3.4
Bytes Technology Software and Computer Services 14,583 3.3
JTC Investment Banking and Brokerage Services 14,391 3.3
4imprint Media 13,760 3.2
Ashtead Technology Oil, Gas and Coal 13,711 3.1
Paragon Banking Finance and Credit Services 13,619 3.1
Hilton Food Food Producers 12,877 2.9
Top ten investments 146,914 33.5
Games Workshop Leisure Goods 11,293 2.6
Hollywood Bowl Travel and Leisure 11,260 2.6
discoverIE Electronic and Electrical Equipment 11,016 2.5
XPS Pensions Investment Banking and Brokerage Services 10,982 2.5
Sirius Real Estate Real Estate Investment Trusts 10,901 2.5
CVS Consumer Services 10,692 2.4
Smart Metering Systems Industrial Support Services 10,569 2.4
Volution Construction and Materials 10,503 2.4
Coats General Industrials 10,424 2.4
Alpha Financial Markets Industrial Support Services 9,765 2.2
Top twenty investments 254,319 58.0
GlobalData Media 9,243 2.1
Gamma Communications Telecommunications Service Providers 9,192 2.1
Midwich Industrial Support Services 8,238 1.9
YouGov Media 7,645 1.8
Telecom Plus Telecommunications Service Providers 7,602 1.7
Next 15 Media 6,649 1.5
Tatton Asset Management Investment Banking and Brokerage Services 6,517 1.5
Serica Energy Oil, Gas and Coal 6,249 1.4
Hunting Oil, Gas and Coal 6,208 1.4
Alpha Group Investment Banking and Brokerage Services 6,102 1.4
Top thirty investments 327,964 74.8
Kainos Software and Computer Services 6,057 1.4
Safestore Real Estate Investment Trusts 6,044 1.4
Big Technologies Software and Computer Services 5,971 1.4
Chemring Aerospace and Defense 5,790 1.3
Mortgage Advice Bureau Finance and Credit Services 5,716 1.3
Craneware Health Care Providers 5,608 1.3
Treatt Chemicals 5,602 1.3
Mattioli Woods Investment Banking and Brokerage Services 5,125 1.2
AJ Bell Investment Banking and Brokerage Services 5,017 1.1
Auction Technology Software and Computer Services 4,975 1.1
Top forty investments 383,869 87.6
Johnson Service Industrial Support Services 4,813 1.1
Volex Electronic and Electrical Equipment 4,455 1.0
Henry Boot Real Estate Investment and Services 4,319 1.0
Marlowe Industrial Support Services 4,091 0.9
Premier Foods Food Producers 3,846 0.9
Impax Asset Management Investment Banking and Brokerage Services 3,769 0.9
Ricardo Construction and Materials 3,420 0.8
Robert Walters Industrial Support Services 3,135 0.7
Liontrust Asset Management Investment Banking and Brokerage Services 2,868 0.6
LBG Media Media 2,541 0.6
Top fifty investments 421,126 96.1
Spirent Telecommunications Equipment 1,795 0.4
Total portfolio 422,921 96.5
Net current assets(A) 15,204 3.5
Total assets 438,125 100.0
(A) Current assets less current liabilities. Excludes bank loans of
£24,951,000.
Condensed Statement of Comprehensive Income (unaudited)
Six months ended Six months ended
31 December 2023 31 December 2022
Revenue Capital Total Revenue Capital Total
Notes £'000 £'000 £'000 £'000 £'000 £'000
Net gains/(losses) on investments held at fair value 19,511 19,511 (15,431) (15,431)
Income 2 6,223 - 6,223 6,082 - 6,082
Investment management fee (354) (1,063) (1,417) (431) (1,292) (1,723)
Administrative expenses (510) - (510) (601) - (601)
Net return before finance costs and taxation 5,359 18,448 23,807 5,050 (16,723) (11,673)
Finance costs (267) (663) (930) (117) (351) (468)
Return before taxation 5,092 17,785 22,877 4,933 (17,074) (12,141)
Taxation 3 - - - - - -
Return after taxation 5,092 17,785 22,877 4,933 (17,074) (12,141)
Return per Ordinary share (pence) 5 6.00 20.93 26.93 5.32 (18.40) (13.08)
The total column of the condensed Statement of Comprehensive Income represents
the profit and loss account of the Company.
All revenue and capital items in the above statement derive from continuing
operations.
The accompanying notes are an integral part of the financial statements.
Condensed Statement of Financial Position (unaudited)
As at As at
31 December 2023 30 June 2023
Notes £'000 £'000
Non-current assets
Investments held at fair value through profit or loss 422,921 438,408
Current assets
Debtors 792 1,637
Investments in AAA-rated money-market funds 16,848 14,129
Cash and short-term deposits 294 294
17,934 16,060
Current liabilities
Creditors: amounts falling due within one year (2,730) (2,943)
Bank loan 8 (24,951) (24,938)
(27,681) (27,881)
Net current liabilities (9,747) (11,821)
Net assets 413,174 426,587
Capital and reserves
Called-up share capital 26,041 26,041
Share premium account 170,146 170,146
Capital reserve 206,133 217,927
Revenue reserve 10,854 12,473
Equity shareholders' funds 413,174 426,587
Net asset value per Ordinary share (pence) 7 508.95 482.95
The accompanying notes are an integral part of the financial statements.
Condensed Statement of Changes in Equity (unaudited)
Six months ended 31 December 2023
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 - - 17,785 5,092 22,877
Buyback of shares into Treasury - - (29,579) - (29,579)
Dividends paid (see note 4) - - - (6,711) (6,711)
Balance at 31 December 2023 26,041 170,146 206,133 10,854 413,174
Six months ended 31 December 2022
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 - - (17,074) 4,933 (12,141)
Buyback of shares into Treasury - - (10,929) - (10,929)
Dividends paid (see note 4) - - - (5,000) (5,000)
Balance at 31 December 2022 26,041 170,146 265,613 8,741 470,541
The capital reserve at 31 December 2023 is split between realised of
£134,329,000 and unrealised of £71,804,000 (31 December 2022 - realised
£170,473,000 and unrealised £95,140,000).
The accompanying notes are an integral part of the financial statements.
Condensed Statement of Cash Flows (unaudited)
Six months ended Six months ended
31 December 2023 31 December 2022
£'000 £'000
Operating activities
Net return before finance costs and taxation 23,807 (11,673)
Adjustment for:
(Gains)/losses on investments (19,511) 15,431
Decrease in accrued income 846 1,665
Increase in other debtors (7) -
(Decrease)/increase in other creditors (354) (399)
Net cash inflow from operating activities 4,781 5,024
Investing activities
Purchases of investments (66,559) (43,368)
Sales of investments 101,676 74,458
Purchases of AAA-rated money-market funds (67,314) (65,871)
Sales of AAA-rated money-market funds 64,594 61,034
Net cash inflow from investing activities 32,397 26,253
Financing activities
Interest paid (888) (484)
Equity dividends paid (6,711) (5,000)
Buyback of shares (29,579) (10,929)
Repayment of loan - (15,080)
Net cash outflow from financing activities (37,178) (31,493)
Decrease in cash and short-term deposits - (216)
Analysis of changes in cash during the period
Opening cash and short-term deposits 294 582
Decrease in cash and short-term deposits as above - (216)
Closing cash and short-term deposits 294 366
The accompanying notes are an integral part of the financial statements.
Notes to the Financial Statements (unaudited)
For the year ended 31 December 2023
1. Accounting policies
Basis of accounting. The condensed financial statements have been prepared in
accordance with Financial Reporting Standard 104 'Interim Financial Reporting'
and with the Statement of Recommended Practice for 'Financial Statements of
Investment Trust Companies and Venture Capital Trusts' issued in July 2023.
They have also been prepared on a going concern basis and on the assumption
that approval as an investment trust will continue to be granted.
The half-yearly financial statements have been prepared using the same
accounting policies as the preceding annual accounts.
2. Income
Six months ended Six months ended
31 December 2023 31 December 2022
£'000 £'000
Income from investments
UK dividend income 4,915 4,834
Property income distributions 98 602
Overseas dividend income 560 441
Special dividends 214 -
5,787 5,877
Interest income
Interest from AAA-rated money-market funds 427 199
Bank interest 9 6
436 205
Total income 6,223 6,082
3. Taxation
The taxation expense reflected in the Condensed Statement of Comprehensive
Income is based on management's best estimate of the weighted annual
corporation tax rate expected for the full financial year. The estimated
annual tax rate used for the year to 30 June 2024 is 25%.
4. Ordinary dividend on equity shares
Six months ended Six months ended
31 December 2023 31 December 2022
£'000 £'000
2023 final dividend of 8.00p per share (2022 - 5.40p) 6,711 5,000
5. Return per share
Six months ended Six months ended
31 December 2023 31 December 2022
p p
Revenue return 6.00 5.32
Capital return 20.93 (18.40)
Total return 26.93 (13.08)
Weighted average number of Ordinary shares 84,942,293 92,803,168
The figures above are based on the following:
Six months ended Six months ended
31 December 2023 31 December 2022
£'000 £'000
Revenue return 5,092 4,933
Capital return 17,785 (17,074)
Total return 22,877 (12,141)
6. Transaction costs
During the period, expenses were incurred in acquiring or disposing of
investments classified as fair value through profit or loss. These have been
expensed through capital and are included within gains on investments in the
Condensed Statement of Comprehensive Income. The total costs were as follows:
Six months ended Six months ended
31 December 2023 31 December 2022
£'000 £'000
Purchases 237 76
Sales 65 64
302 140
7. 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 Condensed Statement of Financial
Position reflects the rights, under the Articles of Association, of the
Ordinary shareholders on a return of assets.
These rights are reflected in the net asset value and the net asset value per
share attributable to Ordinary shareholders at the period end.
As at As at
31 December 2023 30 June 2023
Total shareholders' funds (£'000) 413,174 426,587
Number of Ordinary shares in issue at the period end(A) 81,181,266 88,329,911
Net asset value per share (pence) 508.95 482.95
(A) Excluding shares held in treasury.
During the six months ended 31 December 2023 the Company repurchased 7,148,645
Ordinary shares to be held in treasury (31 December 2022 - 2,332,757) at a
cost of £29,579,000 (31 December 2022 - £10,929,000).
As at 31 December 2023 there were 81,181,266 Ordinary shares in issue (30 June
2023 - 88,329,911). There were also 22,983,156 Ordinary shares (30 June 2023 -
15,834,511) held in treasury.
8. Loans
On 1 November 2023, the Company entered into a new three year revolving credit
facility of £40 million (the "RCF") with The Royal Bank of Scotland
International Limited. The RCF has a further uncommitted accordion provision
allowing the Company to request an increase, subject to lender's approval, of
up to an additional £25 million. At 31 December 2023 £25 million was drawn
down under the RCF at an interest rate of 6.48%.
The RCF is shown in the Condensed Statement of Financial Position net of
unamortised expenses of £49,000 (30 June 2023 - Term Loan - £62,000).
The terms of the unsecured loan facility agreement ("the agreement") 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.
9. Analysis of changes in net debt
At Non-cash At
30 June 2023 Cash flows movements 31 December 2023
£'000 £'000 £'000 £'000
Cash and short-term deposits 294 - - 294
Investments in AAA-rated money-market funds 14,129 2,719 - 16,848
Debt due in less than one year (24,938) - (13) (24,951)
Total net debt (10,515) 2,719 (13) (7,809)
At Non-cash At
30 June 2022 Cash flows movements 31 December 2022
£'000 £'000 £'000 £'000
Cash and short-term deposits 582 (216) - 366
Investments in AAA-rated money-market funds 14,414 4,837 - 19,251
Debt due in less than one year (39,988) 15,080 (16) (24,924)
Total net debt (24,992) 19,701 (16) (5,307)
10. Fair value hierarchy
FRS 102 requires an entity to classify fair value measurements using a fair
value hierarchy that reflects the significance of the inputs used in making
the measurements. The fair value hierarchy shall have the following
classifications:
Level 1: unadjusted quoted prices in an active market for identical assets or
liabilities that the entity can access at the measurement date.
Level 2: inputs other than quoted prices included within Level 1 that are observable
(ie developed using market data) for the asset or liability, either directly
or indirectly.
Level 3: inputs are unobservable (ie for which market data is unavailable) for the
asset or liability.
All of the Company's investments are in quoted equities (30 June 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 (31 December 2023 - £422,921,000; 30
June 2023 - £438,408,000) have therefore been deemed as Level 1.
The investment in AAA rated money-market funds of £16,848,000 (30 June 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.
11. Transactions with the Manager
The Company has an agreement with abrdn Fund Managers Limited ("aFML") for the
provision of investment management, secretarial, accounting and administration
and promotional activity services. The Company agreed a new managament fee
charged on net assets (total assets less total liabilities), effective as of 1
July 2023. During the six months ended 31 December 2023 the management fee
paid to aFML was charged by applying a tiered rate of 0.75% to the first £175
million of net assets, 0.65% of net assets between £175 million and £550
million and 0.55% of net assets above £550 million. The contract is
terminable by either party on six months' notice.
During the period £1,417,000 (31 December 2022 - £1,723,000) of investment
management fees were earned by aFML, with a balance of £1,417,000 (31
December 2022 - £1,723,000) due at the period end.
aFML also receives fees for secretarial and administrative services at a rate
of £75,000 per annum exclusive of VAT, however, this fee arrangement ceased
on 31 December 2023.
During the period, fees of £37,000 (31 December 2022 - £37,000) exclusive of
VAT were earned by aFML for the provision of secretarial and administration
services. The balance due to aFML at the period end was £94,000 (31 December
2022 - £38,000) exclusive of VAT.
The Manager also receives a separate promotional activities fee which during
the period was based on an annual amount of £218,000 exclusive of VAT payable
quarterly in arrears. During the period, fees of £109,000 (31 December 2022 -
£192,000) exclusive of VAT were payable to the Manager, with a balance of
£55,000 (31 December 2022 - £96,000) exclusive of VAT being due at the
period end. The fee received by aFML for promotional activities is entirely
expended by aFML on external/third party promotional costs and does not cover
any internal aFML costs.
12. Subsequent events
Subsequent to the period end, the Company repurchased a further 4,119,687
Ordinary shares to be held in treasury at a cost of £18,052,000.
13. Half-Yearly Financial Report
The financial information in this Report does not constitute statutory
accounts as defined in Sections 434 - 436 of the Companies Act 2006. The
financial information for the year ended 30 June 2023 has been extracted from
the latest published audited financial statements which have been filed with
the Registrar of Companies. The report of the auditors on those accounts
contained no qualification or statement under Section 498 (2), (3) or (4) of
the Companies Act 2006. The half-yearly financial statements have been
prepared using the same accounting policies as the preceding annual accounts.
14. This Half-Yearly Financial Report was approved by the Board on 27 February
2024.
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.
31 December 2023 30 June 2023
Share price a 458.00p 414.00p
Net Asset Value per share b 508.95p 482.95p
Discount (a/b)-1 10.0% 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.
31 December 2023 30 June 2023
£'000 £'000
Total borrowings a (24,951) (24,938)
Cash and short-term deposits 294 294
Investments in AAA-rated money-market funds 16,848 14,129
Amounts due from brokers 5 10
Amounts payable to brokers - (31)
Total cash and cash equivalents b 17,147 14,402
Net gearing (borrowings less cash & cash equivalents) c=a+b (7,804) (10,536)
Shareholders' funds d 413,174 426,587
Net gearing (borrowings less cash & cash equivalents) e=c/d 1.9% 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 daily net asset values published throughout the year. The ratio
reported at 31 December 2023 includes actual costs and charges for the six
months and includes a forecast for costs, charges and the asset base for the
remaining six months of the financial year ending 30 June 2024.
31 December 2023(A) 30 June 2023(B)
£'000 £'000
Investment management fees a 2,885 3,390
Administrative expenses b 917 1,115
Less: non-recurring charges(C) c - (40)
Ongoing charges d=a+b+c 3,802 4,465
Average net assets e 411,837 471,984
Ongoing charges ratio (excluding look-through costs) f=d/e 0.92% 0.95%
Look-through costs(D) g - -
Ongoing charges ratio (including look-through costs) h=f+g 0.92% 0.95%
(A) Forecast for the year ending 30 June 2024 based on estimates as at 31
December 2023.
(B) For the year ended 30 June 2023.
(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.
Share
Six months ended 31 December 2023 NAV price
Opening (p) a 482.95 414.00
Closing (p) b 508.95 458.00
Increase (p) c=b-a 26.00 44.00
% increase d=c/a 5.4% 10.6%
Uplift from reinvestment of dividends(A) e 1.9% 2.3%
Total return increase d+e 7.3% 12.9%
(A) The uplift from reinvestment of dividends assumes that the dividend of
8.00p paid by the Company in November 2023 was reinvested in the NAV and share
price of the Company on the ex-dividend date.
By order of the Board
abrdn Holdings Limited
Company Secretary
27 February 2024
Please note that past performance is not necessarily a guide to the future and
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
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