Half-year Report
26/07/2023 13:13
Aberforth Smaller Companies Trust plc
Half Yearly Report for the six months to 30 June 2023
The following is an extract from Aberforth Smaller Companies Trust plc’s
Half Yearly Report for the six month period to 30 June 2023.
FINANCIAL HIGHLIGHTS
Total Return Performance %
Net Asset Value per Ordinary Share 0.4
Numis Smaller Companies Index (excluding Investment Companies) 1.4
Ordinary Share Price -4.4
30 June 2023 31 December 2022 30 June 2022
Shareholders’ Funds £1,219m £1,251m £1,191m
Market Capitalisation £1,044m £1,128m £1,018m
Actual Gearing employed 3.6% 5.7% 4.6%
Net Asset Value per Ordinary Share 1,438.50p 1,465.67p 1,373.14p
Ordinary Share price 1,232.00p 1,322.00p 1,174.00p
Ordinary Share discount 14.4% 9.8% 14.5%
Interim dividend of 12.95p per share for the year ended 31 December 2023,
which is 7.5% higher than the previous year’s 12.05p per share.
INVESTMENT OBJECTIVE
The investment objective of Aberforth Smaller Companies Trust plc (“the
Company” or “ASCoT”) is to achieve a net asset value total return (with
dividends reinvested) greater than that of the Numis Smaller Companies Index
(excluding Investment Companies (“NSCI (XIC)”)) over the long term.
Chairman’s Statement
Review of performance
The gloom of stockmarkets in 2022 has given way to a somewhat brighter mood so
far in 2023. Over the six months to 30 June 2023, the FTSE All-Share, which is
representative of larger UK companies, recorded a total return of +2.6%. The
return from the benchmark index of smaller companies – the Numis Smaller
Companies Index (excluding Investment Companies) or NSCI (XIC) – was +1.4%.
ASCoT’s net asset value total return was +0.4%. Amid the general widening of
investment trusts discounts over the past two years, ASCoT’s discount
expanded from 9.8% to 14.4% over the six months to 30 June 2023. This meant
that its share price total return in the period was -4.4%.
The source of the stockmarket’s renewed enthusiasm is across the Atlantic.
Lower energy prices and easing supply chains have reduced the rate of
inflation in the US. The hope is that this development will soon enable the
Federal Reserve to end its programme of aggressive interest rate rises. The
prospect of lower US interest rates, which influence the valuation of assets
globally, has out-weighed concerns about US regional bank failures and the
continuing war in Ukraine.
Notwithstanding the rise in share prices so far this year, sentiment in and
towards the UK remains at a low ebb. There are welcome signs of political
pragmatism among both the Conservative and Labour parties, but the imminence
of a General Election justifies continued nervousness about politics.
Inflation is proving more difficult to control than in the US and so interest
rates here have continued to rise. While the Bank of England has revised its
extremely pessimistic prediction of the longest recession since records began,
fears linger about economic slowdown, especially as mortgage rates continue to
rise.
Amid these top-down uncertainties, the good news is that the companies in
which ASCoT invests have continued to display their familiar resilience. The
Managers’ Report describes their balance sheet strength and dividend growth.
It also contrasts these qualities with what appear to me to be anomalous
stockmarket valuations.
Dividends
One of the acid tests of a company’s resilience is its ability to pay a
rising dividend. ASCoT’s investee companies have passed that test in the
first half of 2023, continuing the recovery from the darkest days of the
pandemic. Good underlying progress has been supplemented by the receipt of
four special dividends. Based on the Managers’ current dividend forecasts
for the portfolio’s holdings, it is likely that ASCoT’s Revenue Return per
Ordinary Share in 2023 will be higher than what was a very strong result in
2022.
It would be unwise to rely entirely on forecasts when the path for the economy
is so uncertain, but ASCoT also benefits from its revenue reserves, which have
been built up in the good years and which can be used to support ASCoT’s
dividends in the bad times, such as during the pandemic. These reserves were
69.9p per Ordinary Share at 31 December 2022, equivalent to 1.8 times last
year’s underlying dividend. The Board therefore remains comfortable with its
ambition to increase ASCoT’s full year dividend at a rate above that of
inflation, even though the UK’s persistent inflationary pressures mean that
this is still a high hurdle.
We are pleased to announce an interim dividend of 12.95p per Ordinary Share,
which represents an increase of 7.5% on the previous year’s 12.05p. As was
the case with last year’s interim dividend, this rate of increase is set
above the anticipated year end inflation rate, which is based on an average of
forecasts aggregated by Bloomberg. Should these forecasts prove inaccurate, it
would be the Board’s intention to use the final dividend in order to meet
the ambition to grow ASCoT’s full year underlying dividend (i.e. excluding
any special dividend declared) in real terms.
The interim dividend will be paid on 25 August 2023 to Shareholders on the
register at the close of business on 4 August 2023. The ex dividend date is 3
August 2023. The Company operates a Dividend Reinvestment Plan, details of
which are available from Aberforth Partners LLP or on its website,
www.aberforth.co.uk.
Gearing
In May 2023, the Company announced that it had refinanced the existing
committed credit facility with The Royal Bank of Scotland International
Limited in the amount of £130m for a further three years to 15 June 2026.
These borrowing facilities offer flexibility that is consistent with the
Company’s gearing policy, which is to deploy gearing in a tactical manner in
order to take advantage of periods of stress in equity markets. Gearing has
been deployed on four occasions in ASCoT’s 32 year history, the most recent
opportunity coming in 2020 with the pandemic. Since then, gearing has enhanced
ASCoT’s investment returns, and, because portfolio valuations remain low, it
remained in place at 30 June 2023. The gearing ratio, which is the ratio of
net debt to Shareholders’ Funds, was 4% at that date.
Annual General Meeting (AGM)
All resolutions at the Annual General meeting held on 2 March 2023 were
passed, including approval for the renewal of authority to buy back up to
14.99% of ASCoT’s Ordinary Shares. The resolutions also included a vote on
the continuation of the Company, which is presented to Shareholders every
three years. The Board is grateful for Shareholders’ resounding support,
with 99.9% of votes cast in favour of the resolution.
Share buy-back
In the six months to 30 June 2023, 590,000 shares were bought back and
cancelled. The total value of these repurchases was £7.5m, on an average
discount of 13%.
The Board continues to believe that, at the margin, buy-backs provide an
increase in liquidity for those Shareholders wishing to crystallise their
investment and, at the same time, deliver an economic uplift for those
Shareholders wishing to remain invested in the Company.
Conclusion
The UK economy has defied gravity over the past year. Despite unprecedented
rises in interest rates, recession has been avoided. However, the persistence
of inflation has required the Bank of England to continue to tighten monetary
policy. As higher mortgage rates squeeze household budgets further, I fear
that a downturn is now inevitable. The government has been willing to offer
fiscal support to cope with lockdowns and high energy costs, but it is not
clear that further support is possible or even advisable, since it would
exacerbate the underlying pressure on prices.
What I have written may not be considered particularly insightful since it is
what financial markets in the UK have been worrying about for some time. As
uncertainty about the economy persists, the stockmarket has been condemned to
a holding pattern. The valuations of UK equities in general and of the
portfolio in particular remain very low, with few buyers of small UK quoted
companies beyond contrarian value investors, such as the Managers, and
opportunistic takeovers by private equity and other companies. But we know
that stockmarkets are prone to fits of elation and despondency. Their tendency
to overreact gives me confidence that today’s valuations are the basis of
good future returns. In due course, the stockmarket will anticipate the
recovery of the economy and small company share prices are likely to rebound
rapidly – ASCoT’s portfolio is well positioned to prosper in these
circumstances.
When contemplating the uncertainties of the future, it is important not to
lose sight of the here and now. In our interactions with the Managers and our
scrutiny of the value investment philosophy, my fellow directors and I are
reassured by the quality of the companies in which ASCoT invests. Strong
balance sheets, growth through the economic cycle and good management amid the
various trials of recent years give us confidence that these companies will be
able to take advantage of the inevitable recovery. In the meantime, the
dividend performance of the portfolio’s companies gives the Board confidence
that ASCoT’s dividend can continue to grow and pay its Shareholders to wait
for the stockmarket to reflect more fairly the prospects of small UK quoted
companies.
Richard Davidson
Chairman
26 July 2023
richard.davidson@aberforth.co.uk
Managers’ Report
Introduction
ASCoT’s net asset value total return in the six months to 30 June 2023 was
0.4%. Over the same period, the NSCI (XIC) – ASCoT’s benchmark – rose by
1.4%. Meanwhile, the FTSE All-Share, which is representative of larger UK
companies, was up by 2.6%.
After the poor returns of 2022, equity markets around the world have begun
2023 more positively. Several factors have contributed to the improved mood.
The initial shock of Russia’s war in Ukraine has subsided, while some of the
worst fears about energy supplies and prices have so far proved misplaced. The
reopening of China’s economy, following strict pandemic lockdowns, should
contribute to global economic activity and promises to ease pressure on supply
chains. Related to these points, inflationary forces appear to be abating: in
most major economies, the rate of change in consumer prices is declining,
though it remains elevated in comparison with the period before the pandemic.
The response to inflation has been the large and rapid increases in interest
rates over the past 18 months. These have complicated economic activity and
asset valuations. They have also precipitated financial accidents, such as the
UK’s brief LDI pension crisis in the autumn followed by the spring’s
regional bank failures in the US. The markets’ calculation is that subsiding
inflation will soon allow the Federal Reserve to signal that the all-important
US Fed Funds rate has peaked. In stockmarket terms, the main beneficiaries so
far of this expectation of falling interest rates have been the large
technology companies in the US: their valuations thrived in the low inflation
and low interest rate environment preceding the pandemic and they are
perceived as being best placed to exploit the emerging fascination with
artificial intelligence.
The likelihood of the UK’s monetary policy following suit seems more
distant. Consumer price inflation is proving more persistent, forcing the Bank
of England to raise interest rates to 5% and bringing recession closer as
higher mortgage rates bite. Reawakened memories of a British problem with
inflation have contributed to a pervasive and thorough pessimism about the
UK’s prospects. Domestic politics of recent years have not helped. A
succession of prime ministers has struggled with the additional challenges
that the country’s departure from the EU has presented to economic activity.
Ideology has too often won out over pragmatism, culminating only nine months
ago in Liz Truss’s extraordinary and short-lived premiership.
These concerns have affected investment in the UK. Open-ended equity funds
have experienced persistent outflows for several years and institutional asset
allocation decisions appear influenced more by what has been rather than what
will be. Valuations attributed to UK assets languish. Against the dollar and
euro, sterling remains 15% or so below its levels before the EU referendum.
Gilt yields are on a wide premium to government bond yields in the US and
Europe. And the UK’s stockmarket valuations are towards their lowest in over
30 years when compared with global equity market averages.
Equity valuations are examined in greater detail later in this report, but the
important point is that they contrast sharply with the recent performance of
the underlying businesses. The majority of small UK quoted companies and of
the portfolio’s holdings increased profits and dividends in 2022,
notwithstanding the slew of macro-economic challenges. Cost inflation was
passed on successfully, which confounds a recurring concern that small
companies lack pricing power. Balance sheets were strengthened and are as
strong as they have been in ASCoT’s 32 year history. The underlying progress
and resilience have persisted through the first part of 2023.
Analysis of performance
The table below sets out the contribution of various factors to ASCoT’s
relative return in the six months to 30 June 2023. The following paragraphs
add context and explanation, mainly to the first row in the table, which
quantifies the performance of the portfolio and is usually the most meaningful
effect on ASCoT’s overall returns.
For the six months ended 30 June 2023 Basis points
Attributable to the portfolio of investments, based on mid prices (126)
(after transaction costs of 9 basis points)
Movement in mid to bid price spread 53
Cash/gearing 1
Purchase of ordinary shares 9
Management fee (36)
Other expenses (4)
Total attribution based on bid prices (103)
Note: 100 basis points = 1%. Total Attribution is the difference between the
total return of the NAV and the Benchmark Index (i.e. NAV = 0.39%; Benchmark
Index = 1.42%; difference is -1.03% being -103 basis points).
Style & size
The Managers’ value investment style is often a significant influence on
ASCoT’s returns. Amid the interest rate rises since the pandemic, the style
boosted performance in 2021 and 2022. For the six months to 30 June 2023, data
from the London Business School (LBS) indicate that there was little to choose
between the total returns of the NSCI (XIC)’s value stocks and its growth
stocks. This is somewhat at odds with the very strong share prices of the US
technology leviathans known for their growth characteristics. It seems likely
that LBS’s methodology did not capture broader style effects over what is a
relatively short period.
Turning to size, the portfolio retains its high exposure to the “smaller
small” companies within the NSCI (XIC). This is because the valuations of
these “smaller small” companies remain more attractive than those of the
index’s larger companies, which is set out later in this report. The
portfolio’s size positioning often affects its investment returns, but, much
like the value style, was not an important factor in the six months to 30 June
2023.
Balance Sheets
The table below shows the balance sheet profile of the portfolio and of the
Tracked Universe at 30 June 2023, which is the subset of the NSCI (XIC) that
the Managers follow closely and which represents 98% by value of the total
index.
Weight in companies with: Net cash Net debt/EBITDA < 2x Net debt/EBITDA > 2x Other*
Portfolio: 2023 40% 45% 10% 4%
Tracked universe: 2023 34% 36% 24% 7%
*Includes loss-makers and lenders
The portfolio’s balance sheet profile compares well with that of the index,
having a relatively high exposure to companies with net cash and a relatively
low exposure to those with higher leverage. This profile has emerged from the
Managers’ bottom-up stock selection – the stockmarket is not giving small
companies credit in their valuations for balance sheet strength.
The other important point to make about small companies’ balance sheets is
that they have not been so strong since around 2014. Companies had entered the
2009 recession with too much leverage and spent the next five years repairing
their balance sheets. Today, in contrast, companies would be entering a
slowdown or recession with healthy balance sheets. Clearly, there are
exceptions, but the broad-based balance sheet resilience is an
under-appreciated feature of small companies at present.
Income
The portfolio’s income performance has remained good, with dividend
declarations by investee companies so far in 2023 predominantly reflecting the
growth of profits in 2022. The table below splits the 78 holdings into five
categories, which are determined by each company’s most recent dividend
action.
Nil P ayer Cutter Unchanged Payer Increased Payer New/Returner
14 9 11 40 4
More than half the holdings increased their most recent dividends. A further
boost to the income performance comes from the New / Returners category. Its
constituents are companies that are paying dividends for the first time or
that have resumed payments, having paid nothing through the pandemic. It is
anticipated that four of the current Nil Payers will move into the New /
Returner category over the next 18 months. ASCoT also benefited from four
special dividends announced by investee companies in the six month period.
The income credentials of the portfolio at 30 June 2023 compare well with
averages over ASCoT’s 32 years. The historical portfolio yield was 4.2%,
which is 29% higher than the average over ASCoT’s history. Meanwhile, the
average dividend cover of the 78 holdings was 3.4x, which is 21% higher than
the long term average. The Managers continue to expect income growth from the
portfolio in 2023. An economic downturn would threaten their forecasts, but
its impact should be mitigated by the portfolio’s high dividend cover and
strong balance sheets.
Corporate activity
There was a flurry of M&A activity in the first part of 2022, but this petered
out as interest rates and the cost of corporate debt rose through the second
half of the year. Entering 2023, the Managers believed that the volatility of
debt markets would continue to discourage takeovers. In the event, however,
six new bids were announced for constituents of the NSCI (XIC) in the six
months to 30 June 2023, with ASCoT owning four of them. The average EV/EBITA
of the six at their deal prices was 16.2x, while the average premium to the
pre-announcement share prices was 67%.
More surprising than the rebound in M&A has been the nature of the bidders: in
five of the six deals, the buyers have been private equity firms. The surprise
reflects the fact that debt is the lifeblood of private equity and debt
markets have not yet settled down amid on-going tightening of monetary policy.
However, it would appear that the very low valuations of small UK quoted
companies mean that private equity does not need debt at the outset to make
their M&A models work. This is a stark illustration of the opportunity
currently embedded in the valuations of small UK quoted companies.
ASCoT may benefit from further takeover premiums for its holdings as long as
stockmarket valuations remain at their present low levels. However, in these
circumstances, it remains important to guard against opportunism on the part
of the buyers. Large takeover premiums may still not bring valuations to
appropriate levels and the Managers are prepared to vote against deals where
this is the case. The best M&A experiences are often those in which boards of
directors consult shareholders well in advance. Such consultation reduces the
risk of embarrassment, should shareholders find proposed terms unacceptable,
and can lead to better outcomes, which may be that the company in question
retains its independence. The Managers make it clear to the boards of the
investee companies that they should be consulted in such situations and that
they are willing to be insiders for extended periods.
ASCoT’s gearing
Having commenced its fourth period of gearing in 2020 to take advantage of the
impact of the pandemic on valuations, ASCoT remained geared in the six months
to 30 June 2023. The gearing ratio fell from 5.7% to 3.6% over the six months,
which was due to the timing of purchases and sales. With valuations still
extremely attractive, as set out below, the logic for ASCoT to retain its
gearing is strong.
Active share
Active share is a measure of how different a portfolio is from an index. The
ratio is calculated as half of the sum of the absolute differences between
each stock’s weighting in the index and its weighting in the portfolio. The
higher a portfolio’s active share, the higher its chance of performing
differently from the index, for better or worse. The Managers target an active
share ratio of at least 70%. At 30 June 2023, it stood at 76%.
Portfolio turnover
Portfolio turnover is defined as the lower of purchases and sales divided by
average portfolio value. Over the twelve months to 30 June 2023, turnover was
21%, which compares with an average of 34% over ASCoT’s 32 year history.
This relatively subdued rate of turnover is due to the low stockmarket
valuations of the portfolio’s holdings – discounts to the Managers’
target prices have not generally narrowed, so the opportunity for “value
roll” within the portfolio has been limited. “Value roll” is the term
that the Managers use to describe the recycling of capital from companies with
less upside to target prices into those with greater upside.
Some of the turnover in the period reflected investment in companies that
entered the NSCI (XIC) on 1 January 2023. As described in the 2022 Annual
Report, this was the largest ever rebalancing of the index. The 29 companies
that were injected into the index offered the Managers additional opportunity:
the portfolio owned four of these so-called “fallen angels” at 30 June
2023.
Valuations
The table below sets out the forward valuations of the portfolio, the Tracked
Universe and certain subdivisions of the Tracked Universe. The metric
displayed is enterprise value to earnings before interest, tax and
amortisation (EV/EBITA), which the Managers use most often in valuing
companies. The forecasts underlying the ratios are the Managers’. The bullet
points following the table summarise its main messages.
EV/EBITA 2022 2023 2024
ASCoT 6.3x 7.1x 5.8x
Tracked Universe (234 stocks) 9.4x 9.6x 8.7x
- 40 growth stocks - 194 other stocks 14.5x 8.7x 13.6x 9.0x 13.7x 7.9x
- 78 stocks> £600m market cap - 156 stocks< £600m market cap 11.0x 7.4x 10.8x 7.9x 10.2x 6.6x
• The average EV/EBITA multiples of the portfolio are much lower than those
of the Tracked Universe. This has been a consistent feature over ASCoT’s
history and is consistent with the Managers’ value investment style.
• The portfolio’s 7.1x EV/EBITA ratio for 2023 is considerably lower than
the average multiple of 16.2x at which this year’s M&A deals in the NSCI
(XIC) have been struck.
• The profit forecasts underlying the EV/EBITA multiples for 2023 and 2024
are subject to uncertainty about the timing and intensity of an economic
downturn. It can be inferred from the progression of the multiple across the
three years that the Managers presently expect a slowdown in 2023, followed by
a recovery in 2024.
• The growth stocks within the Tracked Universe are on much higher multiples
than both the portfolio and the rest of the Tracked Universe.
• The “smaller small” companies within the index – here illustrated by
those with market capitalisations less than £600m – are on vast valuation
discounts to their larger peers. The Managers identify no reason for this
beyond a general concern about liquidity and so the portfolio has a relatively
high exposure to these “smaller small” companies.
The table below sets out some of the main characteristics of ASCoT’s
diversified portfolio of smaller companies. The point above about exposure to
“smaller small” companies is reinforced in the weighted average market
capitalisation row.
Portfolio characteristics 30 June 2023 30 June 2022
ASCoT NSCI (XIC) ASCoT NSCI (XIC)
Number of companies 78 339 76 323
Weighted average market capitalisation £528m £945m £532m £795m
Price earnings (PE) ratio (historical) 7.1x 10.8x 7.8x 9.8x
Dividend yield (historical) 4.2% 3.5% 3.3% 3.1%
Dividend cover 3.4x 2.6x 3.8x 3.3x
Perhaps the most notable feature of the table is average historical price
earnings ratio (PE) of ASCoT’s portfolio. It has fallen from 8.1x to 7.1x
over the first six months of 2023 to sit at a 34% discount to the NSCI
(XIC)’s 10.8x. Given ASCoT’s positive NAV return in this period, it can be
inferred that the reduction in the PE was due to growth in earnings per share
of the portfolio’s holdings. As the following chart makes clear, a multiple
of 7.1x is very low in the context of ASCoT’s history.
History indicates that the portfolio’s historical PE ratio falls this low
when recession threatens: the earlier low-points in the chart were the early
1990s recession, the global financial crisis and the pandemic. It is therefore
possible that much of the risk of an economic downturn is already embedded
within share prices. Taking this argument further, small company profits
typically fall by around 30% in a recession. A repeat of this would take the
historical PE ratio of 7.1x to a forward ratio of 10.1x. This multiple of what
can be thought of as trough profits would still be well below the long term
average PE multiple of 12.1x.
An influence on the portfolio’s low valuation at present is its exposure to
UK equities. These are out of favour with global investors for reasons
previously set out in this report. Data from Panmure Gordon help quantify the
scale of this disenchantment. The PE of the UK stockmarket is presently 27%
lower than the PE of global equities, which is much more than the average
discount of 15% over ASCoT’s 32 year history. Comparing ASCoT’s portfolio
directly with global equities, the current PE discount is 52%, whereas the
long term average has been 24%. The valuation elastic is therefore extremely
stretched at present, with ASCoT on a triple discount by virtue of its value
investment style, its exposure to small companies and its Britishness. This
appears incongruous given the resilience of the portfolio’s investee
companies and the fact 45% of their revenues on average are generated outside
the UK. An easing of the tension in valuations, as one or more of these
relationships returns towards the normal levels of the past 32 years, should
bode well for ASCoT’s returns.
Outlook and conclusion
The medium and long term outlook for ASCoT is bright. History is rather
convincing: when valuations have reached today’s levels in the past,
absolute and relative total returns over the next five years have been strong.
Ironically, the greater uncertainty pertains to the nearer term.
Stockmarkets’ immediate obsession is US interest rates – each data release
is scrutinised exhaustively for a hint of what the Federal Reserve might do
next. The positive start to 2023 for equities indicates an expectation that US
interest rates are close to their peak. However, there are important caveats.
The speed and extent of the interest rate increases threaten further accidents
– the financial world has grown used to more than a decade of almost
costless money. Moreover, it is not clear that inflation will return
conveniently and reliably to its pre-pandemic levels – the rate of increase
will subside, but underlying inflationary pressures from labour markets and
from forces such as de-globalisation linger.
While equity investors are presently enthused by the outlook for US monetary
policy, they remain nervous about prospects for UK politics and economics over
the next couple of years. On the political front, there will be a UK General
Election within the next eighteen months. This will come at a time when the
influence of the more extreme elements of both main political parties appears
to be waning. However, a change of government looks likely, which brings
incremental risk.
Meanwhile, the UK economy is blighted by more persistent inflation than are
its peers. This threatens a more aggressive monetary response by the Bank of
England and potentially a more severe downturn in economic activity.
Recessions are unpleasant. They increase hardship faced by households and
businesses. They reduce incomes and profits. But they are also inevitable and
even necessary in order to address the effects of past policy mistakes and of
unforeseeable developments such as the pandemic.
The risks are undeniable. But so is the attractiveness of the valuations
attributed to the portfolio’s holdings by the stockmarket, in all its
worrying about the UK and about the liquidity and cyclicality of small
companies. Importantly, the stress-testing of today’s portfolio valuations
described above suggests that much of the risk of a recession may already be
embedded in share prices.
While it may take time for equity investors to re-embrace the UK stockmarket
and its smaller companies, private equity and overseas companies are showing
no such reluctance. The on-going wave of takeover activity is exposing the
absurdity of present valuations. The portfolio has benefited from this, but it
is often a bittersweet experience – the boost to investment performance from
securing a takeover premium must be weighed against the likelihood that a
better outcome would have been possible were so many not quick to dismiss the
UK.
If patience is required to enjoy a pervasive revaluation of UK equities, it is
reassuring that ASCoT’s investee companies are in good shape. Balance sheets
are unusually robust at present, which should ease the pain of an economic
downturn by reducing the need for equity issues and by supporting dividends.
The outlook for dividends paid by the portfolio’s holdings is also helped by
high dividend cover. Meanwhile, ASCoT’s shareholders benefit from almost two
years of revenue reserves, which give the Board and Managers confidence in the
ambition to keep ASCoT’s dividend rising ahead of inflation.
Aberforth Partners LLP
Managers
26 July 2023
INTERIM MANAGEMENT REPORT
A review of the half year and the outlook for the Company can be found in the
Chairman’s Statement and the Managers’ Report.
Risks and Uncertainties
The Directors have a process for identifying, evaluating and managing the
principal and emerging risks faced by the Company. The Board believes that the
Company has a relatively low risk profile in the context of the investment
trust industry. This belief arises from the fact that the Company has a simple
capital structure; invests only in small UK quoted companies; is not exposed
to derivatives and does not presently intend any such exposure; and outsources
all the main operational activities to recognised, well established firms.
The principal risks faced by the Company relate to investment
policy/performance, market risk, share price discount, gearing, reputational
risk and regulatory risk. An explanation of these risks and how they are
managed can be found in the Strategic Report contained within the 2022 Annual
Report. These principal risks and uncertainties continue to apply as disclosed
in the 2022 Annual Report and as updated by the Managers’ Report in these
interim statements.
Going Concern
The Directors are satisfied that the Company has sufficient resources to
continue in operation for the foreseeable future, a period of not less than 12
months from the date of this report. The Company’s assets comprise mainly
readily realisable equity securities and funding flexibility can typically be
achieved through the use of the Company’s borrowing facilities. Accordingly,
they continue to adopt the going concern basis in preparing the financial
statements.
DIRECTORS’ RESPONSIBILITY STATEMENT
The Directors confirm that, to the best of their knowledge:
(i) the condensed set of financial statements has been prepared in accordance
with Financial Reporting Standard 104 “Interim Financial Reporting”.
(ii) the Half Yearly Report includes a fair review of information required by:
(a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an
indication of important events during the first six months of the year and
their impact on the financial statements together with a description of the
principal risks and uncertainties for the remaining six months of the year;
and
(b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being
disclosure of related party transactions and changes therein.
(iii) the Half Yearly Report, taken as whole, is fair, balanced and
understandable and provides information necessary for Shareholders to assess
the Company’s performance, objective and strategy.
On behalf of the Board
Richard Davidson
Chairman
26 July 2023
INCOME STATEMENT (unaudited)
For the six months ended 30 June 2023
Revenue Capital Total
£’000 £’000 £’000
Realised net gains on sales - 34,230 34,230
Movement in fair value - (47,669) (47,669)
_______ _______ _______
Net (losses) on investments - (13,439) (13,439)
Investment income 27,591 - 27,591
Other income 51 - 51
Investment management fee (Note 2) (1,685) (2,809) (4,494)
Portfolio transaction costs - (1,173) (1,173)
Other expenses (431) - (431)
_______ _______ _______
Net return before finance costs and tax 25,526 (17,421) 8,105
Finance costs (Note 2) (792) (1,319) (2,111)
_______ _______ _______
Return on ordinary activities before tax 24,734 (18,740) 5,994
Tax on ordinary activities (82) - (82)
_______ _______ _______
Return attributable to equity shareholders 24,652 (18,740) 5,912
_______ _______ _______
Returns per Ordinary Share (Note 4) 29.04p (22.08)p 6.96p
Dividends
On 26 July 2023, the Board declared an interim dividend for the year ending 31
December 2023 of 12.95p per Ordinary Share (2022 – 12.05p), which will be
paid on 25 August 2023.
For the six months ended 30 June 2022
Revenue Capital Total
£’000 £’000 £’000
Realised net gains on sales - 16,084 16,084
Movement in fair value - (279,810) (279,810)
_______ _______ _______
Net (losses) on investments - (263,726) (263,726)
Investment income 27,311 - 27,311
Other income - - -
Investment management fee (Note 2) (1,929) (3,216) (5,145)
Portfolio transaction costs - (1,003) (1,003)
Other expenses (394) - (394)
_______ _______ _______
Net return before finance costs and tax 24,988 (267,945) (242,957)
Finance costs (Note 2) (259) (431) (690)
_______ _______ _______
Return on ordinary activities before tax 24,729 (268,376) (243,647)
Tax on ordinary activities - - -
_______ _______ _______
Return attributable to equity shareholders 24,729 (268,376) (243,647)
_______ _______ _______
Returns per Ordinary Share (Note 4) 28.43p (308.54)p (280.11)p
For the year ended 31 December 2022
Revenue Capital Total
£’000 £’000 £’000
Realised net gains on sales - 56,896 56,896
Movement in fair value - (252,652) (252,652)
_______ _______ _______
Net (losses) on investments - (195,756) (195,756)
Investment income 53,188 - 53,188
Other income 7 - 7
Investment management fee (Note 2) (3,513) (5,855) (9,368)
Portfolio transaction costs - (2,078) (2,078)
Other expenses (808) - (808)
_______ _______ _______
Net return before finance costs and tax 48,874 (203,689) (154,815)
Finance costs (Note 2) (704) (1,173) (1,877)
_______ _______ _______
Return on ordinary activities before tax 48,170 (204,862) (156,692)
Tax on ordinary activities - - -
_______ _______ _______
Return attributable to equity shareholders 48,170 (204,862) (156,692)
_______ _______ _______
Returns per Ordinary Share (Note 4) 55.64p (236.64)p (181.00)p
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS’ FUNDS
(unaudited)
For the six months ended 30 June 2023
Share capital £’000 Capital redemption reserve £’000 Special reserve £’000 Capital reserve £’000 Revenue reserve £’000 Total £’000
Balance as at 31 December 2022 853 135 50,481 1,109,683 89,718 1,250,870
Return on ordinary activities after tax - - - (18,740) 24,652 5,912
Equity dividends paid - - - - (30,084) (30,084)
Purchase of Ordinary Shares (6) 6 (7,501) - - (7,501)
_______ _______ _______ ________ _______ ________
Balance as at 30 June 2023 847 141 42,980 1,090,943 84,286 1,219,197
_______ _______ _______ ________ _______ ________
For the year ended 31 December 2022
Share capital £’000 Capital redemption reserve £’000 Special reserve £’000 Capital reserve £’000 Revenue reserve £’000 Total £’000
Balance as at 31 December 2021 879 109 83,777 1,314,545 73,255 1,472,565
Return on ordinary activities after tax - - - (204,862) 48,170 (156,692)
Equity dividends paid - - - - (31,707) (31,707)
Purchase of Ordinary Shares (26) 26 (33,296) - - (33,296)
_______ _______ _______ ________ _______ ________
Balance as at 31 December 2022 853 135 50,481 1,109,683 89,718 1,250,870
_______ _______ _______ ________ _______ ________
For the six months ended 30 June 2022
Share capital £’000 Capital redemption reserve £’000 Special reserve £’000 Capital reserve £’000 Revenue reserve £’000 Total £’000
Balance as at 31 December 2021 879 109 83,777 1,314,545 73,255 1,472,565
Return on ordinary activities after tax - - - (268,376) 24,729 (243,647)
Equity dividends paid - - - - (21,262) (21,262)
Purchase of Ordinary Shares (12) 12 (16,706) - - (16,706)
_______ _______ _______ ________ _______ ________
Balance as at 30 June 2022 867 121 67,071 1,046,169 76,722 1,190,950
_______ _______ _______ ________ _______ ________
BALANCE SHEET
(unaudited)
As at 30 June 2023
30 June 31 December 30 June
2023 2022 2022
£’000 £’000 £’000
Fixed assets
Investments at fair value through profit or loss (Note 5) 1,262,992 1,322,261 1,246,040
________ ________ ________
Current assets
Investment income receivable 4,151 2,118 2,637
Amounts due from brokers 8,461 - -
Other debtors 41 27 46
Cash at bank 10,710 1,668 906
________ ________ ________
23,363 3,813 3,589
________ ________ ________
Creditors (amounts falling due within one year)
Amounts due to brokers (2,096) - (555)
Bank debt facility - (74,973) -
Other creditors (252) (231) (184)
________ ________ ________
(2,348) (75,204) (739)
________ ________ ________
Net current assets/(liabilities) 21,015 (71,391) 2,850
________ ________ ________
Total assets less current liabilities 1,284,007 1,250,870 1,248,890
Creditors (amounts falling due after more than one year)
Bank debt facility (64,810) - (57,940)
________ ________ ________
TOTAL NET ASSETS 1,219,197 1,250,870 1,190,950
________ ________ ________
CAPITAL AND RESERVES: EQUITY INTERESTS
Share Capital
Ordinary Shares 847 853 867
Reserves
Capital redemption reserve 141 135 121
Special reserve 42,980 50,481 67,071
Capital reserve 1,090,943 1,109,683 1,046,169
Revenue reserve 84,286 89,718 76,722
________ ________ ________
TOTAL SHAREHOLDERS’ FUNDS 1,219,197 1,250,870 1,190,950
________ ________ ________
Net Asset Value per share (Note 6) 1,438.50p 1,465.67p 1,373.14p
CASH FLOW STATEMENT
(unaudited)
For the six months ended 30 June 2023
Six months ended Six months ended Year ended
30 June 2023 30 June 2022 31 December 2022
£’000 £’000 £’000
Net cash inflow from operating activities 20,586 20,853 42,630
Investing activities
Purchases of investments (127,971) (108,457) (250,161)
Sales of investments 166,262 152,922 284,746
_______ _______ _______
Cash inflow from investing activities 38,291 44,465 34,585
Financing activities
Purchases of Ordinary Shares (7,501) (17,436) (34,026)
Equity dividends paid (30,084) (21,262) (31,707)
Interest and fees paid (2,250) (632) (1,732)
Gross drawdowns of bank debt facilities (before any costs) 20,000 43,000 126,000
Gross repayments of bank debt facilities (before any costs) (30,000) (71,500) (137,500)
_______ _______ _______
Cash (outflow) from financing activities (49,835) (67,830) (78,965)
Change in cash during the period 9,042 (2,512) (1,750)
_______ _______ _______
Cash at the start of the period 1,668 3,418 3,418
Cash at the end of the period 10,710 906 1,668
_______ _______ _______
NOTES TO THE FINANCIAL STATEMENTS
1. Accounting Standards
The financial statements have been prepared on a going concern basis and in
accordance with the Financial Reporting Standard 104 and the AIC’s Statement
of Recommended Practice “Financial Statements of Investment Trust Companies
and Venture Capital Trusts”. The total column of the Income Statement is the
profit and loss account of the Company. All revenue and capital items in the
Income Statement are derived from continuing operations. No operations were
acquired or discontinued in the period. The same accounting policies used for
the year ended 31 December 2022 have been applied.
2. Investment Management Fee and Bank Borrowings
The Managers, Aberforth Partners LLP, receive an annual management fee,
payable quarterly in advance, equal to 0.75% of net assets up to £1 billion,
and 0.65% thereafter.
The investment management fee and finance costs of bank borrowings have been
allocated 62.5% to capital reserve and 37.5% to revenue reserve, in line with
the Board’s expected long term split of returns, in the form of capital
gains and income respectively, from the investment portfolio of the Company.
3. Dividends
Six months ended Six months ended Year ended
30 June 2023 30 June 2022 31 December 2022
£’000 £’000 £’000
Amounts recognised as distributions to equity holders in the period:
Final dividend of 24.25p for the year ended 31 December 2021 - 21,262 21,262
Interim dividend of 12.05p for the year ended 31 December 2022 - - 10,445
Final dividend of 26.95p for the year ended 31 December 2022 23,000 - -
Special dividend of 8.30p for the year ended 31 December 2022 7,084 - -
______ ______ ______
30,084 21,262 31,707
______ ______ ______
The interim dividend for the year ending 31 December 2023 of 12.95p (2022 –
12.05p) will be paid on 25 August 2023 to shareholders on the register on 4
August 2023. The ex dividend date is 3 August 2023. The interim dividend has
not been included as a liability in these financial statements.
4. Returns per Ordinary Share
The returns per Ordinary Share are based on the following.
30 June 2023 30 June 2022 31 December 2022
Returns attributable to Ordinary Shareholders £5,912,000 £(243,647,000) £(156,692,000)
Weighted average number of shares in issue during the period 84,888,578 86,981,282 86,570,115
Return per Ordinary Share 6.96p (280.11)p (181.00)p
5. Investments at fair value
In accordance with FRS 102 and FRS 104, fair value measurements have been
classified using the fair value hierarchy:
Level 1 - using unadjusted quoted prices for identical instruments in an
active market;
Level 2 - using inputs, other than quoted prices included within Level 1, that
are directly or indirectly observable (based on market data); and
Level 3 - using inputs that are unobservable (for which market data is
unavailable).
Investments held at fair value through profit or loss
Level 1 Level 2 Level 3 Total
As at 30 June 2023 £'000 £'000 £'000 £'000
Listed equities 1,262,992 - - 1,262,992
Unlisted equities - - - -
________ ________ ________ ________
Total financial asset investments 1,262,992 - - 1,262,992
________ ________ ________ ________
Level 1 Level 2 Level 3 Total
As at 31 December 2022 £'000 £'000 £'000 £'000
Listed equities 1,322,261 - - 1,322,261
Unlisted equities - - - -
________ ________ ________ ________
Total financial asset investments 1,322,261 - - 1,322,261
________ ________ ________ ________
Level 1 Level 2 Level 3 Total
As at 30 June 2022 £'000 £'000 £'000 £'000
Listed equities 1,246,040 - - 1,246,040
Unlisted equities - - - -
________ ________ ________ ________
Total financial asset investments 1,246,040 - - 1,246,040
________ ________ ________ ________
6. Net Asset Value per Ordinary Share
The net assets and the net asset value per share attributable to the Ordinary
Shares at each period end are calculated in accordance with their entitlements
in the Articles of Association and were as follows.
30 June 2023 31 December 2022 30 June 2022
Net assets attributable £1,219,197,000 £1,250,870,000 £1,190,950,000
Ordinary Shares in issue at end of period 84,754,605 85,344,605 86,731,924
Net Asset Value per Ordinary Share 1,438.50p 1,465.67p 1,373.14p
7. Share Capital
During the period, the Company bought back and cancelled 590,000 shares (2022:
1,216,342) at a cost of £7,501,000 (2022: £16,706,000). 105,000 shares have
been bought back for cancellation between 1 July 2023 and 26 July 2023.
8. Related party transactions
There have been no transactions with related parties during the first six
months of the current financial year that have materially affected the
financial position or the performance of the Company. Under UK accounting
standards, the Directors have been identified as related parties and their
fees and interests are disclosed in the 2022 Annual Report.
9. Alternative Performance Measures
Alternative Performance Measures ("APMs") are measures that are not defined by
FRS 102 and FRS 104. The Company believes that APMs, referred to within
‘Financial Highlights’ on page 1 of the Half Yearly Report, provide
Shareholders with important information on the Company and are appropriate for
an investment trust. These APMs are also a component of reporting to the
Board. A glossary of APMs can be found in the 2022 Annual Report.
10. Further Information
The foregoing do not constitute statutory accounts of the Company (as defined
in section 434(3) of the Companies Act 2006). The financial information for
the year ended 31 December 2022 has been extracted from the statutory
accounts, which have been filed with the Registrar of Companies. The Auditor
issued an unqualified opinion on those accounts and did not make any
statements under section 498(2) or (3) of the Companies Act 2006. All
information shown for the six months to 30 June 2023 is unaudited.
Certain statements in this report are forward looking. By their nature,
forward looking statements involve a number of risks, uncertainties or
assumptions that could cause actual results or events to differ materially
from those expressed or implied by those statements. Forward looking
statements regarding past trends or activities should not be taken as
representation that such trends or activities will continue in the future.
Accordingly, undue reliance should not be placed on forward looking
statements.
Copies of the Half Yearly Report will be sent to shareholders and will be
available shortly from Aberforth Partners LLP, 14 Melville Street, Edinburgh,
EH3 7NS or from the website www.aberforth.co.uk. A copy will also shortly be
available for inspection at the National Storage Mechanism at:
https://data.fca.org.uk/#/nsm/nationalstoragemechanism.
CONTACT:
Euan Macdonald (Telephone: 0131 220 0733)
Aberforth Partners LLP, Managers and Secretaries
26 July 2023
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