Half-year Report
26/07/2024 11:54
Aberforth Smaller Companies Trust plc
Half Yearly Report for the six months to 30 June 2024
The following is an extract from Aberforth Smaller Companies Trust plc’s
Half Yearly Report for the six month period to 30 June 2024.
FINANCIAL HIGHLIGHTS
Total Return Performance %
Net Asset Value per Ordinary Share 13.1
Deutsche Numis Smaller Companies Index (excluding Investment Companies) 5.4
Ordinary Share Price 12.9
30 June 2024 31 December 2023 30 June 2023
Shareholders’ Funds £1,426m £1,297m £1,219m
Market Capitalisation 1 £1,272m £1,163m £1,044m
Actual Gearing employed 1 6.5% 5.1% 3.6%
Net Asset Value per Ordinary Share 1,694.73p 1,536.73p 1,438.50p
Ordinary Share price 1 1,512.00p 1,378.00p 1,232.00p
Ordinary Share discount 1 10.8% 10.3% 14.4%
Interim dividend of 13.60p per share for the year ended 31 December 2024,
which is 5.0% higher than the previous year’s 12.95p per share.
1Alternative Performance Measures (refer to Note 9 and the 2023 Annual
Report)
INVESTMENT OBJECTIVE
The investment objective of the Company is to achieve a net asset value total
return (with dividends reinvested) greater than that of the Deutsche Numis
Smaller Companies Index (excluding Investment Companies) (“DNSCI (XIC)”)
over the long term.
Chairman’s Statement
Review of performance
ASCoT’s net asset value total return in the six months to 30 June 2024 was
+13.1%, while its share price total return was +12.9%. The difference
between the two numbers reflected a slight widening of the discount of the
share price to the net asset value per share. This was a particularly good
performance for a six month period and compares well with the +5.4% total
return from the benchmark index, the Deutsche Numis Smaller Companies Index
(excluding investment companies (DNSCI (XIC)). Large UK companies,
represented by the FTSE All-Share, recorded a +7.4% return.
So strong an investment performance was not the obvious outcome against a
background of wars, elections and recessions, but markets move to their own
beat. As 2023 drew to a close, valuations of small UK quoted companies were
so low that it seemed something had to give. The immediate challenge to the
despondency has come in the form of takeover activity. Bigger companies,
overseas companies and private equity have spotted the opportunity in small UK
quoted companies even as institutional and retail investors lose interest.
The other important development has been a further decline in the inflation
rate. This has inspired the market to look ahead to the prospect of lower
interest rates and beyond that to an upturn in economic activity.
The Managers’ Report explains how this investment environment has affected
ASCoT’s performance, as well as setting out the portfolio’s positioning
and valuation.
Dividends
ASCoT enjoyed a very strong income performance in 2023. Dividend receipts
from investee companies were the highest ever and one third above their 2019
level before the pandemic. For 2024, a modest decline in underlying dividend
receipts (i.e. excluding special dividends) is currently expected. This
reflects the recession in the second half of last year and weaker trading
conditions encountered by investee companies.
Notwithstanding this cyclical weakness, the Board expects to be able to meet
its ambition to grow ASCoT’s 2024 full year dividend above the rate of
inflation. We take confidence both from the Managers’ dividend estimates
and from ASCoT’s healthy revenue reserves. These reserves amounted to
80.1p per Ordinary Share at the start of the year, equivalent to roughly 1.9
times last year’s underlying dividend. On the basis of current forecasts,
we do not anticipate using these reserves in respect of 2024.
The Board is pleased to announce an interim dividend of 13.60p per Ordinary
Share. This is 5.0% higher than the previous year’s 12.95p. As was the
case last year, 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 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 29 August 2024 to Shareholders on the
register at the close of business on 9 August 2024. The ex-dividend date is
8 August 2024. 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
ASCoT benefits from a £130m credit facility from The Royal Bank of Scotland
International Limited, which runs to 15 June 2026. The facility is deployed
tactically to take advantage of periods of equity market stress, with a view
to increasing investment returns for Shareholders. ASCoT has been geared on
four occasions over its 33 year history. The present opportunity arose amid
the pandemic in 2020, since when gearing has enhanced returns. Because
portfolio valuations remain depressed, the Board and Managers believe it
appropriate that ASCoT remains geared. Influenced by the timing of M&A
activity within the portfolio, the gearing ratio has varied through the first
half of 2024. At 30 June 2024, £98m of the credit facility was deployed and
the gearing ratio was 6.5%.
Share buy-back
The Board believes that buy-backs provide an increase in liquidity at the
margin for those Shareholders looking to crystallise their investment and, at
the same time, deliver an economic uplift for those Shareholders wishing to
remain invested in the Company.
In the six months to 30 June 2024, 275,000 shares were bought back and
cancelled. The total value of these repurchases was £3.7m, on an average
discount of 12%. Since 2008, ASCoT’s share buy-backs have totalled £161m
and added £24m of value to Shareholders.
Annual General Meeting (AGM)
All resolutions at the AGM held on 5 March 2024 were passed, including
approval for the renewal of authority to buy back up to 14.99% of ASCoT’s
Ordinary Shares
Conclusion
Financial markets are never boring. The revaluation of those companies
enabling artificial intelligence (AI) has been extraordinary, exemplified by
Nvidia as it vies to be the world’s most valuable company. Its staggering
ascent has been a challenge to the valuation of other companies and indeed
asset classes. The effect has been akin to that of a black hole, sucking
liquidity and interest away from other investment opportunities. Whether
Nvidia and the others go on to justify investors’ confidence remains to be
seen – markets do tend to overshoot in both directions.
Small UK quoted companies are a case in point. At the end of 2023 the market
was deeply despondent about their prospects. This left their valuations
vulnerable to good news, or at least less bad news, which has come in the form
of numerous bids for UK companies and improving inflation reports. It is
most encouraging that ASCoT has taken advantage of this renewed interest in
the asset class to start 2024 with good investment returns.
Of course, it would be unwise to expect the stockmarket to deliver the further
reappraisal of smaller companies in an uninterrupted fashion. After all, a
clear lesson from the last couple of years is the unpredictability of
inflation data, which has affected monetary policy and economic activity. To
this we should add the on-going uncertainties at the political level. The
decisive election outcome should improve perceptions of the UK, but the
actions of the new government remain to be determined. Meanwhile, France’s
election highlights political strain within the EU and the American
presidential election looms.
However, the Board remains optimistic about ASCoT’s prospects for several
reasons. Our discussions with the Managers and their reports make clear that
ASCoT invests in good businesses – they are well run, they have strong
balance sheets, and they grow their profits and dividends over time.
Additionally, despite the improvement of the first half of the year,
valuations remain attractive both in relation to history and to equities in a
broader international context. Furthermore, the Managers are unwaveringly
committed to their investment approach and value investment philosophy, a
consistency which has served ASCoT well over its 33 years even as the markets
ebb and flow.
Richard Davidson
Chairman
26 July 2024
richard.davidson@aberforth.co.uk
Managers’ Report
Investment background
Over the six months to 30 June 2024, ASCoT’s net asset value total return
was +13.1%. This compares with a +5.4% return from ASCoT’s benchmark, the
DNSCI (XIC), and with a +7.4% return from large companies in the form of the
FTSE All-Share.
This good start to 2024 has its roots in the very low valuations ascribed by
the stockmarket to small UK quoted companies as 2023 drew to a close – with
sentiment so negative, it was never going to take much to bring improved
investment performance. The first half has indeed brought encouraging
developments for the UK’s economy, its politics and its stockmarket.
• On the economic front, recession has been a persistent
concern over the past two years. Higher inflation and interest rates
threatened a slowdown in domestic activity, which became noticeable in the
trading statements of smaller companies from the second quarter of 2023. We
now know that there was indeed a recession in the second half of last year.
It was, though, a mild and short downturn, much less severe than some
commentators had expected. Growth remains subdued, but, with the rate of
inflation easing, there is the prospect of lower interest rates later in the
year. In turn, more accommodating monetary policy should herald more
favourable trading conditions for companies and an upturn in the profit cycle.
• To many outside observers, the UK’s political situation
since the EU referendum has been baffling. Perceptions of political
dysfunction have discouraged investment in UK equities and affected their
valuation relative to other markets. However, the UK’s seeming monopoly on
political uncertainty is becoming less clearcut. On the one hand, the
General Election has delivered a government with a decisive majority that
should not be in thrall to the more extreme elements of the ruling party. On
the other hand, the politics of several other western democracies threaten to
become less certain. The EU elections have seen an upswing in support for
populist parties and have precipitated a potentially destabilising
parliamentary election in France. Meanwhile, the US faces its own democratic
test later in the year, with the outcome still far from certain.
• Concerns that the UK stockmarket may not be fit for
purpose intensified in 2023 when Arm, the semiconductor business, chose to
list in the US. Before that, there was a broadening recognition by
government and regulators that the UK’s capital markets could be improved.
A slew of initiatives – such as the Edinburgh Reforms, the Mansion House
Compact, the FCA’s review of listing rules and consultation for a UK ISA –
has followed. It is easy to be sceptical about each of these in isolation,
but official recognition of the issue and the general direction of travel are
encouraging. However, taking a step back, it is worth reflecting on whether
the UK stockmarket has a particular problem. After all, de-equitisation and
the loss of companies to private capital have been features of many markets
for two decades. The unusual stockmarket in the global context has not been
the UK, but the US with the extraordinary and incredible valuations accorded
to a small number of technology giants. From their daily interactions with
the UK stockmarket, the Managers believe that it can value companies fairly
over time. The valuation process may be complicated by concerns about the
economic cycle and by politics, but these ebb and flow and currently enhance
the opportunity in UK equities.
As equity investors mull this opportunity, the first half of 2024 brought
clear evidence of how gaps between stockmarket valuations and companies’
intrinsic value can be bridged – M&A activity continued at an elevated
rate. Larger companies, overseas companies and private equity have
identified the opportunity in depressed UK valuations and are emerging as the
marginal buyers of UK equities.
Over the six months, the investment universe saw agreed bids for seven
companies announced and there were numerous approaches for other companies.
Of the agreed deals, ASCoT had holdings in three, which together accounted for
around one third of ASCoT’s out-performance against the DNSCI (XIC) in the
period. Throughout its history, ASCoT’s performance tends to have
benefited from M&A – part of the Managers’ investment approach is to
consider who might want to own a company if the stockmarket proves unwilling
to value it appropriately. However, given how low valuations are at present,
there is a heightened risk that companies are sold too cheaply. Some company
boards, influenced by the pervasive gloom about the UK and sometimes
encouraged by other Shareholders, have been too quick to yield to takeover
interest.
Where takeover valuations fall short of their determination of intrinsic
value, the Managers vote against the proposed deals or engage to seek improved
terms from the acquirers. However, the chance of a better outcome for
Shareholders is improved by timely consultation by boards of target companies
before they agree to a deal. In order to engage constructively, the Managers
are prepared to be taken inside for extended periods. To be clear, the
purpose of these engagement efforts is not to protect the UK stockmarket but
to improve investment results for ASCoT’s Shareholders.
Analysis of performance and portfolio characteristics
Over the six months to 30 June 2024, ASCoT’s net asset value total return
was +13.1% and the DNSCI (XIC)’s was +5.4%. An analysis of the difference
between the two numbers is shown in the table below. The most significant
influence on the performance attributable to the portfolio of investments was
M&A activity: as noted above, the three companies that announced agreed bids
in the period accounted for 240 basis points of relative performance.
For the six months ended 30 June 2024 Basis points
Attributable to the portfolio of investments, based on mid prices 746
(after transaction costs of 8 basis points)
Movement in mid to bid price spread 11
Cash/gearing 47
Purchase of ordinary shares 4
Management fee (36)
Other expenses (3)
Total attribution based on bid prices 769
Note: 100 basis points = 1%. Total Attribution is the difference between the
total return of the NAV and the Benchmark Index (i.e. NAV = 13.12%; Benchmark
Index = 5.43%; difference is 7.69% being 769 basis points).
The next table sets out a series of characteristics of both the portfolio and
the DNSCI (XIC). The paragraphs that follow provide context and explanation
for these characteristics and for ASCoT’s performance in the first half of
2024.
Portfolio characteristics 30 June 2024 30 June 2023
ASCoT DNSCI (XIC) ASCoT DNSCI (XIC)
Number of companies 77 339 78 339
Weighted average market capitalisation £624m £986m £528m £945m
Weighting in “smaller small” companies * 56% 27% 60% 31%
Portfolio turnover over prior 12 months 19% N/A 21% N/A
Active share 73% N/A 76% N/A
Price earnings (PE) ratio (historical) 10.2x 13.5x 7.1x 10.8x
Dividend yield (historical) 3.8% 3.4% 4.2% 3.5%
Dividend cover (historical) 2.6x 2.2x 3.4x 2.6x
*“Smaller small” companies are members of the DNSCI (XIC) that are not
also members of the FTSE 250
Style & size
The Managers’ value investment style has been helpful to ASCoT’s returns
since the start of the pandemic rally in late 2020. Higher inflation and
interest rates have contributed to a more favourable environment for the value
investor. So far in 2024, the London Business School’s analysis of style
effects within the DNSCI (XIC) suggests little difference between the
performances of the index’s value and growth cohorts, with the latter very
slightly ahead of the former. This would imply that style did not have a
meaningful effect on ASCoT’s relative returns in the six month period.
Size positioning relative to the DNSCI (XIC) was more helpful. ASCoT retains
its higher exposure to “smaller small” companies. FTSE 250 stocks
represent 73% of the total value of the DNSCI (XIC) but only 44% of ASCoT’s
portfolio. The Managers’ preference for the smaller non FTSE 250 companies
is motivated by their lower valuations. Over the six months to 30 June 2024,
“smaller small” companies out-performed the FTSE 250, which indicates a
boost to ASCoT’s return from its size positioning.
Balance Sheets
The table below shows the balance sheet profile of the portfolio and of the
Tracked Universe, which is a subset of the DNSCI (XIC). It comprises 227
companies, which the Managers follow closely and which together represent 98%
by value of the total DNSCI (XIC) index.
Weight in companies with: Net cash Net debt/EBITDA < 2x Net debt/EBITDA > 2x Other*
Portfolio: 2024 34% 45% 14% 7%
Tracked universe: 2024 37% 39% 17% 6%
*Includes loss-makers and lenders
Notwithstanding the recession in the second half of 2023, small companies’
balance sheets remain in good condition. The table above shows that over one
third of both the investment universe and ASCoT’s portfolio is represented
by companies with net cash on their balance sheets. This resilience has
allowed companies to continue to invest despite the tougher trading
conditions. The ratio of capital expenditure to depreciation for companies
with December year ends, which reported their 2023 results in the first
quarter of 2024, was a healthy 1.2x. Balance sheet strength has also
contributed to an upsurge in share buy-back activity. Fourteen of ASCoT’s
holdings repurchased shares in the first half of 2024, as boards sought to
take advantage of depressed stockmarket valuations.
Income
The table below divides ASCoT’s 77 holdings in categories that are
determined by each company’s most recent dividend action. The balance of the
analysis is positive, with the most populated category being Increased Payers.
Nil P ayer Cutter Unchanged Payer Increased Payer New/Returner
14 15 12 34 2
The main change compared with twelve months ago is the higher number of
Cutters. This reflects the recession and more challenging trading conditions
in the second half of 2023. Consistent with this, it is likely that ASCoT’s
dividend income from its holdings will be lower in 2024 than it was in 2023.
However, last year’s dividend experience was extremely strong and so, on the
basis of current estimates for the rest of the year, it is likely that the
Board will be able to meet its dividend ambition and have the option to
strengthen revenue reserves further.
The average historical yield of ASCoT’s 77 holdings was 3.8% at 30 June
2024, which is down from 4.2% twelve months earlier. Dividend cover has
declined from 3.4x to 2.6x. This is because dividends have proved more
resilient than have profits through the recent downturn. Such resilience
reflects the strong balance sheets previously described. It is also
influenced by a general appreciation among investee company boards of the
importance of dividends to their investors, particularly when broad interest
in UK equities is at a low ebb.
ASCoT’s gearing
At 30 June 2024, ASCoT’s gearing ratio was 6.5%, up from 5.1% at the start
of the year. The ratio has oscillated through the period with share price
movements and as proceeds from holdings subject to takeovers have been
received.
ASCoT employs gearing tactically to take advantage of periods of stress in
financial markets. The current instance of gearing is the fourth since
launch in 1990 and stems from the pandemic in 2020. Since then, gearing has
enhanced investment returns, but valuations of smaller companies remain very
attractive. As long as the opportunity embedded in these valuations remains,
it is appropriate for ASCoT to be geared.
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% for ASCoT’s portfolio compared with the
DNSCI (XIC). At 30 June 2024, it stood at 73%.
Value roll and portfolio turnover
The main influence on ASCoT’s portfolio turnover in any period is usually
the stockmarket’s appetite for small UK quoted companies. If prices and
valuations are rising, the upsides to the Managers’ target prices are likely
to be narrowing. All else being equal, this would encourage the rotation of
ASCoT’s capital from companies with lower upsides to those with higher
upsides. The Managers’ term this dynamic the “value roll” and it has
made an important contribution to ASCoT’s capital and income returns over
the years. It follows that periods of higher portfolio turnover are often
associated with strong returns for ASCoT.
Over the twelve months to 30 June 2024, portfolio turnover, defined as the
lower of purchases and sales divided by average portfolio value, was 19%.
This is below the long term average of 34%. Notwithstanding ASCoT’s
positive return in the six month period, this suggests that there was less
opportunity for “value roll” than usual. This is another symptom of the
deep under-valuation of small UK quoted companies – if the stockmarket does
not reflect their true value, there is every incentive to maintain the
position.
Valuations
The valuations of UK equities in general and small UK quoted companies in
particular remain attractive. The Managers’ Report published in January
described how ASCoT benefited from three layers of valuation advantage: (1)
the PE ratio of UK equities is lower than that of the rest of the world; (2)
the PE of smaller companies is lower than that of large UK companies; (3) the
PE ratio of ASCoT’s portfolio is lower than that of small UK quoted
companies. This triple discount was still in place at 30 June 2024, but,
importantly, there are signs that a re-rating is under way.
The chart below depicts the historical PE ratio of ASCoT’s portfolio. At
the start of 2024, the PE was 7.9x, a rating consistent with recession. The
previous three occasions on which the PE has reached this level have come with
economic downturns: the early 1990s recession at the left of the chart, the
global financial crisis in the middle and the pandemic recession in 2020. On
each occasion, the de-rating of the portfolio’s companies has been followed
by a re-rating, as the stockmarket moves from worrying about falling earnings
to enthusing about earnings recovery. The chart indicates that we are in the
early stages of a similar recovery, with the average PE of the portfolio
having risen to 10.2x at 30 June 2024.
Both the numerator and the denominator of the PE ratio contributed to its rise
over the first six months of 2024. Share prices have risen even as earnings
reported by companies have declined –data from London Business School
suggest that small company profits declined by 8% in 2023. The stockmarket
looks ahead and, gaining confidence from easing inflation and a likely peak in
interest rates, is starting to anticipate a turn in the profits cycle. The
opportunity for recovery in profits comes from both the impact of last
year’s recession and the pandemic’s lingering effects, such as the
extensive supply chain problems.
As the chart suggests, there is scope for a further re-rating as profits
recover. Of the three earlier recessions in ASCoT’s lifetime, one – the
early 1990s downturn – was caused by inflation and the monetary policy
reaction. The table below shows how the recession played out and its impact
on small UK quoted companies.
1990 1991 1992 1993 Cumulative 1991-93
UK economic context
GDP YoY +0.6% -1.4% +0.2% +2.3% +1.1%
CPI YoY +7.0% +7.5% +4.2% +2.4% +15.9%
Year end base rates 13.9% 10.4% 6.9% 5.4% -
DNSCI (XIC)* experience
Year end PE ratio 8.2x 11.3x 13.9x 18.6x -
Implied earnings growth +1.8% -13.7% -13.0% +6.2% -20.3%
Total return -23.5% +18.9% +7.1% +41.5% +80.2%
*Taken or calculated from London Business School data
The table shows that small company share prices fell in 1990 as the market
anticipated the recession in 1991 and two years of sharp declines in
earnings. However, even as the profit downturn played out, share prices
started to rise as the market was encouraged by lower interest rates to
anticipate an upturn in earnings. That upturn duly arrived in 1993, which
precipitated further share prices gains. Over the period, small company
valuations took the strain as the year end PE ratio rose from 8.2x to 18.6x.
It is tempting to draw parallels between the early 1990s experience and the
current situation. In 2022, the total return from small companies was -17.9%
and the PE was 8.1x at the year end. In 2023, the recessionary conditions
meant that earnings declined by 8.2%, but the total return from the asset
class turned positive as the market started to anticipate recovery and took
the year end PE ratio up to 12.8x. In 2024 so far, the total return has
again been positive, even though earnings are likely to be flat to slightly
down over the year as a whole. The market again seems enthused by the
prospect of interest rate cuts, which in due course might bring an earnings
recovery in 2025.
Clearly, much could change over coming months and there is no guarantee that
the events of the early 1990s will be replicated. However, the experience
then serves as a useful reminder of how the market gets to grips with
inflection points in the economic cycle and looks through prevailing or near
term gloom.
Outlook and conclusion
Around the world, financial markets remain focused on the US interest rate
cycle. US economic data released through the first half of the year proved
more robust than anticipated – disinflation is happening, but uncertainty
about the future path of inflation remains higher than in the years before the
pandemic. This has contributed to a delay to the first cut to US interest
rates. Until the Federal Reserve moves, it is unlikely that other central
banks will be able to ease monetary policy in a meaningful fashion. Meanwhile,
financial markets are also contending with elevated geopolitical risk.
Russia’s invasion of Ukraine continues, while Israel and Hamas remain in
conflict. Elsewhere, the implications of recent elections and of those to come
add to the uncertainty. An additional complication for markets has been the
burgeoning fascination for AI. This promises significant productivity
benefits for many companies in due course but benefits a very small number of
stocks in the near term. Nvidia and its ilk have assumed truly incredible
valuations and, with their apparent promise of secular and low risk growth,
would appear to be sucking interest from other equities.
This has been an invidious backdrop for many asset classes, small UK quoted
companies included. However, such conditions give rise to investment
opportunities as the stockmarket inevitably overreacts in both directions.
There are several strands to the investment opportunity in front of ASCoT
today.
• The valuations of UK assets have attracted a discount
since the EU referendum as political uncertainty has deterred investment
activity. By giving Labour a convincing majority, the recent election
promises a period of greater stability. It will take time to understand
their priorities and the impact of their policies on the economy and markets,
but it is feasible that the UK could emerge from 2024 with a less uncertain
political situation than many of its western peers, which could help the
relative valuation of UK assets.
• The companies available to ASCoT in the investment
universe have good and well managed businesses. Their balance sheets are
strong and in normal economic conditions their profits grow. Using the five
years up to the end of 2019, to exclude the pandemic and its aftereffects,
small company dividend growth averaged 8% per annum. When the pandemic then
hit dividends by one third, they recovered fully in less than two years.
Such growth and resilience are not characteristics of poor companies.
• Having endured the downside of an economic slowdown, the
market is now contemplating an upturn in the economic cycle. Corporate
profitability should benefit as interest rates decline and, contemporaneously,
market valuations should also improve as has happened in previous recoveries.
• The on-going high rate of M&A activity is highlighting the
attractiveness of UK valuations and the quality of small UK quoted
companies. After all, it is unlikely that overseas companies and private
equity firms are buying UK companies merely to benefit from a cyclical
recovery in profits. The emergence of these M&A buyers, together with the
upsurge in share buy-backs by smaller companies, introduces marginal demand
from informed buyers for the asset class and mitigates the effect of retail
and institutional selling.
It is encouraging that these factors have begun to be recognised in stronger
share prices and higher valuations over recent months. The path to a fuller
and merited revaluation of the portfolio’s holdings is unlikely to be
smooth, but ASCoT is well placed to generate good medium and long term
investment returns for its Shareholders.
Aberforth Partners LLP
Managers
26 July 2024
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
strategy/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 2023 Annual
Report. These principal risks and uncertainties continue to apply as disclosed
in the 2023 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
26 July 2024
INCOME STATEMENT (unaudited)
For the six months ended 30 June 2024
Revenue Capital Total
£’000 £’000 £’000
Realised net gains on sales - 73,968 73,968
Movement in fair value - 72,570 72,570
_______ _______ _______
Net gains on investments - 146,538 146,538
Investment income 27,050 - 27,050
Other income 57 - 57
Investment management fee (Note 2) (1,770) (2,950) (4,720)
Portfolio transaction costs - (1,102) (1,102)
Other expenses (427) - (427)
_______ _______ _______
Net return before finance costs and tax 24,910 142,486 167,396
Finance costs (Note 2) (1,239) (2,066) (3,305)
_______ _______ _______
Return on ordinary activities before tax 23,671 140,420 164,091
Tax on ordinary activities - - -
_______ _______ _______
Return attributable to equity shareholders 23,671 140,420 164,091
_______ _______ _______
Returns per Ordinary Share (Note 4) 28.12p 166.78p 194.90p
Dividends
On 26 July 2024, the Board declared an interim dividend for the year ending 31
December 2024 of 13.60p per Ordinary Share (2023 – 12.95p), which will be
paid on 29 August 2024.
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
For the year ended 31 December 2023
Revenue Capital Total
£’000 £’000 £’000
Realised net gains on sales - 59,725 59,725
Movement in fair value - (1,293) (1,293)
_______ _______ _______
Net gains on investments - 58,432 58,432
Investment income 56,423 - 56,423
Other income 91 - 91
Investment management fee (Note 2) (3,350) (5,583) (8,933)
Portfolio transaction costs - (1,855) (1,855)
Other expenses (823) - (823)
_______ _______ _______
Net return before finance costs and tax 52,341 50,994 103,335
Finance costs (Note 2) (1,578) (2,631) (4,209)
_______ _______ _______
Return on ordinary activities before tax 50,763 48,363 99,126
Tax on ordinary activities (82) - (82)
_______ _______ _______
Return attributable to equity shareholders 50,681 48,363 99,044
_______ _______ _______
Returns per Ordinary Share (Note 4) 59.79p 57.05p 116.84p
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS’ FUNDS
(unaudited)
For the six months ended 30 June 2024
Share capital £’000 Capital redemption reserve £’000 Special reserve £’000 Capital reserve £’000 Revenue reserve £’000 Total £’000
Balance as at 31 December 2023 844 144 38,840 1,158,046 99,353 1,297,227
Return on ordinary activities after tax - - - 140,420 23,671 164,091
Equity dividends paid - - - - (31,686) (31,686)
Purchase of Ordinary Shares (3) 3 (3,695) - - (3,695)
_______ _______ _______ ________ _______ ________
Balance as at 30 June 2024 841 147 35,145 1,298,466 91,338 1,425,937
_______ _______ _______ ________ _______ ________
For the year ended 31 December 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 - - - 48,363 50,681 99,044
Equity dividends paid - - - - (41,046) (41,046)
Purchase of Ordinary Shares (9) 9 (11,641) - - (11,641)
_______ _______ _______ ________ _______ ________
Balance as at 31 December 2023 844 144 38,840 1,158,046 99,353 1,297,227
_______ _______ _______ ________ _______ ________
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
_______ _______ _______ ________ _______ ________
BALANCE SHEET
(unaudited)
As at 30 June 2024
30 June 31 December 30 June
2024 2023 2023
£’000 £’000 £’000
Fixed assets
Investments at fair value through profit or loss (Note 5) 1,519,222 1,363,980 1,262,992
________ ________ ________
Current assets
Investment income receivable 2,086 2,593 4,151
Amounts due from brokers 894 - 8,461
Other debtors 93 68 41
Cash at bank 5,691 2,734 10,710
________ ________ ________
8,764 5,395 23,363
________ ________ ________
Creditors (amounts falling due within one year)
Amounts due to brokers (3,892) - (2,096)
Other creditors (282) (305) (252)
________ ________ ________
(4,174) (305) (2,348)
________ ________ ________
Net current assets 4,590 5,090 21,015
________ ________ ________
Total assets less current liabilities 1,523,812 1,369,070 1,284,007
Creditors (amounts falling due after more than one year)
Bank debt facility (97,875) (71,843) (64,810)
________ ________ ________
TOTAL NET ASSETS 1,425,937 1,297,227 1,219,197
________ ________ ________
CAPITAL AND RESERVES: EQUITY INTERESTS
Share Capital
Ordinary Shares 841 844 847
Reserves
Capital redemption reserve 147 144 141
Special reserve 35,145 38,840 42,980
Capital reserve 1,298,466 1,158,046 1,090,943
Revenue reserve 91,338 99,353 84,286
________ ________ ________
TOTAL SHAREHOLDERS’ FUNDS 1,425,937 1,297,227 1,219,197
________ ________ ________
Net Asset Value per share (Note 6) 1,694.73p 1,536.73p 1,438.50p
CASH FLOW STATEMENT
(unaudited)
For the six months ended 30 June 2024
Six months ended Six months ended Year ended
30 June 2024 30 June 2023 31 December 2023
£’000 £’000 £’000
Net cash inflow from operating activities 22,441 20,586 46,160
Investing activities
Purchases of investments (163,680) (127,971) (255,193)
Sales of investments 156,872 166,262 270,051
_______ _______ _______
Cash (outflow)/inflow from investing activities (6,808) 38,291 14,858
Financing activities
Purchases of Ordinary Shares (3,695) (7,501) (11,641)
Equity dividends paid (31,686) (30,084) (41,046)
Interest and fees paid (3,295) (2,250) (4,265)
Gross drawdowns of bank debt facilities (before any costs) 56,000 20,000 52,000
Gross repayments of bank debt facilities (before any costs) (30,000) (30,000) (55,000)
_______ _______ _______
Cash (outflow) from financing activities (12,676) (49,835) (59,952)
Change in cash during the period 2,957 9,042 1,066
_______ _______ _______
Cash at the start of the period 2,734 1,668 1,668
Cash at the end of the period 5,691 10,710 2,734
_______ _______ _______
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 2023 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 2024 30 June 2023 31 December 2023
£’000 £’000 £’000
Amounts recognised as distributions to equity holders in the period:
Final dividend of 26.95p for the year ended 31 December 2022 - 23,000 23,000
Special dividend of 8.30p for the year ended 31 December 2022 - 7,084 7,084
Interim dividend of 12.95p for the year ended 31 December 2023 - - 10,962
Final dividend of 28.55p for the year ended 31 December 2023 24,091 - -
Special dividend of 9.00p for the year ended 31 December 2023 7,595 - -
______ ______ ______
31,686 30,084 41,046
______ ______ ______
The interim dividend for the year ending 31 December 2024 of 13.60p (2023 –
12.95p) will be paid on 29 August 2024 to shareholders on the register on 9
August 2024. The ex dividend date is 8 August 2024. 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 2024 30 June 2023 31 December 2023
Returns attributable to Ordinary Shareholders £164,091,000 £5,912,000 £99,044,000
Weighted average number of shares in issue during the period 84,192,569 84,888,578 84,766,084
Return per Ordinary Share 194.90p 6.96p 116.84p
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 2024 £'000 £'000 £'000 £'000
Listed equities 1,519,222 - - 1,519,222
Unlisted equities - - - -
________ ________ ________ ________
Total financial asset investments 1,519,222 - - 1,519,222
________ ________ ________ ________
Level 1 Level 2 Level 3 Total
As at 31 December 2023 £'000 £'000 £'000 £'000
Listed equities 1,363,980 - - 1,363,980
Unlisted equities - - - -
________ ________ ________ ________
Total financial asset investments 1,363,980 - - 1,363,980
________ ________ ________ ________
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
________ ________ ________ ________
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 2024 31 December 2023 30 June 2023
Net assets attributable £1,425,937,000 £1,297,227,000 £1,219,197,000
Ordinary Shares in issue at end of period 84,139,605 84,414,605 84,754,605
Net Asset Value per Ordinary Share 1,694.73p 1,536.73p 1,438.50p
7. Share Capital
During the period, the Company bought back and cancelled 275,000 shares (2023:
590,000) at a cost of £3,695,000 (2023: £7,501,000). No shares have been
bought back for cancellation between 1 July 2024 and 26 July 2024.
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 2023 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 and in 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 2023 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 2023 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 2024 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:
Jeremy Hall (Telephone: 0131 220 0733)
Aberforth Partners LLP, Managers and Secretaries
26 July 2024
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