Henderson Smllr Cos - Annual Financial Report and Final Dividend
03/08/2023 07:00
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RNS Number : 1245I Henderson Smaller Cos Inv Tst PLC 03 August 2023
JANUS HENDERSON FUND MANAGEMENT UK LIMITED
THE HENDERSON SMALLER COMPANIES INVESTMENT TRUST PLC
LEGAL ENTITY IDENTIFIER: 213800NE2NCQ67M2M998
THE HENDERSON SMALLER COMPANIES INVESTMENT TRUST PLC
ANNUAL FINANCIAL RESULTS FOR THE YEAR ENDED 31 MAY 2023
This announcement contains regulated information.
KEY HIGHLIGHTS
§ Final dividend increased to 19.0p per ordinary share (2022: 17.0p)
§ 20th consecutive year of growth in the annual dividend
§ Over the ten years to 31 May 2023, the Company has outperformed the
benchmark by 34.1%
§ Outperformed the benchmark in 16 of the last 20 years
Neil Hermon, Fund Manager, said:
"Despite it being a poor year for performance, as growth stocks de-rated
following the increase in interest rates, the long-term record of the Company
remains strong…"
INVESTMENT OBJECTIVE
The Company aims to maximise shareholders' total returns (capital and income)
by investing in smaller companies that are quoted in the United Kingdom.
PERFORMANCE
Total Return Performance for the years ended 31 May
1 year 3 years 5 years 10 years
% % % %
NAV(1) -13.8 12.4 -3.4 108.0
Benchmark(2) -6.5 30.4 3.1 73.9
Average sector NAV(3) -7.4 26.1 5.5 100.8
Share price(4) -12.0 8.8 -7.9 118.7
Average sector share price(5) -5.5 31.4 5.6 107.2
FTSE All-Share Index 0.4 33.9 15.2 67.5
Performance Year ended Year ended
31 May 2023 31 May 2022
NAV per share at year end 904.1p 1,074.4p
Share price at year end 785.0p 917.5p
Discount at year end(6) 13.2% 14.6%
Gearing at year end 12.6% 11.2%
Dividend for the year 26.00p(7) 24.00p
Revenue return per share 29.38p 24.57p
Dividend yield(8) 3.3% 2.6%
Total net assets £675m £803m
Ongoing charge(9) 0.44% 0.42%
1 Net asset value ("NAV") per ordinary share total return with income
reinvested
2 Numis Smaller Companies Index (excluding investment companies) total return
3 Average NAV total return of the Association of Investment Companies ("AIC")
UK Smaller Companies sector
4 Share price total return using mid-market closing price with income
reinvested
5 Average share price total return of the AIC UK Smaller Companies sector
6 Calculated using the NAV and mid-market share price at year end
7 This represents an interim dividend of 7.00p and a proposed final dividend
of 19.00p, subject to shareholder approval at the AGM
8 Based on the ordinary dividends paid and payable for the year and the
mid-market share price at year end
9 No performance fee is included in this calculation as no performance fee was
paid in 2023 or 2022
A glossary of terms and explanations of alternative performance measures are
included in the Annual Report.
Sources: Morningstar Direct, Janus Henderson, Refinitiv Datastream
CHAIR'S STATEMENT
Dear Shareholder
Performance
The year under review was disappointing: UK equity markets experienced
difficult and volatile conditions and the Company suffered negative absolute
returns. The Company also underperformed its benchmark, largely caused by
growth stocks remaining out of favour. In the financial year to 31 May 2023,
the Company's net asset value ("NAV") fell by 13.8% and the share price fell
by 12.0%, versus a 6.5% fall in the Numis Smaller Companies Index benchmark,
all on a total return basis. The AIC UK Smaller Companies NAV sector average
total return declined by 7.4%. Over the longer term, however, your Company's
NAV total return remains well ahead of the benchmark index; over the ten-year
period to 31 May 2023 your Company outperformed the benchmark by 34.1%. The
Fund Manager's Report provides a detailed review of the year.
Smaller companies underperformed the wider market in a turbulent environment
of rising interest rates and higher bond yields. High-quality smaller growth
stocks suffered as investors favoured larger liquid stocks. Some of our
cyclical investments saw earnings downgrades, leading to de-ratings, although
the majority of our companies continued to post strong results and saw no
material change in their investment thesis, trading or outlook.
Dividend and earnings
Positively, the total revenue received from your Company's portfolio rose from
£20.7 million to £24.4 million over the year, and our earnings per share
rose from 24.6p at 31 May 2022 to 29.4p at 31 May 2023. This reflects the
strong financial performance of the majority of our portfolio companies, which
were able to increase their dividends.
The Board is pleased to recommend an increased final dividend of 19.0p per
share which, subject to shareholder approval at the Annual General Meeting,
will be paid on 9 October 2023 to shareholders on the register at 25 August
2023. When added to the interim payment of 7.0p, this brings the full-year
dividend to 26.0p per share, an 8.3% increase from the 2022 full-year
distribution of 24.0p per share. This will be fully funded from current-year
revenue. I am delighted to report that this will be our 20th consecutive year
of growth in the annual dividend; the annualised increase in dividends paid
since 2003 equates to 21.8%. Your Company will now gain the AIC accolade of
'Dividend Hero'.
During the year we commenced a tracing and engagement programme to locate
shareholders who have not claimed their dividends for long periods of time. We
believe it is important to reunite shareholders with their lost assets, and
our project is designed to help them resolve the obstacles that may have
hindered claims to ownership and to take the required action.
Share rating
Your Company's share price discount to NAV fluctuated over the year between
17.4% and 8.2%, averaging 12.4% and closing the year at 13.2%. The share price
over the year fell from 917p to 785p, giving a total return of -12.0% and
reflecting a slight narrowing of the discount to net asset value.
During the year to 31 May 2023 no shares were issued or bought back. Your
Board continues to monitor the discount and regularly discusses the merits of
buying back shares. We do not currently believe that share buy-backs represent
the most effective way of generating long-term shareholder value.
Responsible investing
Our Fund Manager's approach to ESG investing has been embedded in the
Company's investment process for over 20 years. With the awareness that ESG
investment activities are increasingly important, I would refer shareholders
to our 'ESG Matters' report in the Annual Report for more information on how
the Company positions itself and for a report on engagement case studies
undertaken during the year.
Board developments
David Lamb, Senior Independent Director and marketing representative, retired
from the Board on 30 September 2022. I would like to thank David for his many
years of service and wise counsel on the Company's affairs. Kevin Carter has
taken on the role of Senior Independent Director and Michael Warren is the
Board's new marketing representative.
I am delighted that Yen Mei Lim joined the Board in April 2023 as our newest
non-executive director, in line with our long-term succession planning. With
over 20 years of experience in the financial services industry, and as a
qualified lawyer and accountant, Mei brings deep insight and expertise across
merger and acquisition activity, corporate development and finance,
particularly in the field of growth potential for smaller businesses committed
to resiliency, accessibility and sustainability.
We meet the national targets on gender and ethnic diversity, including the
targets set by the FCA's Listing Rules for all FTSE 350 members. According to
these targets, at least 40% of board members should be women, at least one
woman should hold a senior position, and at least one director should be from
an ethnic minority. As such we also meet the FTSE Women Leaders Review and
Parker Review recommendations. Please refer to the Annual Report for a fuller
disclosure about Board composition in the Governance report.
Annual General Meeting ("AGM")
We are pleased to invite shareholders to attend the AGM in person at our
registered office on Thursday, 5 October 2023 at 11.30 am. We encourage
shareholders to attend for the opportunity to meet the Board, the Fund Manager
Neil Hermon, and Deputy Fund Manager Indriatti van Hien. Neil and Indriatti
will give a presentation on the year under review and will discuss their
outlook for the year ahead. There will be an opportunity to ask questions and
debate, and to meet the Fund Manager, Deputy Fund Manager and directors after
the formal proceedings. Shareholders unable to join in person will be able to
join the meeting by Zoom.
We encourage all shareholders to submit their votes on the resolutions, all of
which come with the Board's endorsement, ahead of the deadline of Tuesday, 3
October 2023 to ensure that their vote counts at the AGM. Please see the AGM
Notice in the Annual Report for more information on joining and voting.
The Fund Manager discusses these results and performance during the year in a
video available from 9.00 am on the date of release of this announcement at
www.hendersonsmallercompanies.com (http://www.hendersonsmallercompanies.com) .
If you have any questions for the Board or the Fund Manager in advance of the
AGM, please contact us at itsecretariat@janushenderson.com
(mailto:itsecretariat@janushenderson.com) .
Outlook
It has been a difficult year and we remain cautious about the outlook, but are
confident in the ability of our Fund Manager and his team and in the
investment philosophy applied to the portfolio. The portfolio is weighted
towards companies with well-capitalised balance sheets and entrepreneurial
management teams, and as such we believe your Company is well positioned and
prepared to take advantage of the investment opportunities that lie ahead
despite the current uncertain market. In closing I would like to thank
shareholders for your continued support.
Penny Freer
Chair of the Board
FUND MANAGER'S REPORT
Fund performance
The Company had a disappointing year in performance terms, falling in absolute
terms and underperforming its benchmark. The share price fell by 12.0% and the
net asset value by 13.8% on a total return basis. This compared with a
decrease by 6.5% in the Company's benchmark total return, the Numis Smaller
Companies Index (excluding investment companies). The underperformance came
from a combination of the negative contributions from stock selection, gearing
and expenses. Negative contributions from stock selection were principally a
function of the underperformance of growth companies as they de-rated in
valuation terms due to market concerns about the impact of rising interest
rates and higher bond yields. In most cases, this was independent of the
operational and financial performance of these businesses, which remained, on
the whole, strong. Additionally, some of our cyclically exposed positions
suffered as the global economy weakened, leading to selective earnings
downgrades and consequent de-ratings. Despite it being a poor year for
performance, as growth stocks de-rated following the increase in interest
rates, the long-term record of the Company remains strong, outperforming its
benchmark in 16 of the last 20 years.
Market - year under review
The year under review was a volatile and ultimately negative one for UK equity
markets. Markets faced a number of challenges including a zero-tolerance
policy to Covid in China which suppressed economic growth and exacerbated
supply chain challenges, the ongoing conflict in Ukraine which kept energy
prices high, particularly in Western Europe, the persistent cost-of-living
crisis fuelled by high inflation and political instability in the UK,
primarily focused around the short-lived tenure of Liz Truss as Prime
Minister.
The principal driver of market returns, however, has remained central bank
policy. Inflation projections continued to worsen throughout the initial part
of the year and central banks, led by the Federal Reserve, European Central
Bank and Bank of England, raised interest rates aggressively. Despite
indications that headline inflation has peaked, core inflation has remained
sticky. Whilst goods inflation has started to ease, services inflation, driven
by supply side pressures and a tight labour market, has remained elevated.
Consequently, the messaging from central banks has remained hawkish regarding
the future path of interest rates. Rising interest rates and a move from
quantitative easing to quantitative tightening led to a weakening in global
economic growth in the period, putting pressure on corporate earnings.
The markets saw a continued flight to safety by investors who have taken
refuge from uncertain macroeconomic conditions by investing in larger, more
liquid and more international stocks. This has led to another year of
underperformance by smaller companies versus larger companies.
Gearing
Gearing started the year at 11.2% and ended at 12.6%. Debt facilities are a
combination of £30 million 20-year unsecured loan notes at an interest rate
of 3.33% issued in 2016, £20 million 30-year unsecured loan notes at 2.77%
issued in February 2022, and £85 million short-term bank borrowings.
As markets fell, the use of gearing was a negative contributor to performance
in the year. Gearing, however, has made a significant positive contribution to
investment performance over the 20 years I have managed the investment
portfolio.
Attribution analysis
The following tables show the top five contributors to, and the top five
detractors from, the Company's relative performance.
12-month return Relative contribution
% %
Principal contributors
Balfour Beatty +45.0 +0.9
National Express(1) -58.1 +0.6
Oxford Instruments +25.0 +0.6
RPS Group +114.5 +0.5
John Wood(1) -41.1 +0.4
1 Not owned by the Company
Balfour Beatty is an international contractor and infrastructure investor. New
management has transformed the business over the last few years, driving
margins higher across all operational activities in the UK, US and Hong Kong
whilst maintaining the significant value of the infrastructure investment
portfolio. Significantly improved cashflow has allowed the business to
accelerate returns to shareholders through ongoing share buybacks and
increased dividends. Given likely increased infrastructure investment in its
key markets, the company looks well placed to continue to deliver growth in
earnings, cashflow and returns to investors.
National Express (now Mobico) is an international operator of bus and rail
services. The business has struggled to rebuild profitability post-Covid as
weaker demand and higher wage costs have impacted the business. Additionally,
the business suffers from high levels of debt. The Company did not own a
position in this stock.
Oxford Instruments is a manufacturer of advanced instrumentation equipment.
The company benefits from servicing a number of high-growth industries such as
semiconductors, quantum computing, life sciences and advanced materials. In
addition, its 'Horizon' programme of business improvement is driving sales,
profit and margin growth. The company has a very strong balance sheet and,
given a positive outlook for its end markets, the company is well placed for
the future.
RPS Group is an independent environmental, health, safety and risk consulting
group, which provides scientific, planning and design advice to customers in
the commercial and government sectors. Formed by a series of acquisitions, the
group has gone through significant change, with self-help improvement, a
refreshed management team and tighter strategic focus. The group is benefiting
from buoyant infrastructure, renewables and energy markets. The business was
acquired by a US competitor, Tetra Tech, during the year at a significant
premium to the undisturbed share price.
John Wood is an international engineering, procurement and construction
("EPC") contractor for the oil and gas industry. Despite selling its 'Built
Environment' business, the company still suffers from the perception of a weak
balance sheet caused by provisions relating to historic loss-making contracts.
The company was the subject of an abandoned takeover approach from Apollo. The
Company did not own a position in this stock.
12-month return Relative contribution
% %
Principal detractors
Future -63.6 -1.3
Synthomer -70.7 -0.9
GB Group -46.2 -0.7
Bank of Georgia(1) +102.3 -0.6
RWS Holdings -40.5 -0.6
1 Not owned by the Company
Future is a tech-enabled global platform for specialised media which targets
consumers and business-to-business ("B2B") brands across Europe, America and
Asia Pacific. The company creates specialised content to attract and grow
high-value audiences. These audiences are then monetised through memberships
and subscriptions, print and digital advertising, e-commerce sales and events.
Future has both an organic and inorganic growth strategy. Management is
focused on purchasing new brands and titles to leverage its scalable
technology and drive digital growth using its revenue optimisation model. The
shares have suffered from both earnings downgrades and a material de-rating
during the year. Downgrades have been driven by greater-than-expected
normalisation of spending in consumer technology post-pandemic, while the
de-rating has been driven by concerns around advertising volumes and yields in
an uncertain macroeconomic environment. There have also been more existential
concerns around potential disruption to its business model from artificial
intelligence ("AI"). Poorly handled communications around the retirement of
the long-standing CEO in the period only added to investor nervousness. Whilst
we cannot be certain the downgrade cycle has ended, we believe the rating has
discounted much of this. A new CEO is now in place and the company has
retained and, in some cases, improved on its leading market positions which
gives us confidence that earnings can recover in improved macroeconomic
conditions.
Synthomer is a diversified chemicals group. The group has expanded through
acquisition which has diversified the company's end markets. The group enjoyed
extremely buoyant market conditions in its nitrile latex market as demand for
gloves rapidly expanded during the pandemic. A marked cooling in demand in
this market in the last year combined with a cyclical downturn in the
coatings, adhesives and general chemicals markets has led to a significant
fall in profitability. Additionally, previous acquisition activity has left
the company with elevated financial leverage. A new management team is in the
process of reducing debt by disposals and other balance sheet measures. We
believe the business is well placed to benefit from a recovery in the nitrile
latex market as demand recovers.
GB Group is a data identity, fraud prevention and address verification
business. The company provides a combination of software and data to clients
to help onboard their customers in an efficient and accurate manner whilst
also reducing the risk of fraud. The company's end markets are growing rapidly
as services move from offline to online channels, a trend which is expected to
continue as new business models are formed. GB Group has grown both
organically and through acquisition. The shares have fallen in the year due to
weaker trading conditions for some of the group's financial service and
internet economy customers as well as being impacted by the general market
de-rating of growth companies.
Bank of Georgia is a leading retail and commercial bank in Georgia. Robust
economic growth in the region has led to strong growth in profitability and an
improving capital position for the business. The Company did not own a
position in this stock.
RWS Holdings is a leading provider of translation software and services.
Although the company is extracting the expected synergies from its acquisition
of SDL plc, regulation change in its patent translation services business,
weakness in demand from its large technology customers and a shift to SaaS
from licence sales in its software division has led to modest falls in
profitability. This has led to a de-rating in the valuation of the company.
The business retains a strong net cash balance sheet and has significant
potential for recovery once the negative drivers on profitability abate.
Portfolio activity
Trading activity in the portfolio was consistent with an average holding
period of over five years. Our approach is to consider our investments as long
term in nature and to avoid unnecessary turnover. The focus has been on adding
stocks to the portfolio that have good growth prospects, sound financial
characteristics and strong management, at a valuation level that does not
reflect these strengths. Likewise, we have been employing strong sell
disciplines to cut out stocks that fail to meet these criteria.
Acquisitions
During the year we have added a number of new positions to our portfolio.
These include the following:
Ergomed provides specialised services to the pharmaceuticals industry in its
operations as both a clinical research outsourcer ("CRO") and provider of
pharmacovigilance services. It is a global business which operates 24 offices
and services 140 countries although its main exposure comes from the US and
Europe. The CRO business specialises in drug development for oncology and rare
diseases, while its pharmacovigilance services benefit from the high burden of
drug regulation. It is a capital-light business which generates high returns.
The business has a net cash balance sheet which it is looking to deploy on
acquisitions to further augment strong organic growth trends.
GlobalData is a leading business information and data provider. The business
was formed by Mike Danson, who had previously founded and then sold
Datamonitor, a comparative business. He remains a majority shareholder of
GlobalData. The company provides high-level data intelligence, analytics and
insights across a wide range of industries principally to executive level
customers at major organisations. The key product differentiator is the focus
on live and real-time updated datasets and analysis rather than big reference
'big book reports'. The business is set to deliver strong growth through high
retention rates, upselling to existing customers, price increases and new
customer adds. With a cost base under control, margins are set to expand from
current levels.
JTC is a global professional services firm operating in 20 jurisdictions
covering fund, corporate and private client product offerings. It operates two
divisions: Institutional Client Services, which focuses on the provision of
fund, corporate, and banking solutions to institutional clients, primarily
fund managers, listed companies and multinationals; and Private Client
Services, which provides trust, corporate and banking services for global
wealth management firms, family offices and ultra-high-net-worth individuals.
Our investment provides exposure to the growth in fund regulation and the
continued trend of outsourcing fund administration. The business is still run
by its founder so an entrepreneurial spirit prevails and there is a strong
ethos of share ownership and alignment throughout the business.
Morgan Advanced Materials is a thermal and ceramic products business. The DNA
of the business is knowledge of material science around ceramics and carbon.
It services a wide range of end markets, customers and applications. The
company is operating at the forefront of material science applications, making
materials that need extreme precision in highly challenging operating
environments such as extreme temperatures, high altitudes or high winds. We
think the company has materially improved its portfolio over recent years and
recent organic growth has exceeded expectations. We felt that the low
valuation the company was trading on did not reflect these positives. In
addition, the company's balance sheet is strong which gives it the scope to
supplement growth with accretive acquisitions.
Trainline is a global ticketing platform operating in the rail and coach
industry. It has a leading position in the UK and Europe as an e-commerce
player that sells rail and coach tickets on behalf of carriers to both
consumers and businesses. The platform is accessible through its highly rated
mobile and desktop app. The investment case provides exposure to growth trends
in online purchasing of e-tickets and the increased liberalisation of European
rail. Earnings are being depressed by continued investment in Europe, while
the valuation multiple is currently being impacted by the uncertainty
surrounding UK rail regulation. Both factors provided a good entry point to
buy the shares.
Wilmington is a training, events and education business. Based in the UK, the
group is split into two units: Intelligence which provides a combination of
risk and compliance data to insurance, pension and healthcare customers
globally, and Training & Education which offers bespoke technical support
for customers across the financial services and healthcare sectors. The group
has attractive business fundamentals with high profit margins, operating in
defensive areas of corporate spend with growth opportunities as businesses
expand on training and development activities. With a positive market backdrop
and the potential for future value-enhancing acquisitions, Wilmington has a
strong earnings outlook.
Disposals
To balance the additions to our portfolio, we have disposed of positions in
companies which we felt were set for poor price performance. We sold our
holding in De La Rue, a provider of currency and security products.
Overcapacity in the market is leading to pressure on prices and capacity
utilisation and earnings expectations have been guided down significantly. We
also disposed of our holding in Alphawave, a semiconductor licensing and
manufacturing company. Since its initial public offering ("IPO") the business
has had a poor record of meeting market expectations and the acquisition of
Banias Labs, a loss-making Israeli semiconductor company, further depressed
profitability and pushed the group into a net debt position. We sold our
position in Gym Group, a low-cost gym operator, as membership recovery from
Covid had been disappointing and may indicate a structural shift in the
market. We also sold our position, in line with our stated policy, in Dechra
Pharmaceuticals, a veterinary products supplier, as it was elevated to the
FTSE 100.
Takeover activity
There was a decent level of takeover activity in the portfolio. This was
consistent with the wider mid and small-cap equity markets aided by continued
levels of interest from private equity. A number of takeover bids were
received: for Euromoney, a B2B information provider, from a private equity
consortium; for RPS Group, an international engineering consultancy, from
Tetra Tech; for EMIS, an IT healthcare company, from United Health Group; and
for Hyve, an exhibitions organiser, from Providence Equity Partners.
Top ten positions
The following table shows the Company's top ten stock positions and their
active positions versus the Numis Smaller Companies Index (excluding
investment companies):
Top ten positions Portfolio Index weight Active weight
at 31 May 2023 % % %
Oxford Instruments 3.7 1.2 2.5
Impax Asset Management 3.0 - 3.0
Bellway 2.8 - 2.8
Balfour Beatty 2.8 - 2.8
OSB Group 2.5 - 2.5
Paragon Banking 2.3 0.9 1.4
Vesuvius 2.3 0.8 1.5
Mitchells and Butlers 2.2 0.9 1.3
Team17 1.9 - 1.9
Watches of Switzerland 1.8 - 1.8
A brief description of the largest positions (excluding Oxford Instruments and
Balfour Beatty which were covered earlier) follows:
Impax Asset Management is an environmentally and socially responsible focused
asset manager based in the UK. The company was formed in 1998 by the current
CEO Ian Simm, and has several funds spanning public equities, bonds and
private equity assets. Demand for these strategies is growing as
sustainability agendas have become top priorities for governments, consumers
and investors alike. As a result, the business has seen rapid growth in assets
under management which we expect to continue as the group's strong performance
track record and global distribution agreements should lead to further
inflows.
Bellway is a national UK housebuilder. The company has an excellent long-term
track record of controlled expansion whilst maintaining a strong balance
sheet. Although the company has delivered strong operational and financial
performance, the share price has fallen due to the weakness in the housing
market, caused by the economic downturn and rising interest rates. Although
future short-term profitability is likely to fall as house prices soften and
volumes contract, the business remains well placed to benefit from any
recovery. Additionally, valuation support is provided by the large discount to
net asset value at which the shares currently trade.
OSB Group is a speciality lender with a primary focus on providing buy-to-let
mortgages to professional landlords. Regulations on complex underwriting and
the sophistication of its underwriting capability have allowed OSB to grow
market share and, with landlord demand remaining robust, the business is
poised to see further growth. The company has built a very strong capital
position, and this is allowing the company to return significant cash to
shareholders through share buy-backs and increased dividends.
Paragon Banking is a speciality lender with a primary focus on providing
buy-to-let mortgages to professional landlords. The company has changed its
structure in the last few years by obtaining a banking licence allowing the
company to diversify its funding sources into the retail market. The company
enjoys a very strong capital position, enabling it to pay higher dividends
whilst buying back some of its own stock. Regulations on complex underwriting
and the sophistication of its underwriting capability have allowed Paragon to
grow market share from non-bank lenders which have suffered in this rising
rate environment.
Vesuvius is a materials technology company. The company offers steel flow
control, foundry technologies, advanced refractories and metal processing
products and services to customers around the world. The business has gone
through significant rationalisation over recent years removing excess capacity
and improving returns on capital and margins. The company has demonstrated
excellent pricing power during the recent inflationary period, validating its
leading market position and high value add of its products. Although the steel
industry is seeing the impact of global economic weakness, the business is
well positioned to enjoy strong growth once markets recover.
Mitchells & Butlers is a national owner and operator of pubs in the UK.
Its major brands include All Bar One, Browns, Harvester, Toby Carvery,
O'Neill's, Miller & Carter, Nicholson and Ember Inns. The vast majority of
its pubs are owned freehold, meaning it has substantial asset value backing.
After a difficult trading period impacted by lockdowns and restricted trading
during Covid and more recently pressures from significant inflation in energy,
food prices and labour costs, the outlook is looking brighter especially as
consumer demand remains strong and cost pressures are starting to ease. The
company is steadily repaying its securitised debt, enabling a transfer of
value from debt to equity. Additionally, with its pension deficit now cleared,
cashflow is improving, allowing the possibility of a resumption in dividends
to shareholders.
Team17 is a developer and publisher of video games for PCs, consoles and
mobile devices. The company focuses on the independent games market and
selectively works with developers and third parties to launch new content on
multiple platforms. The business listed in 2018 and has had a strong record of
growth driven by well-received new releases, the monetisation of new content
and improved profitability as the portfolio has expanded. With strong internal
intellectual property and the balance sheet in a net cash position, the
company is well set for future growth.
Watches of Switzerland is a leading retailer of luxury watches and jewellery
in the UK and US. The group trades under the banner of four prestigious retail
brands: Watches of Switzerland, Mappin & Webb, Goldsmiths and Mayors. The
group has a 40% share of the UK luxury watch market and a 10%+ share of the US
luxury watch market. Over 50% of revenues are generated from the sale of Rolex
watches. In addition to driving sales densities across existing stores through
improved marketing and stock availability, management's growth strategy is
centred around expansion in the US and Europe where there is significant
potential for market share gains.
Portfolio weightings
As at 31 May 2023, the portfolio was weighted by company size as follows:
Weighting %
31 May 2023 31 May 2022
FTSE 100 0.0 1.9
FTSE 250 70.2 63.5
FTSE Small Cap 14.3 16.5
FTSE AIM 28.1 29.3
Gearing (12.6) (11.2)
Market outlook
With inflation staying elevated against official targets, central banks, led
by the US Federal Reserve, have remained hawkish. We have seen significant
rises in interest rates globally and a move from quantitative easing to
tightening. The market is forecasting further modest rises in interest rates
globally although it is clear we are much closer to the end rather than the
start of the monetary policy tightening cycle. Oscillating confidence levels
in central bankers' willingness and ability to strike the right balance
between containing inflation and supporting economic growth are driving
heightened levels of uncertainty and volatility in global bond and equity
markets.
The rapid rise of inflation, driven by energy prices but also by a wider
number of other components, and rising interest rates are putting pressure on
consumers and businesses alike. Although the labour market is strong and wages
are rising, real net disposable income is falling and consumer confidence is
low. The delayed transmission mechanism of rising interest rates and their
impact on the economy mean that economic conditions are likely to worsen in
the short term.
Geopolitics remain challenging with the ongoing conflict in Ukraine and
heightened tensions between China, the US and Europe. The longer-term economic
implications of these are material. There is an urgent need to reduce European
dependence on Russian oil and gas supplies and a requirement to decrease
China's influence on the global supply chain through investment in nearshoring
capability. We expect capital spending to increase as a result and pockets of
inflation to remain as bottlenecks appear in the process of supply chain
reorganisation.
In the UK corporate sector we are encouraged by the fact that conditions are
intrinsically stronger than they were during the Global Financial Crisis of
2008-2009. In particular, balance sheets are more robust. Dividends have been
recovering strongly and we are seeing an increasing number of companies buying
back their own stock.
After an active 2021, the IPO market has become considerably quieter as equity
market confidence has diminished. There are no signs this is likely to change
in the short term. Merger and acquisition activity ("M&A") has remained
robust as acquirors, particularly private equity, look to exploit
opportunities thrown up by the recent equity market falls. We expect this to
continue in the coming months as UK equity market valuations remain markedly
depressed versus other developed markets.
In terms of valuations, the equity market is now trading below long-term
averages. Corporate earnings rebounded sharply following the pandemic-induced
shock in 2020. Lead indicators suggest this rebound is likely to continue to
fade as economic activity weakens further. Rising interest costs and
increasing tax burdens are putting further pressure on corporate earnings
growth. The view that the UK economy is entering a moderate recession is now
consensual and the debate is now focused on whether the trough will be deeper
than expected.
Although uncertainty remains around short-term economic conditions, we think
that the portfolio is well positioned to withstand an economic downturn and
exploit any opportunities it presents. The movements in equity markets have
thrown up some fantastic buying opportunities. However, it is important to be
selective as the strength of franchise, market positioning and balance sheets
will likely determine the winners from the losers.
In conclusion, the year under review has been a disappointing one for the
Company. Absolute performance was negative and the Company underperformed its
benchmark. The operating performance of our portfolio companies, however, has
been robust. The companies are soundly financed and attractively valued.
Additionally, the smaller companies market continues to throw up exciting
growth opportunities in which the Company can invest. We remain confident in
our ability to generate significant value from a consistent and disciplined
investment approach.
Neil Hermon
Fund Manager
INVESTMENT PORTFOLIO at 31 May 2023
Company Principal activities Valuation Portfolio
£'000 %
Oxford Instruments Advanced instrumentation equipment 27,826 3.66
Impax Asset Management(1) ESG-focused investment manager 22,801 3.00
Bellway Housebuilder 21,338 2.81
Balfour Beatty International contractor 21,274 2.80
OSB Group Buy-to-let mortgage provider 19,258 2.53
Paragon Banking Buy-to-let mortgage provider 17,232 2.27
Vesuvius Ceramic engineering 17,140 2.25
Mitchells & Butlers Hospitality operator 16,710 2.20
Team17(1) Games software developer 14,438 1.90
Watches of Switzerland Luxury watch retailer 13,897 1.83
10 largest 191,914 25.25
Ascential Exhibition organiser and data services 13,688 1.80
Alpha Financial Markets(1) Investment management consultancy 13,233 1.74
Learning Technologies(1) E-learning 12,806 1.68
Spectris Electronic control and process instrumentation 12,693 1.67
Renishaw Precision measuring and calibration equipment 12,638 1.66
Gamma Communications(1) Telecommunications 12,628 1.66
Computacenter IT reseller 12,528 1.65
Volution Producer of ventilation products 12,505 1.65
Softcat Software reseller 11,671 1.54
Future Specialist internet, website and magazine company 11,552 1.52
20 largest 317,856 41.82
IntegraFin B2B financial platform 11,196 1.47
Just Group Enhanced annuity provider 11,043 1.45
Bytes Technology Software reseller 10,965 1.44
Victrex Speciality chemicals 10,062 1.32
Serco Outsourcing services 9,996 1.31
Rathbones Private client wealth manager 9,970 1.31
Bodycote Engineering group 9,889 1.30
Workspace Real estate investment and services 9,809 1.29
Moneysupermarket.Com Price comparison website 9,789 1.29
Foresight Specialist fund manager 9,680 1.27
30 largest 420,255 55.27
Savills Property transactional consulting services 9,555 1.26
Serica Energy(1) Oil & gas exploration and production 9,448 1.24
GB Group(1) Data intelligence services 9,379 1.23
Tyman Building products 9,095 1.20
Chemring Technology products and services 9,070 1.19
RWS Holdings(1) Patent translation services 8,809 1.16
Crest Nicholson Housebuilder 8,719 1.15
Redde Northgate Commercial vehicle hire 8,672 1.14
Hollywood Bowl Ten pin bowling operator 8,137 1.07
SigmaRoc(1) Aggregates supplier 8,098 1.07
40 largest 509,237 66.98
Midwich(1) Audio-visual equipment distributor 7,788 1.02
Qinetiq Defence services 7,543 0.99
Next Fifteen Communications(1) PR and media services 7,430 0.98
Burford Capital(1) Litigation finance 7,324 0.96
Liontrust Asset Management Specialist fund management 7,163 0.94
Auction Technology Online auction software provider 6,720 0.88
Morgan Advanced Materials Engineering group 6,670 0.88
Pagegroup Recruitment company 6,199 0.82
Genuit Building products 6,176 0.81
Bridgepoint Private equity fund manager 6,110 0.80
50 largest 578,360 76.06
CLS Real estate investment and services 5,952 0.78
Trainline Online ticket retailer 5,936 0.78
Luceco Electrical products 5,913 0.78
Wickes DIY retailer 5,856 0.77
Harworth Urban regeneration and property investment 5,421 0.71
Videndum Broadcast and camera systems 5,239 0.69
SThree Recruitment company 5,081 0.67
XP Power Electrical power products 5,056 0.67
Smart Metering Systems(1) Energy smart meters 5,030 0.66
AB Dynamics(1) Automotive testing and measurement products 4,925 0.65
60 largest 632,769 83.22
Restore(1) Office service provider 4,778 0.63
DFS Furniture retailer 4,748 0.62
Harbour Energy Oil and gas exploration and production 4,663 0.61
Synthomer Speciality chemicals 4,582 0.60
Howden Joinery Kitchen manufacturer and retailer 4,459 0.59
Moonpig Online card and gift retailer 4,387 0.58
Gresham House(1) Specialist fund manager 4,322 0.57
Stelrad Radiator manufacturer 4,271 0.56
Capricon Energy Oil and gas exploration and production 3,961 0.52
Empiric Student accommodation 3,865 0.51
70 largest 676,805 89.01
Wilmington B2B information provider 3,836 0.51
Hunting Oil equipment and services 3,832 0.50
Helical Office property investor and developer 3,766 0.50
Avon Protection Defence products 3,690 0.49
Pebble(1) Promotional products and services 3,689 0.49
Alliance Pharma(1) Pharmaceutical products 3,438 0.45
GlobalData(1) B2B information provider 3,402 0.45
RM Education software and services 3,330 0.44
Spirent Communications Telecom testing services 3,276 0.43
JTC Fund administrator 3,121 0.41
80 largest 712,185 93.68
Young & Co's share class A(1) Pub operator 3,009 0.40
Grainger Residential property investor 2,981 0.39
Advanced Medical Solutions(1) Medical supplies manufacturer 2,912 0.38
Aptitude Software Software retailer 2,880 0.38
Young & Co's share class NV(1) Pub operator 2,851 0.38
Halfords Cycling and automative products retailer 2,727 0.36
Headlam Floor coverings distributor 2,651 0.35
Benchmark Holdings(1) Aquaculture services 2,630 0.35
Restaurant Group Restaurant and pub operator 2,611 0.34
Blancco Technology(1) Data erasure software 2,600 0.34
90 largest 740,037 97.35
Severfield Structural steel products 2,488 0.33
Essentra Industrial distributor 2,374 0.31
Clarkson Shipping services 2,302 0.30
Access Intelligence(1) Marketing services software provider 2,238 0.29
Tribal(1) Educational support services and software 2,232 0.29
Eurocell Building products 2,072 0.27
Ergomed(1) Clinical trial services 2,028 0.27
Thruvision(1) Detection technology 1,800 0.24
Safestyle(1) Window and door retailer 1,710 0.23
Focusrite(1) Audio production equipment 875 0.12
100 largest 760,156 100.00
Total Equity Investments 760,156 100.00
(1) Quoted on the Alternative Investment Market
There were no convertible or fixed interest securities at 31 May 2023 (2022:
None)
PRINCIPAL RISKS AND UNCERTAINTIES
The Board, with the assistance of the Manager, has carried out a robust
assessment of the principal and emerging risks facing the Company which relate
to the activity of investing in the shares of smaller companies that are
listed (or quoted) in the United Kingdom.
The directors seek assurance that the risks are appropriately evaluated, their
possible outcomes considered, and that effective mitigating controls are in
place. To support this process, the Audit and Risk Committee ("ARC") maintains
a detailed risk matrix which identifies the substantial risks to which the
Company is exposed and methods of mitigating against them as far as
practicable. The ARC considers the Company's principal and emerging risks at
each meeting, with a thorough review at least once per year, using heat maps
derived from the detailed risk matrix. Every year each director undertakes an
individual assessment of each risk. The individual ratings are collated and
reviewed at a meeting, which triggers fresh critical debate. The Board
regularly considers these and does not consider the principal risks to have
changed during the course of the reporting period and up to the date of this
report.
Throughout the year the Board has considered the impact of macroeconomic
events with a global impact and heightened market volatility, including the
aftermath of Covid-19 and the ongoing ramifications of the Russia/Ukraine
conflict. The Board has assessed the impact of mitigation measures on
manufacturing supply lines and on heightened uncertainty in the business
environment. The Board has also considered the wider consequences of the
recent specific problems in the US and Swiss banking sectors, and continues to
monitor economic uncertainty and the cost-of-living crisis in the UK, and the
UK banks' appetite for lending to the corporate sector.
While uncertainty remains around short-term economic conditions, the Board has
concluded that the Company's portfolio and the Manager's investment approach
should prove resilient. The Fund Manager's long-standing philosophy is that,
over the long term, smaller companies are able to deliver superior returns
than the broader market, driven by his fund management team's fundamental,
qualitative analysis, engagement with management teams and strong valuation
discipline.
The principal risks fall broadly under the following categories:
Risk Controls and mitigation
Investment activity and strategy The Board reviews investment strategy at each board meeting. An inappropriate
investment strategy (for example, in terms of asset allocation or the level of
Poor long-term investment gearing) may lead to underperformance against the Company's benchmark and the
companies in its peer group; it may also result in the Company's shares
performance (significantly below agreed benchmark or market/industry average) trading at a wider discount to net asset value
("NAV") per share. The Board manages these risks by ensuring a diversification
of investments and a regular review of the extent of borrowings. The Manager
Loss of the Fund Manager or operates in accordance with investment limits and restrictions determined by
the Board; these include limits on the extent to which borrowings may be used.
management team The Board reviews its investment limits and restrictions regularly and the
Manager confirms its compliance with them each month. The Manager provides the
directors with management information, including performance data and reports
and shareholder analysis. The Board monitors the implementation and results of
Impact of political, environmental, health or other emergencies (e.g. the investment process with the Fund Manager, and regularly reviews data that
Covid-19, war and a changing macroeconomic environment) on the Company's monitor portfolio risk factors.
investments
The Fund Manager reports to each board meeting on his close oversight of the
Approach to ESG matters portfolio, and more frequently in the event of a crisis. Performance is
monitored by JHI's internal teams, any of which would escalate directly to the
Board in the event of matters of concern. At each meeting, the Board reviews
the Fund Manager's ESG engagement with portfolio companies and their
Material climate-related impacts (both physical and transition risks) governance structures, ESG risks reports, and votes cast against management.
The Board also reviews JHI's ESG-related marketing activity specific to the
Company.
Market appetite - investment
objective and/or policy not The performance of the Company relative to its benchmark and its peers and the
discount/premium to NAV per share are key performance indicators measured by
appropriate in the current market or not sought by investors resulting in a the Board on a continual basis and are reported on in the Annual Report.
wide discount
The Board obtains assurances from the Manager that the UK Smaller Companies
team is suitably resourced, and the Fund Manager is appropriately remunerated
and incentivised in this role. The Board also considers the succession plan
for the fund management team on an annual basis.
See the Annual Report for a description of the engagement with shareholders
and potential investors undertaken by the Board and Manager to keep the market
informed about Company developments.
Legal and regulatory In order to qualify as an investment trust the Company must comply with s1158
Corporation Tax Act 2010 ("s1158"). A breach of s1158 could result in the
Loss of investment trust status Company losing investment trust status and, as a consequence, capital gains
realised within the Company's portfolio would be subject to corporation tax.
The s1158 criteria are monitored by the Manager and the results are reported
to the directors at each board meeting. The Company must comply with the
Breach of company law or Listing Rules resulting in suspension provisions of the Companies Act 2006 (the "Act") and, as the Company has a
premium listing on the London Stock Exchange, the Company must comply with the
Listing, Prospectus and Disclosure Guidance and Transparency Rules of the FCA.
A breach of the Act could result in the Company and/or the directors being
fined or becoming the subject of criminal proceedings. A breach of the FCA
Rules could result in the suspension of the Company's shares which would in
turn lead to a breach of s1158. The Board relies on its corporate secretary
and its professional advisers to ensure compliance with the Act and FCA Rules.
Operational Disruption to, or failure of, the Manager's accounting, dealing or payment
systems or the custodian's records could prevent the accurate reporting and
Failure of, disruption to or inadequate service levels by key third-party monitoring of the Company's financial position. The Manager has contracted
service provider some of its operational functions, principally those relating to trade
processing, investment administration and accounting, to BNP Paribas. Details
of how the Board monitors the services provided by Janus Henderson and its
other suppliers, and the key elements designed to provide effective internal
Cyber-crime leading to loss of confidential data control and risk management, such as review of service providers' assurance
reports, are explained further in the Annual Report.
Breach of internal controls
Cybersecurity is closely monitored by the ARC as part of quarterly internal
controls reports, and the ARC receives an annual presentation from Janus
Henderson's Chief Information Security Officer.
Impact of political, environmental, health or other emergencies (e.g.
Covid-19, war and a changing macroeconomic environment) on the Company's
operations and those of its service providers
The Board monitors effectiveness and efficiency of service providers'
processes through ongoing compliance and operational reporting. There were no
disruptions to the services provided to the Company in the year under review.
Financial instruments and the management of risk By its nature as an investment trust, the Company is exposed in varying
degrees to market risk (comprising market price risk, currency risk and
interest rate risk), liquidity risk and credit and counterparty risk. An
analysis of these financial risks and the Company's policies for managing them
are set out in note 15 in the Annual Report.
EMERGING RISKS
At each meeting, the Board considers emerging risks which it defines as
potential trends, sudden events or changing risks which are characterised by a
high degree of uncertainty in terms of occurrence probability and possible
effects on the Company. Once emerging risks become sufficiently clear, they
may be treated as specific risks and enter the Company's matrix of significant
risks. During the year, the directors agreed that emerging risks would include
disruption to markets, the global economy and society through artificial
intelligence ("AI") such as ChatGPT, and UK banks' appetite for lending to the
UK corporate sector, including investment trusts. The directors also
considered the trend for UK-listed companies to de-list from the London Stock
Exchange and seek an alternative listing in the US, and agreed that
potentially more relevant for smaller UK-focused companies would be a
de-listing and move to private equity.
The Board receives reporting on risks from the Manager and other service
providers in addition to any ad hoc reports on specialist topics from
professional advisors. The Board monitors effectively the changing risk
landscape and potential threats to the Company with the support of regular
reports and ad hoc reports as required, the directors' own experience and
external insights gained from industry and shareholder events.
BORROWINGS
The Company has borrowed £30 million by its issue in 2016 of 3.33% unsecured
loan notes 2036 and a further £20 million by its issue in 2022 of 2.77%
unsecured loan notes 2052. The Company is able to draw short-term borrowings
of up to £85 million from its committed borrowing facility with BNP Paribas,
London branch (2022: £85 million with Industrial and Commercial Bank of China
Limited, London branch ("ICBC")). There were borrowings of £50.7 million
drawn down under the facility at 31 May 2023 (2022: £50.3 million).
Accordingly, the Company has access to borrowings of up to £135 million: the
£50 million of fixed debt represented by the issue of unsecured loan notes
and a committed bank facility of £85 million.
VIABILITY STATEMENT AND CONTINUATION VOTE
The Company is a long-term investor. The Board believes it is appropriate to
assess the Company's viability over a five-year period in recognition of the
Company's long-term horizon and what the Board believes to be investors'
horizons, taking account of the Company's current position and the potential
impact of the principal risks and uncertainties as documented in the Strategic
Report.
The assessment has considered the impact of the likelihood of the principal
risks and uncertainties facing the Company, in particular investment strategy
and performance against benchmark, whether from asset allocation or the level
of gearing, and market risk, in severe but plausible scenarios, and the
effectiveness of any mitigating controls in place.
The Board took into account the liquidity of the portfolio and the borrowings
in place when considering the viability of the Company over the next five
years and the Company's ability to meet liabilities as they fall due. This
included consideration of the duration of the Company's loan and borrowing
facilities and how a breach of any covenants could impact the Company's NAV
and share price, recognising the current strength of the covenants, liquidity
of the portfolio and capital reserves available. The Board used a five-year
cash-flow forecast and sensitivity analysis to support its deliberations.
The Board considers revenue and expense forecasts at each meeting, with
additional focus at the time of reviewing half-year and year-end results. At
the same time the Board discusses the impact on the Company of decreases in
revenue and the impact that would have on revenue and capital reserves
available to pay dividends.
The Board does not expect there to be any significant change in the principal
risks and adequacy of the mitigating controls in place, nor does the Board
envisage any change in strategy or objective or any events that would prevent
the Company from continuing to operate over the next five years; the Company's
assets are liquid, its commitments are limited and the Company intends to
continue to operate as an investment trust. In coming to this conclusion, the
Board has considered rigorously the aftermath of the Covid-19 pandemic, the
continued macroeconomic and geopolitical uncertainty following Russia's
invasion of Ukraine and impact on global supply chains, and the current
cost-of-living crisis. The Board considers that these events have highlighted
the advantages of holding an investment trust.
The Board does not believe that these factors will have a long-term impact on
the viability of the Company and its ability to continue in operation,
notwithstanding the short-term uncertainty these events have caused in the
markets and specific shorter-term issues, such as supply chain disruption,
inflation and labour shortages.
The continuation vote at the 2022 AGM was passed with support of 99.2% of
votes cast and the Board expects shareholders to support continuation at the
2025 AGM which is within the viability assessment period.
Based on their assessment, the directors have a reasonable expectation that
the Company will be able to continue in operation and meet its liabilities as
they fall due over the next five years to 31 May 2028.
FUTURE DEVELOPMENTS
The future success of the Company is dependent primarily on the performance of
its investment portfolio, which will, to a significant degree, reflect the
performance of the stock market and the skill of the Manager. While the
Company invests in companies that are listed (or quoted) in the United
Kingdom, the underlying businesses of those companies are affected by external
factors, many of an international nature. The Board's intention is that the
Company will continue to pursue its stated investment objective and strategy
as explained in the Annual Report. The Chair's Statement and the Fund
Manager's Report in the Annual Report give commentary on the outlook for the
Company. Other information on recommended dividends and financial risks is
detailed in the Strategic Report and in notes 9 and 15 to the financial
statements in the Annual Report.
RELATED-PARTY TRANSACTIONS
The Company's transactions with related parties in the year were with the
directors and the Manager. There were no material transactions between the
Company and its directors, and the only amounts paid to them were in respect
of remuneration. Remuneration is paid quarterly in arrears and amounts for
April and May 2023 were therefore accrued as at the year end. There were no
other outstanding amounts payable at the year end. The directors did not claim
any expenses during the years to 31 May 2023 or 31 May 2022. Directors'
shareholdings are listed in the Annual Report.
In respect of the Manager's service provision during the year, other than fees
payable by the Company in the ordinary course of business and the facilitation
of marketing activities with third parties, there were no material
transactions with the Manager affecting the financial position of the Company.
More details on transactions with the Manager, including amounts outstanding
at the year end, are in the Annual Report.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
Each director who is listed in the Annual Report confirms that, to the best of
his or her knowledge:
· the financial statements, which have been prepared in accordance with
International Accounting Standards in conformity with the requirements of the
Companies Act 2006 on a going concern basis, give a true and fair view of the
assets, liabilities, financial position and profit/loss of the Company; and
· the Strategic Report and financial statements include a fair review of the
development and performance of the business and the position of the Company,
together with a description of the principal risks and uncertainties that it
faces.
On behalf of the Board
Penny Freer
Chair of the Board
STATEMENT OF COMPREHENSIVE INCOME
Year ended 31 May 2023 Year ended 31 May 2022
Revenue Capital Revenue Capital
return return Total return return Total
Notes £'000 £'000 £'000 £'000 £'000 £'000
2 Investment income 24,295 - 24,295 20,648 - 20,648
3 Other income 95 - 95 2 - 2
Losses on investments held at fair value through profit or loss - (127,252) (127,252) - (187,266) (187,266)
Currency losses - - - - (1) (1)
Total income/(loss) 24,390 (127,252) (102,862) 20,650 (187,267) (166,617)
Expenses
4 Management fees (710) (1,657) (2,367) (1,004) (2,343) (3,347)
Other expenses (731) - (731) (728) - (728)
Profit/(loss) before finance costs and taxation 22,949 (128,909) (105,960) 18,918 (189,610) (170,692)
Finance costs (997) (2,325) (3,322) (562) (1,310) (1,872)
Profit/(loss) before taxation 21,952 (131,234) (109,282) 18,356 (190,920) (172,564)
Taxation (5) - (5) (1) - (1)
Profit/(loss) for the year and total comprehensive income 21,947 (131,234) (109,287) 18,355 (190,920) (172,565)
5 Earnings/(loss) per ordinary share - basic and diluted 29.38p (175.68p) (146.30p) 24.57p (255.58p) (231.01p)
The total columns of this statement represent the Statement of Comprehensive
Income, prepared in accordance with UK-adopted International Accounting
Standards in conformity with the requirements of the Companies Act 2006.
The revenue return and capital return columns are supplementary to this and
are prepared under guidance published by the Association of Investment
Companies.
STATEMENT OF CHANGES IN EQUITY
Retained earnings
Capital
Share redemption Capital Revenue Total
capital reserve reserves reserve equity
Notes Year ended 31 May 2023 £'000 £'000 £'000 £'000 £'000
Total equity at 1 June 2022 18,676 26,745 744,044 13,134 802,599
Total comprehensive income: - - (131,234) 21,947 (109,287)
(Loss)/profit for the year
Transactions with owners, recorded directly to equity:
6 Ordinary dividends paid - - - (17,925) (17,925)
Total equity at 31 May 2023 18,676 26,745 612,810 17,156 675,387
Retained earnings
Capital
Share redemption Capital Revenue Total
capital reserve reserves reserve equity
Notes Year ended 31 May 2022 £'000 £'000 £'000 £'000 £'000
Total equity at 1 June 2021 18,676 26,745 935,307 12,170 992,898
Total comprehensive income: - - (190,920) 18,355 (172,565)
(Loss)/profit for the year
Transactions with owners, recorded directly to equity:
6 Ordinary dividends paid - - (343) (17,391) (17,734)
Total equity at 31 May 2022 18,676 26,745 744,044 13,134 802,599
BALANCE SHEET
At 31 May At 31 May
2023 2022
Notes £'000 £'000
Non-current assets
Investments held at fair value through profit or loss 760,156 892,397
Current assets
Receivables 3,187 4,229
Cash and cash equivalents 13,338 8,991
16,525 13,220
Total assets 776,681 905,617
Current liabilities
Payables (851) (2,990)
Bank loans (50,672) (50,268)
(51,523) (53,258)
Total assets less current liabilities 725,158 852,359
Non-current liabilities
Financial liabilities (49,771) (49,760)
Net assets 675,387 802,599
Equity attributable to equity shareholders
7 Share capital 18,676 18,676
Capital redemption reserve 26,745 26,745
Retained earnings:
Capital reserves 612,810 744,044
Revenue reserve 17,156 13,134
Total equity 675,387 802,599
8 Net asset value per ordinary share 904.1p 1,074.4p
STATEMENT OF CASH FLOWS
Year ended
31 May 31 May
2023 2022
£'000 £'000
Operating activities
Loss before taxation (109,282) (172,564)
Add back interest payable 3,322 1,872
Losses on investments held at fair value through profit or loss 127,252 187,266
Purchases of investments (109,395) (165,877)
Sales of investments 114,384 166,572
Increase in receivables (38) (1)
Decrease in amounts due from brokers 1,394 1,179
Increase in accrued income (316) (412)
Decrease in payables (66) (4,545)
(Decrease)/increase in amounts due to brokers (2,081) 1,607
Net cash inflow from operating activities before interest and taxation 25,174 15,097
Interest paid (3,303) (1,659)
Net cash inflow from operating activities(1) 21,871 13,438
Financing activities
Equity dividends paid (17,928) (17,734)
(Repayment)/drawdown of bank loans 404 (9,592)
Issue of unsecured private placement notes - 20,000
Direct expenses on issue of unsecured private placement notes - (82)
Net cash outflow from financing activities (17,524) (7,408)
Increase in cash and cash equivalents 4,347 6,030
Currency losses - (1)
Cash and cash equivalents at the start of the year 8,991 2,962
Cash and cash equivalents at the end of the year 13,338 8,991
(1) In accordance with IAS 7.31, cash inflow from dividends was £24,000,000
(2022: £20,243,000) and cash
inflow from interest was £74,000 (2022: £2,000)
NOTES TO THE FINANCIAL STATEMENTS
1 Accounting policies: Basis of preparation
The Henderson Smaller Companies Investment Trust plc (the "Company") is a
company incorporated and domiciled in the United Kingdom under the Companies
Act 2006 (the "Act"). The financial statements of the Company for the year
ended 31 May 2023 have been prepared in accordance with UK-adopted
International Accounting Standards in conformity with the requirements of the
Act. These comprise standards and interpretations approved by the
International Accounting Standards Board ("IASB"), together with
interpretations of the International Accounting Standards and Standing
Interpretations Committee approved by the IFRS Interpretations Committee
("IFRS IC") that remain in effect, to the extent that IFRS have been adopted
by the United Kingdom.
The financial statements have been prepared on a going concern basis and on
the historical cost basis, except for the revaluation of certain financial
instruments held at fair value through profit or loss. The principal
accounting policies adopted are set out in the Annual Report. These policies
have been applied consistently throughout the year. Where presentational
guidance set out in the Statement of Recommended Practice (the "SORP") for
investment trusts issued by the Association of Investment Companies (the
"AIC") is consistent with the requirements of IFRS, the directors have sought
to prepare the financial statements on a basis consistent with the
recommendations of the SORP.
There have been no amendments to International Accounting Standards issued and
effective for the year under review which are applicable to the Company's
financial statements. There are no new standards or amendments to
International Accounting Standards issued but not effective for the year under
review or early adopted by the Company that are expected to have any impact on
the Company's financial statements.
Going concern
The assets of the Company consist of securities that are readily realisable
and, accordingly, the directors believe that the Company has adequate
resources to continue in operational existence for at least twelve months from
the date of approval of the financial statements. In coming to this
conclusion, the directors have also considered the aftermath of the Covid-19
pandemic and its residual impact on the Company, the continued macroeconomic
and geopolitical uncertainty following Russia's invasion of Ukraine and impact
on supply chains, the nature of the Company's covenants, the strength of the
Company's distributable reserves and the liquidity of the portfolio. They have
concluded that the Company is able to meet its financial obligations,
including the repayment of the bank loan, as they fall due for a period of at
least twelve months from the date of issuance.
Having assessed these factors, the principal risks and other matters discussed
in connection with the Viability Statement in the Annual Report, the Board has
therefore determined that it is appropriate for the financial statements to be
prepared on a going concern basis. The Company's shareholders are asked every
three years to vote for the continuation of the Company. An ordinary
resolution to this effect was put to the Annual General Meeting ("AGM") held
on 30 September 2022 and passed by a substantial majority of the shareholders.
The next continuation vote will take place at the AGM in 2025.
2 Investment income
2023 2022
£'000 £'000
Income from companies listed or quoted in the United Kingdom:
Dividends 22,553 18,939
Special dividends 1,177 1,577
Property income distributions 565 132
Total investment income 24,295 20,648
3 Other income
2023 2022
£'000 £'000
Bank and other interest 95 2
95 2
4 Management fees
2023 2022
Revenue Capital Total Revenue Capital Total
return return return return return return
£'000 £'000 £'000 £'000 £'000 £'000
Management fee 710 1,657 2,367 1,004 2,343 3,347
710 1,657 2,367 1,004 2,343 3,347
A summary
of the
managemen
t
agreement
is given
in the
Annual
Report.
5 (Loss)/earnings per ordinary share
The earnings per ordinary share figure is based on the net loss for the year
of £109,287,000 (2022: net loss of £172,565,000) and on 74,701,796 (2022:
74,701,796) ordinary shares, being the weighted average number of ordinary
shares in issue during the year.
The earnings per ordinary share figure detailed above is analysed between
revenue and capital as below:
2023 2022
£'000 £'000
Net revenue profit 21 18
,9 ,3
47 55
Net capital loss (1 (1
31 90
,2 ,9
34 20
) )
Net total loss (1 (1
09 72
,2 ,5
87 65
) )
Weighted average number of ordinary shares in issue during the year 74 74
,7 ,7
01 01
,7 ,7
96 96
20 20
23 22
Revenue earnings per ordinary share 29 24
.3 .5
8p 7p
Capital loss per ordinary share (175.68p) (255.58p)
Total loss per ordinary share (146.30p) (231.01p)
The Company has no securities in issue that could dilute the return per
ordinary share. Therefore the basic and diluted earnings per ordinary share
are the same.
6 Ordinary dividends
2023 2022
Record Date Pay date £'000 £'000
Final dividend: 17.0p (2022: 16.75p) for the year ended 31 May 2022 26 August 2022 10 October 2022 12,699 12,513
Interim dividend: 7.0p (2022: 7.00p) 9 February 2023 6 March 2023 5,229 5,229
for the year ended 31 May 2023
Unclaimed dividends over 12 years old (3) (
8
)
17,925 17,734
Subject to approval at the AGM, the proposed final dividend of 19.00p per
ordinary share will be paid on 9 October 2023 to shareholders on the register
of members at the close of business on 25 August 2023. The shares will be
quoted ex-dividend on 24 August 2023.
The proposed final dividend for the year ended 31 May 2023 has not been
included as a liability in these financial statements. Under IFRS, the final
dividend is not recognised until approved by the shareholders.
The total dividends payable in respect of the financial year which form the
basis of the test under section 1158 Corporation Tax Act 2010 are set out
below:
2023 2022
£'000 £'000
Revenue available for distribution by way of dividends for the year 21,947 18,355
Interim dividend for the year ended 31 May 2023: 7.00p (2022: 7.00p) (5,229) (5,229)
Final dividend for the year ended 31 May 2022: 17.00p (based on 74,701,796 - (12,699)
shares in issue at 2 August 2022)
Proposed final dividend for the year ended 31 May 2023: 19.00p (based on (14,193) -
74,701,796 shares in issue at 1 August 2023)
Transfer to reserves 2,525 427
7 Share capital
2023 2022
£'000 £'000
Allotted, issued, authorised and fully paid:
74,701,796 ordinary shares of 25p each (2022: 74,701,796) 18,676 1
8
,
6
7
6
Duri
ng
the
year
the
Comp
any
made
no
purc
hase
s of
its
own
issu
ed
ordi
nary
shar
es
(202
2:
nil)
. Up
to
the
date
of
this
repo
rt,
the
Comp
any
has
not
purc
hase
d
any
ordi
nary
shar
es.
8 Net asset value ("NAV") per ordinary share
The NAV per ordinary share is based on the net assets attributable to the
ordinary shares of £675,387,000 (2022: £802,599,000) and on the 74,701,796
ordinary shares in issue at 31 May 2023 (2022: 74,701,796).
The Company has no securities in issue that could dilute the NAV per ordinary
share.
The movement during the year of the net assets attributable to the ordinary
shares was as follows:
2023 2022
£'000 £'000
Net assets attributable to the ordinary shares at 1 June 802,599 992,898
Net losses for the year (109,287) (172,565)
Ordinary dividends paid in the year (17,925) (17,734)
Net assets attributable to the ordinary shares at 31 May 675,387 802,599
9 2023 Financial information
The figures and financial information for the year ended 31 May 2023 are
extracted from the Company's annual financial statements for that period and
do not constitute statutory accounts. The Company's annual financial
statements for the year to 31 May 2023 have been audited but have not yet been
delivered to the Registrar of Companies. The Independent Auditor's Report on
the 2023 annual financial statements is unqualified, does not include a
reference to any matter to which the auditor drew attention without qualifying
the report, and does not contain any statements under s498(2) or s498(3)
Companies Act 2006.
10 2022 Financial information
The figures and financial information for the year ended 31 May 2022 are
compiled from an extract of the published financial statements for that year
and do not constitute statutory accounts. Those financial statements have been
delivered to the Registrar of Companies, include the unqualified Independent
Auditor's Report on the 2021 annual financial statements, do not include a
reference to any matter to which the auditors drew attention without
qualifying the report, and do not contain any statements under s498(2) or
s498(3) Companies Act 2006.
11 Annual Report
The Annual Report for the year ended 31 May 2023 will be sent to shareholders
in August 2023 and will be available on www.hendersonsmallercompanies.com.
Thereafter copies will be available from the corporate secretary at the
Company's registered office: 201 Bishopsgate, London EC2M 3AE.
12 Annual general meeting ("AGM")
The Company's AGM will be held at 11.30 am on Thursday, 5 October 2023. The
Board invites shareholders to attend the meeting at the registered office at
201 Bishopsgate, London EC2M 3AE, or via Zoom webinar connection if
preferable. The Fund Manager will present his review of the year and thoughts
on the future and will be pleased to answer your questions, as will the Board.
Instructions on attending the meeting in person or virtually, and details of
resolutions to be put to the AGM, are included in the Notice of AGM in the
Annual Report and will be available at www.hendersonsmallercompanies.com. If
shareholders would like to submit any questions in advance of the AGM, they
are welcome to send these to the corporate secretary at
itsecretariat@janushenderson.com.
13. General Information
Company Status
The Henderson Smaller Companies Investment Trust plc is a UK domiciled
investment trust company.
ISIN number/SEDOL Ordinary Shares: GB0009065060/0906506
London Stock Exchange (TIDM) Code: HSL
Global Intermediary Identification Number (GIIN): WZD8S7.99999.SL.826
Legal Entity Identifier (LEI): 213800NE2NCQ67M2M998
Registered Office
201 Bishopsgate, London EC2M 3AE
Directors and Secretary
The directors of the Company are Penny Freer (Chair of the Board), Alexandra
Mackesy (Audit and Risk Committee Chair), Kevin Carter (Senior Independent
Director), Victoria Sant, Michael Warren and Yen Mei Lim.
The Corporate Secretary is Janus Henderson Secretarial Services UK Limited.
For further information please contact:
Neil Hermon Dan Howe
Fund Manager Head of Investment Trusts
Janus Henderson Investors Janus Henderson Investors
Telephone: 020 7818 4351 Telephone: 020 7818 4458
Harriet Hall
Investment Trust PR Manager
Janus Henderson Investors
Telephone: 020 7818 2919
Neither the contents of the Company's website nor the contents of any website
accessible from hyperlinks on the Company's website (or any other website) are
incorporated into, or form part of, this announcement.
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