Henderson Smllr Cos - Annual Financial Report and Final Dividend
01/08/2024 07:00
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RNS Number : 6738Y Henderson Smaller Cos Inv Tst PLC 01 August 2024
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 2024
This announcement contains regulated information.
KEY HIGHLIGHTS
§ Final dividend increased to 19.5p per ordinary share (2023: 19.0p)
§ Share price total return of 17.3% in the year
§ 21st consecutive year of growth in the annual dividend
§ Outperformed the benchmark in 15 of the last 20 years
§ Over the ten years to 31 May 2024, outperformed the benchmark by 25.1%
Neil Hermon, Fund Manager, said:
"Despite the current geopolitical and economic challenges facing stock
markets, we believe the portfolio is well positioned to withstand this
backdrop and fully participate in the anticipated upswing when it occurs. The
recent 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."
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 2024
1 year 3 years 5 years 10 years
% % % %
NAV(1) 14.5 -18.8 18.2 97.7
Benchmark(2) 18.2 0.0 29.7 72.6
Average sector NAV(3) 14.1 -1.7 28.0 88.6
Share price(4) 17.3 -24.6 18.8 109.1
AIC sector share price(5) 15.1 -2.5 30.6 97.3
FTSE All-Share Index 15.4 25.5 37.3 77.6
Performance Year ended Year ended
31 May 2024 31 May 2023
NAV per share at year end 1,003.1p 904.1p
Share price at year end 888.0p 785.0p
Discount at year end(6) 11.5% 13.2%
Gearing at year end 11.5% 12.6%
Dividend for the year 27.00p(7) 26.00p
Revenue return per share 29.85p 29.38p
Dividend yield(8) 3.0% 3.3%
Total net assets £747m £675m
Ongoing charge(9) 0.45% 0.44%
1 NAV per ordinary share total return with income reinvested
2 Deutsche 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 7.5p and a proposed final
dividend of 19.5p, 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 2024 or 2023
A glossary of terms and explanations of alternative performance measures are
included in the Annual Report.
Sources: Morningstar Direct, Janus Henderson, LSEG Datastream
CHAIR'S STATEMENT
Dear Shareholder
Performance
The year under review showed an improved performance with strong absolute
gains. The Company's net asset value ("NAV") rose 14.5% and the share price
increased 17.3% in the year to 31 May 2024, on a total return basis. This
compared with the AIC UK Smaller Companies sector's average NAV and share
price total return which rose 14.1% and 15.1%, respectively.
The financial year saw a marked difference of performance in each half: after
falling 7.7% in the first six months, the Company's net asset value total
return rebounded strongly in the second half, climbing 24.0%. Despite this
strong absolute performance, the Company underperformed its benchmark, the
Deutsche Numis Smaller Companies Index (excluding investment companies), by
3.7%. This mainly reflected some company-specific issues that temporarily
impacted a number of our larger holdings. The Fund Manager's Report in the
Annual Report provides a detailed review of the year.
The UK market experienced a volatile twelve months, with smaller companies
outperforming large-cap stocks as sentiment around the economy improved, aided
by the peak in interest rates at the end of 2023 coupled with falling
inflation. Corporate performance has been generally robust and smaller
companies have benefitted from the increased M&A interest which the
undervalued UK market has attracted.
We were pleased to see the strong recovery in the second half of the financial
year and are optimistic that the portfolio is well positioned to benefit from
a continued recovery. Over the longer term, your Company's NAV total return
remains well ahead of the benchmark index; your Company outperformed the
benchmark by 25.1% over the ten years to 31 May 2024.
Dividend and earnings
Total revenue from your Company's portfolio rose from £24.4m to £24.8m and
earnings per share rose from 29.4p to 29.9p, with the majority of our
portfolio companies taking advantage of their healthy financial performance to
increase dividend payments.
The Board is pleased to recommend an increased final dividend of 19.5p per
share which, subject to shareholder approval at the Annual General Meeting,
will be paid on 7 October 2024 to shareholders on the register at 30 August
2024. When added to the interim dividend of 7.5p, this brings the total
dividend for the year to 27.0p per share, a 3.8% increase on 2023's total
dividend of 26.0p per share. This dividend will be fully funded from current
year revenues. As an 'AIC Dividend Hero', this will be our 21st consecutive
year of growth in the annual dividend.
Share rating
Despite the improved investment performance, your Company's share price
discount to NAV fluctuated during the year between 8.7% and 15.4%, averaging
12.9% and closing the year at 11.5%. The share price over the year rose from
785.0p to 888.0p, reflecting a narrowing of the discount to NAV.
Share buybacks
The Company bought back 196,665 shares for cancellation in the year under
review. This reflects our view that the unusually wide discount to the NAV at
which the Company's share price trades presents an attractive opportunity to
enhance shareholder value. The buybacks are within the authority granted at
the last AGM which allows for the purchase of a maximum of 14.99% of share
capital. The shares bought back represent 0.3% of the total number of shares
in issue at the start of the year.
Gearing
During the year, the Board renewed its revolving credit facility with BNP
Paribas for a further 12 months at a lower level of £70m (2023: £85m),
following an assessment of the Company's gearing requirements over the coming
year. Combined with long-term structural debt of £50m loan notes, this takes
your Company's total borrowing capacity to £120m (2023: £135m). The Fund
Manager reports on his use of gearing during the year under review in the
Annual Report.
Stewardship
The Company continues its stewardship activities, and we report in detail in
the Annual Report on our fund management team's active engagement during the
year with portfolio companies on a range of topics, including management of
hazardous material by building companies and decarbonisation by house
builders.
Annual General Meeting ("AGM")
We are pleased to invite shareholders to attend the AGM in person at our
registered office on Wednesday, 2 October 2024, 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 their outlook for the
year ahead. Shareholders unable to join in person will be able to join the
meeting by videoconference.
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 Monday, 30
September 2024, to ensure that their vote counts at the AGM, as there will be
live voting only for those physically present 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 the year-end
announcement at 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.
Outlook
It has been an improved year and we are pleased with the momentum seen in the
second half of the period. Dissatisfaction with the Conservative Party led to
a landslide win and large majority for the Labour Party in the July 2024
election. We now expect a period of greater stability. Recent positive
statements on business and growth from the new Labour government give us
optimism for an improvement in levels of investment into the UK stock market.
The significant falls in inflation have led to expectations of interest rate
cuts. The exact timing is uncertain, but the prospect of improved economic
conditions should support equity markets which are trading below long-term
averages and where the discount of smaller companies to their larger
counterparts is at an historic high, with many declaring dividend increases
and share buybacks funded from strong balance sheets.
We are pleased to note that signs of interest in the UK market have been
growing, with an improvement in the pace of merger and acquisition ("M&A")
activity over the past year. We were also encouraged by the successful initial
public offering ("IPO") of Raspberry Pi which highlights the possibilities for
the UK to be home to growth businesses in exciting sectors. We hope this trend
continues as the Financial Conduct Authority ("FCA") reforms the UK listing
framework and creates a more attractive proposition.
Your portfolio companies are generally reporting robust performances, which
are not reflected in current depressed valuations, and they are taking
advantage of strong balance sheets to declare attractive dividend payments.
The outlook for 2024-2025 looks brighter, as the expectation of rate
reductions increases.
Smaller companies continue to offer exciting opportunities. We remain
confident in the ability of our Fund Managers to draw on their consistent and
disciplined investment approach to generate significant long-term value.
Penny Freer
Chair of the Board
FUND MANAGER'S REPORT
Fund performance
The Company had a mixed year in performance terms, rising in absolute terms
but underperforming its benchmark. The share price rose by 17.3% and the net
asset value by 14.5% on a total return basis. This compared with an increase
of 18.2% in the Company's benchmark total return, the Numis Smaller Companies
Index (excluding investment companies). The underperformance came from a
combination of negative contributions from stock selection and expenses offset
by a positive contribution from gearing. Negative contribution from stock
selection was 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 addition, company-specific issues
impacted a number of our larger holdings. We believe these issues are
temporary or more than fully reflected in the underlying share price and
expect these companies to recover over time. The year saw a marked difference
in our semi-annual performance with net asset value (total return) falling
7.7% in the first half of the financial year and a strong recovery in the
second half when net asset value (total return) rose 24.0%. Despite it being a
poor relative year for performance, the long-term record of the Company
remains strong, outperforming its benchmark in 16 of the last 21 years.
Market - year under review
The year under review was a volatile but ultimately positive one for UK equity
markets. The key driver of market returns remained monetary policy. Central
banks across the world, led by the Federal Reserve, ECB and Bank of England,
continued to increase base rates in the first half of our financial year. The
messaging on the future path of base rates fluctuated between hawkish and
dovish which caused meaningful moves in sovereign bond yields in both
directions. However, the markets experienced a watershed moment in the last
quarter of 2023 as developed-market central banks signalled that base rates
had peaked and that their focus was now shifting to when to make the first
cut. This supported equity markets, particularly in the second half of our
financial year.
Inflation continued to fall over the year under review and is now much closer
to official targets. This has been principally driven by falling goods prices,
whilst services and wage inflation has remained stubbornly high. These factors
are causing central banks to debate when and how fast to bring interest rates
down and shifting expectations of the timing and speed of rate reduction to
the right.
Global economic conditions remained mixed. In the UK economic growth has
flatlined, following the technical recession in the second half of 2023.
Notwithstanding that, corporate profit performance has remained generally
robust. In addition, there has been a heightened level of inward M&A
activity, particularly from private equity and foreign corporates,
highlighting the undervaluation of the UK equity market. Oil prices rose, on
account of the conflict in the Middle East and sterling saw gentle
appreciation against the US dollar.
Smaller companies outperformed larger companies over the year driven by the
prospect of interest rate cuts and potentially improving economic conditions.
Additional support came from the M&A activity referred to above, which
principally occurred in the small and mid-cap space.
Gearing
Gearing started the year at 12.6% and ended at 11.5%. 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 £70 million short-term bank borrowings.
As markets rose, the use of gearing was a positive contributor to performance
in the year. Gearing has made a significant positive contribution to
investment performance over the 21 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.
Principal contributors
12-month return Relative contribution
% %
Paragon +67.4 +0.7
Close Brothers(1) -44.1 +0.6
Playtech(1) -20.4 +0.5
Aston Martin Lagonda(1) -20.6 +0.5
Pets at Home(1) -18.0 +0.5
(1) Not owned by the Company
Paragon Banking is a speciality lender with a primary focus on providing
buy-to-let mortgages to professional landlords. 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. As interest rates have risen Paragon has been able to grow its
net interest margin leading to strong earnings growth.
Close Brothers is a specialist financial services company involved in lending,
asset management services and securities market making. The company was hit by
an FCA review into the historic provision of loans in the auto finance market
which could require Close to make substantial provisions to cover customer
redress. The Company did not own a position in this stock.
Playtech develops software platforms and content for the online, mobile and
land-based gaming industry. Although operational performance has been solid
the company has been hit with a legal dispute with its Mexican JV partner
leading to the non-payment of fees to Playtech. The Company did not own a
position in this stock.
Aston Martin Lagonda is a manufacturer of luxury automobiles. Operational
weakness, high leverage and a requirement to bolster the balance sheet by
share issuance impacted the share price over the period under review. The
Company did not own a position in this stock.
Pets at Home is a leading UK retailer of pet products and provider of
veterinary services. As the Covid-induced boom in pet ownership has subsided,
growth in its retail business has slowed, compounded by a problematic move
into a new distribution centre which has caused stock availability issues.
Additionally, sentiment around the veterinary business has been impacted by a
Competition and Markets Authority enquiry into the wider industry. The Company
did not own a position in this stock.
Principal detractors
12-month return Relative contribution
% %
Impax Asset Management -35.4 -1.6
Team17 -20.6 -0.8
Carnival(1) +67.6 -0.7
Oxford Instruments -8.7 -0.7
Learning Technologies -13.2 -0.5
(1) Not owned by the Company
Impax Asset Management is an environmentally and socially responsible focused
asset manager based in the UK. The company has delivered impressive earnings
growth over the last five years from a combination of asset inflows and
positive market performance. The last 12 months have been more challenging,
primarily due to higher interest rates and the derating of growth companies
that it typically invests in. The business has also experienced mild outflows.
This combination of outflows and challenging investment performance has put
pressure on company profitability. Nevertheless, the strength of the brand and
long-term track record provides us with confidence about the growth
opportunities at the company over the medium term.
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 group has a strong long-term performance record driven
by new releases and monetisation of the backlog of portfolio games. More
recent trading has been challenging with profitability impacted by a poor
release schedule and higher than expected costs. Looking ahead, this business
has several levers to return to its historical earnings growth and we remain
confident on its medium-term outlook.
Carnival is a global provider of cruise ship holidays. Strong demand from
consumers, particularly in the US, plus lower fuel costs saw profitability
expand which drove strong share price performance. 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 has driven sales,
profit and margin growth. The company has a very strong balance sheet and,
given a positive long-term outlook for its end markets, it is well placed for
the long term. In the short term some end-market weakness, particularly in
semiconductors, more stringent licence controls on exports to China and some
supply chain issues have led to slower growth and share price
underperformance.
Learning Technologies is a provider of software and services to the learning
and human resource development market. Lower demand for its services, caused
by constrained corporate spending due to global economic weakness, has seen
growth at the company slow and profit forecasts missed. These issues are
cyclical rather than structural and the company should return to growth once
economic conditions improve.
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:
Bloomsbury is a publisher of children's, adults' and academic book titles. The
group was originally founded by Nigel Newton, the current CEO, as an
independent, medium sized and high-quality publisher of authors with high
potential. In this regard, the group is most famous for its identification and
publication of the Harry Potter series by J.K. Rowling and more recently, the
works of Sarah J. Maas. With exciting new content from authors expected in the
future, the group has a strong growth profile over the medium term.
hVIVO is a clinical research organisation specialising in human challenge
trials for infectious and respiratory disease products. These trials involve
exposing volunteers to characterised pathogens and offer pharmaceutical and
biotech companies a relatively cheap and effective way to undertake
accelerated drug development. The company has operations in the UK, Ireland,
France and the Netherlands. The barriers to entry in this niche industry are
high as the proprietary datasets about viral loads can only be built through
experience. The business is focussed on both organic growth, through the
development of ancillary services, and inorganic growth. The company is
experiencing robust contract and order book momentum and has good visibility
on near-term growth. Cash generation is strong and working capital
requirements are negative in periods of order book growth. Management has set
ambitious medium-term revenue and margin targets and our investment gives us
exposure to structural growth in this niche market.
Keller is a leading provider of ground engineering services to the
construction industry. It has a global presence with operations in 37
countries. However, its key territory is the US where it makes 80% of its
profits and has a leading market position. A new management team has
transformed the bidding disciplines and controls around contracts which has
materially improved financial performance. Increased profitability has
translated into strong cash generation which has de-levered the balance sheet.
This should allow more optionality over M&A activity and/or capital
returns to shareholders. With demand in its key US market likely to remain
robust and recovery potential in its European and Australasian operations,
prospects remain strong.
Morgan Sindall is a diversified construction services group with operations in
office fit-out, construction, infrastructure, social housing maintenance,
affordable housing and urban regeneration. The company, led by CEO and founder
John Morgan, has an exceptional track record of steady dependable growth,
over-delivery of expectations and strong cash generation. Recent investment in
its affordable housing division looks well timed as the new Labour Government
prioritises increased housing production.
Telecom Plus is a multi-service provider of utilities, insurance and cash-back
cards to over 1 million customers in the UK under its Utility Warehouse Brand.
The company's unique route to market, a partner referral model, and
differentiated product offering, bundled services, has historically led to low
customer churn. Its multi-service offering gives the company a structural cost
advantage versus competing single-product utility providers. Our investment
thesis is centred on the belief that growth rates should accelerate following
the market and regulatory changes which were instigated by the energy crisis
in 2022 and which have reduced competition in this market. The business is
capital light and has a shareholder-friendly approach to capital returns.
XPS Pensions is an insurance consultancy business. Given regulatory change and
increased activity in the pension buy-out market, demand for their services is
likely to remain strong, driving superior earnings growth in the medium term.
Additionally, the balance sheet has de-levered significantly, allowing more
substantial returns to shareholders. The sector has seen significant
consolidation in recent years and it would be unsurprising to see XPS involved
in any further activity either as an acquiror or acquiree.
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 Halfords, a cycle and automotive parts retailer. Operational
performance has been disappointing and acquisitions in the automotive
servicing area have not lived up to expectations. With continued unfavourable
weather and weakness in consumer spending, we believe trading conditions
remain difficult. We also disposed of our holding in Headlam, a floor
coverings distributor. Weakness in the housing market is impacting demand and
the company has seen profitability collapse and cash flow deteriorate. With
new competition and a long recovery ahead, the outlook looks challenged. We
sold our position in Restore Group, a box storage and diversified business
services group. Although the company has appointed new management and has
taken action to improve underperforming parts of the business, we are
concerned that the group faces structural pressures as demand for paper-based
services falls in a digital world. We also sold our position, in line with our
stated policy, in Howden Joinery, a kitchen manufacturer and retailer, as it
was promoted 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: Blancco Technology, a provider of data erasure software, from
Francisco Partners; Ergomed, a clinical research outsourcer, from Permira;
Gresham House, a specialist alternative asset manager, from Searchlight
Capital Partners; Restaurant Group, a UK based restaurant and pub group, from
Apollo; Smart Metering Systems, an owner of smart meter devices and battery
assets, from KKR; Spirent Communications, a telecoms software and services
provider, from Keysight Technologies; and Tyman, a building materials group,
from Quanex.
Top ten positions
The following table shows the Company's top ten stock positions and their
active weight versus the Deutsche Numis Smaller Companies Index (excluding
investment companies):
Top ten positions Portfolio Index weight Active weight
at 31 May 2024 % % %
Paragon Banking 3.3 1.1 2.2
Mitchells and Butlers 3.1 1.2 1.9
Bellway 3.0 - 3.0
Oxford Instruments 2.7 1.0 1.7
Balfour Beatty 2.6 - 2.6
Future 2.5 0.8 1.7
OSB 2.5 - 2.5
Vesuvius 2.3 0.9 1.4
Gamma Communications 1.9 - 1.9
IntegraFin 1.8 0.8 1.0
A brief description of the largest positions (excluding Paragon Banking and
Oxford Instruments which were covered earlier) follows:
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 then 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 have eased. The company is
steadily repaying its securitised debt, enabling a transfer of value from debt
to equity. Additionally, with its pension deficit now cleared, cash flow is
improving, allowing an accelerated reduction in net debt.
Bellway is a national UK housebuilder. The company has an excellent long-term
track record of controlled expansion, solid operational and financial
performance whilst maintaining a strong balance sheet. Recent weakness in the
housing market, caused by the economic downturn and rising interest rates has
put short-term profitability under pressure as house prices soften and volumes
contract. However, the business remains well placed to benefit from any
recovery. Additionally, valuation support is provided by the discount to net
asset value at which the shares currently trade.
Balfour Beatty is an international contractor and infrastructure investor.
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 cash flow 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, cash flow and returns to investors.
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.
In addition to these verticals, the business owns Go.Compare, a price
comparison website which operates in the UK. Following a year of earnings
downgrades and management change, the company has renewed its focus on organic
growth and portfolio optimisation. Management is reinvesting in the business
to drive top line growth and the board has been proactive about actively
looking for options to accelerate value creation. This in conjunction with a
stabilisation in audience numbers has driven a re-rating of the shares during
the period under review. Despite their strong run, the shares look undervalued
on a sum-of-the-parts basis and, notwithstanding potential structural
pressures driven by artificial intelligence ("AI"), we have renewed confidence
that the stock will continue to perform when the consumer technology cycle
turns or the board realises value through the sale of one or more of its
operating divisions.
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 it to return significant cash to shareholders
through share buybacks and increased dividends.
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 especially as
margins have clear scope to strengthen.
Gamma Communications provides voice, data, mobile and internet-based telecoms
to small and medium-sized enterprises in the UK and Europe. The company is
focused on selling cloud-based telephony solutions, a market which is rapidly
growing as users switch to more flexible services. The company has been highly
successful with this approach in the UK and has recently expanded, through
acquisitions, into Germany, the Netherlands and Spain to replicate this
strategy. Overall, Gamma is operating in a market with good long-term growth
opportunities and is in a strong position to win with its customer and
technology-focused approach.
IntegraFin operates an investment platform business in the UK. This platform
is designed for independent financial advisers and their clients to hold and
manage their investment products in a cost efficient and easy to use format.
The high-quality customer service and attractive fee rates act as
differentiators against competition and as a result, the business has seen
impressive growth in assets on the platform since the group's inception in
2000. With the company requiring little capital to grow, IntegraFin is a
high-returns business which should be able to consistently return cash to
shareholders.
Portfolio weightings
As at 31 May 2024, the portfolio was weighted by company size as follows:
Weighting %
31 May 2024 31 May 2023
FTSE 100 0.0 0.0
FTSE 250 77.7 70.2
FTSE Small Cap 12.6 14.3
FTSE AIM 21.2 28.1
Gearing (11.5) (12.6)
Market outlook
Whilst global inflation has fallen significantly over the last year, it
remains above official targets. Hence central banks, led by the US Federal
Reserve, have retained their generally hawkish stance. However, it is clear we
have reached the end of the monetary policy tightening cycle and the next
movement in rates will be downwards. What is not clear is the timing of when
rates start to fall and the speed of their descent. So far in 2024, economic
data, particularly services and wage inflation and labour market activity, has
surprised negatively, pushing expectations of interest rate cuts further into
the future. In the meantime, the delayed transmission mechanism of rising
interest rates and their impact means that economic conditions are likely to
remain challenging in the short term. Notwithstanding this, the prospect of a
monetary easing cycle is likely to support global equity markets and allow
valuation multiples to expand.
Geopolitics remain challenging, with the ongoing conflicts in Ukraine and the
Middle East and heightened tensions between China and the US. The longer-term
economic implications of this 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. In addition, domestic politics are likely to be an
area of volatility. Up to half the global population is going to the polls in
2024 with key elections in the UK, USA, France, India, Mexico, South Korea and
the EU. In the UK, a surprise early election has resulted in the expected
Labour landslide win, mostly due to dissatisfaction with the incumbent
Conservative Government rather than enthusiasm for the Labour Party. The
strong majority should allow for a stable government, and one that is less
reliant on the fringes of their party. We see this result as a clearing event
for the market and expect the political premium associated with the UK to
reduce over time. We welcome Labour's commitment to 'boost investment' and in
particular their pledge to 'increase investment from pension funds in UK
markets'. Any incremental flow into the UK could breathe life into a generally
under-owned and, more importantly, undervalued UK equity market.
In the 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
recovered strongly post-pandemic and we are seeing an increasing number of
companies buying back their own stock.
The IPO market has been exceptionally quiet as equity market confidence has
diminished. There are some signs that this is likely to improve in the short
to medium term, with the recent successful float of Raspberry Pi providing
evidence that the UK equity market remains open for attractive, growing
businesses. M&A activity 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 trading below long-term averages.
In addition, smaller companies are trading at a historically high discount to
their larger counterparts. A sharp rebound in corporate earnings following the
pandemic-induced shock in 2020 has now faded. Weak economic activity led to
subdued corporate earnings growth in 2023 compounded by rising interest costs
and a higher corporate tax burden. The outlook for 2024 looks more favourable
as cost pressures ease and demand remains generally robust.
Although uncertainty remains around short-term economic conditions, we think
that the portfolio is both well positioned to withstand current challenging
economic conditions and participate in the upswing as it occurs. 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 mixed one for the Company.
Absolute performance was positive although 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 offer 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 2024
Company Principal activities Valuation Portfolio
£'000 %
Paragon Banking Buy-to-let mortgage provider 27,198 3.26
Mitchells & Butlers Hospitality operator 25,487 3.06
Bellway Housebuilder 25,039 3.00
Oxford Instruments Advanced instrumentation equipment 22,330 2.68
Balfour Beatty International contractor 21,541 2.59
Future Specialist internet, website and magazine company 21,200 2.54
OSB Group Buy-to-let mortgage provider 20,416 2.45
Vesuvius Ceramic engineering 19,520 2.34
Gamma Communications(1) Telecommunications 15,972 1.92
IntegraFin B2B financial platform 14,918 1.79
10 largest 213,621 25.63
Computacenter IT reseller 14,482 1.74
Impax Asset Management(1) ESG-focused investment manager 14,322 1.72
Chemring Technology products and services 13,896 1.67
Just Group Enhanced annuity provider 13,623 1.63
GB Group(1) Data intelligence services 13,087 1.57
Volution Producer of ventilation products 12,651 1.52
Serco Outsourcing services 12,446 1.49
Renishaw Precision measuring and calibration equipment 12,385 1.49
Ascential Exhibition organiser 12,235 1.47
Bodycote Engineering group 12,064 1.45
20 largest 344,812 41.38
Genuit Building products 11,713 1.41
Tyman Building products 11,632 1.40
Softcat Software reseller 11,620 1.39
Pagegroup Recruitment company 11,440 1.37
Savills Property transactional consulting services 11,400 1.37
Foresight Specialist fund manager 11,376 1.37
Team17(1) Games software developer 11,284 1.35
Next Fifteen Communications(1) PR and media services 10,957 1.31
Qinetiq Defence services 10,840 1.30
Workspace Real estate investment and services 10,700 1.28
30 largest 457,774 54.93
Learning Technologies(1) Learning services and software 10,655 1.28
Bytes Technology Software reseller 10,626 1.28
Victrex Speciality chemicals 10,609 1.27
Spectris Electronic control and process instrumentation 10,131 1.22
Crest Nicholson Housebuilder 9,988 1.20
Redde Northgate Commercial vehicle hire 9,838 1.18
Watches of Switzerland Luxury watch retailer 9,830 1.18
Hunting Oil equipment and services 9,695 1.16
Hollywood Bowl Ten pin bowling operator 9,570 1.15
MONY Price comparison website 9,442 1.13
40 largest 558,158 66.98
(1) Quoted on the Alternative Investment Market
Company Principal activities Valuation Portfolio
£'000 %
SigmaRoc(1) Aggregates supplier 9,141 1.10
Alpha Financial Markets(1) Investment management consultancy 9,000 1.08
Rathbones Private client wealth manager 8,726 1.05
Trainline Online ticket retailer 8,597 1.03
Midwich(1) Audio-visual equipment distributor 8,417 1.01
Luceco Electrical products 8,307 1.00
XP Power Electrical power products 7,980 0.96
Serica Energy(1) Oil & gas exploration and production 7,923 0.95
Morgan Advanced Materials Engineering group 7,339 0.88
Burford Capital(1) Litigation finance 7,267 0.87
50 largest 640,855 76.91
Clarkson Shipping services 7,193 0.86
Harbour Energy Oil and gas exploration and production 6,930 0.83
Keller Ground engineering 6,826 0.82
Synthomer Speciality chemicals 6,718 0.81
Wickes DIY retailer 6,622 0.79
Harworth Urban regeneration and property investment 6,364 0.76
RWS Holdings(1) Patent translation services 5,822 0.70
Avon Protection Defence products 5,799 0.70
SThree Recruitment company 5,784 0.69
Wilmington B2B information provider 5,738 0.69
60 largest 704,651 84.56
JTC Fund administrator 5,400 0.65
Auction Technology Online auction software provider 5,272 0.63
Morgan Sindall Diversified building contractor 5,222 0.63
Moonpig Online card and gift retailer 5,049 0.61
Videndum Broadcast and camera systems 5,031 0.60
GlobalData(1) B2B information provider 5,005 0.60
AB Dynamics(1) Automotive testing and measurement products 4,927 0.59
DFS Furniture retailer 4,600 0.55
Liontrust Asset Management Specialist fund management 4,349 0.52
Telecom Plus Provider of consumer services 4,287 0.51
70 largest 753,793 90.45
Bloomsbury Publishing Consumer and academic publisher 4,227 0.51
Bridgepoint Private equity fund manager 4,111 0.49
Stelrad Radiator manufacturer 4,060 0.49
Empiric Student accommodation 3,847 0.46
RM Education software and services 3,816 0.46
XPS Pensions Pensions consultancy 3,795 0.46
Helical Office property investor and developer 3,472 0.42
Essentra Industrial distributor 3,337 0.40
CLS Real estate investment and services 3,077 0.37
ME Group Vending equipment 2,925 0.35
80 largest 790,460 94.86
( )(1) Quoted on the Alternative Investment Market
Company Principal activities Valuation Portfolio
£'000 %
Advanced Medical Solutions(1) Medical supplies manufacturer 2,875 0.34
Benchmark Holdings(1) Aquaculture services 2,873 0.34
Grainger Residential property investor 2,869 0.34
Young & Co's share class A(1) Pub operator 2,778 0.33
Severfield Structural steel products 2,736 0.33
Pebble(1) Promotional products and services 2,666 0.32
YouGov(1) Market research and data services 2,579 0.31
Domino's Pizza Franchise operator of pizza outlets 2,493 0.30
Young & Co's share class NV(1) Pub operator 2,464 0.30
Eurocell Building products 2,318 0.28
90 largest 817,111 98.05
Pulsar1 Marketing services software provider 2,238 0.27
Capricorn Energy Oil and gas exploration and production 2,021 0.24
Alliance Pharma(1) Pharmaceutical products 1,979 0.24
Alfa Financial Software Leasing software 1,978 0.24
Tribal(1) Educational support services and software 1,964 0.24
Hill & Smith Fabricated metal products 1,578 0.19
Spirent Communications Telecom testing services 1,536 0.18
Thruvision(1) Detection technology 1,125 0.13
hVIVO(1) Clinical trial services 1,113 0.13
Oxford Biomedica Gene and cell therapy 725 0.09
100 largest 833,368 100.00
Total equity investments 833,368 100.00
There were no convertible or fixed interest securities at 31 May 2024 (2023:
None).
1 Quoted on the Alternative Investment Market
( )
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
ongoing ramifications of the Russia/Ukraine war and conflict in the Middle
East. The Board has had regard to 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 economic
uncertainty, disruption to markets and society through artificial intelligence
("AI"), the UK General Election, 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
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
Poor long-term investment performance (significantly below agreed benchmark or trading at a wider discount to net asset value ("NAV") per share. The Board
market/ industry average) manages these risks by ensuring a diversification of investments and a regular
review of the extent of borrowings. The Manager operates in accordance with
investment limits and restrictions determined by the Board; these include
limits on the extent to which borrowings may be used. The Board reviews its
Loss of the Fund Manager or management team 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 the investment
Impact of political, environmental, health or other emergencies (e.g. process with the Fund Manager, and regularly reviews data that monitor
pandemics, war and a changing macroeconomic environment) on the Company's portfolio risk factors.
investments
The Fund Manager reports to each board meeting on his close oversight of the
Unmanaged ESG activities and material climate-related (physical and portfolio, and more frequently in the event of a crisis. Performance is
transition) impacts within portfolio companies 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
governance structures, ESG risks reports, and votes cast against management.
Market appetite - investment objective and/or policy not appropriate in the The Board also reviews JHI's ESG-related marketing activity specific to the
current market or not sought by investors resulting in a wide discount Company.
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
the Board on a continual basis and are reported on in the Annual Report.
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
listing in the closed-ended investment funds category of the FCA's UK Listing
Rules and trades on the main market of the London Stock Exchange, the Company
must comply with the UK 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 legal proceedings. A breach of the FCA Rules
could result in 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 providers 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.
pandemics, 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:
● major general elections globally during the year;
● possible global conflict owing to escalated violence in the
Middle East;
● high levels of government debt, leading to increased
government spending on interest costs; and
● a further decline in voting by retail shareholders who own
their shares via platforms. This is a risk common to the investment company
sector. The Board considers that it is taking all reasonable actions possible
at this time to mitigate the risk through its increased focus on promotion to
retail shareholders.
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.
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 continued macroeconomic and geopolitical
uncertainty following Russia's invasion of Ukraine, heightened tensions
between the US and China, conflict in the Middle East, the current
cost-of-living crisis and the new government in the UK. 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 and 2028 AGMs, which are 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 2029.
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 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.
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 and expenses. Remuneration is paid quarterly in arrears and
amounts for April and May 2024 were therefore accrued as at the year end.
There were no other outstanding amounts payable at the year end. 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 2024 Year ended 31 May 2023
Revenue Capital Revenue Capital
return return Total return return Total
Notes £'000 £'000 £'000 £'000 £'000 £'000
2 Investment income 24,656 - 24,656 24,295 - 24,295
3 Other income 190 - 190 95 - 95
Gains/(losses) on investments held at fair value through profit or loss - 75,521 75,521 - (127,252) (127,252)
Total income/(loss) 24,846 75,521 100,367 24,390 (127,252) (102,862)
Expenses
4 Management fees (679) (1,584) (2,263) (710) (1,657) (2,367)
Other expenses (647) - (647) (731) - (731)
Profit/(loss) before finance costs and taxation 23,520 73,937 97,457 22,949 (128,909) (105,960)
Finance costs (1,235) (2,882) (4,117) (997) (2,325) (3,322)
Profit/(loss) before taxation 22,285 71,055 93,340 21,952 (131,234) (109,282)
Taxation 5 - 5 (5) - (5)
Profit/(loss) for the year and total comprehensive income 22,290 71,055 93,345 21,947 (131,234) (109,287)
5 Earnings/(loss) per ordinary share - basic and diluted 29.85p 95.14p 124.99p 29.38p (175.68p) (146.30p)
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.
All revenue and capital items in the above statement derive from continuing
operations. No operations were acquired or discontinued in the year.
The profit attributable to Ordinary shareholders for the year disclosed above
represents the Company's total Comprehensive Income. The Company does not have
any other Comprehensive Income.
STATEMENT OF CHANGES IN EQUITY
Retained earnings
Capital
Share redemption Capital Revenue Total
capital reserve reserves reserve equity
Notes Year ended 31 May 2024 £'000 £'000 £'000 £'000 £'000
Total equity at 1 June 2023 18,676 26,745 612,810 17,156 675,387
Total comprehensive income: - - 71,055 22,290 93,345
Profit for the year
Transactions with owners, recorded directly to equity:
Buyback of shares for cancellation (49) 49 (1,598) - (1,598)
6 Ordinary dividends paid - - - (19,794) (19,794)
Total equity at 31 May 2024 18,627 26,794 682,267 19,652 747,340
Retained earnings
Capital
Share redemption Capital Revenue Total
Notes capital reserve reserves reserve equity
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
BALANCE SHEET
At 31 May At 31 May
2024 2023
Notes £'000 £'000
Non-current assets
Investments held at fair value through profit or loss 833,368 760,156
Current assets
Receivables 11,763 3,187
Cash and cash equivalents 9,249 13,338
21,012 16,525
Total assets 854,380 776,681
Current liabilities
Payables (1,514) (851)
Bank loans (55,744) (50,672)
(57,258) (51,523)
Total assets less current liabilities 797,122 725,158
Non-current liabilities
Financial liabilities (49,782) (49,771)
Net assets 747,340 675,387
Equity attributable to equity shareholders
7 Share capital 18,627 18,676
Capital redemption reserve 26,794 26,745
Retained earnings:
Capital reserves 682,267 612,810
Revenue reserve 19,652 17,156
Total equity 747,340 675,387
8 Net asset value per ordinary share 1,003.1p 904.1p
STATEMENT OF CASH FLOWS
Year ended
31 May 31 May
2024 2023
Notes £'000 £'000
Operating activities
Profit/(loss) before taxation 93,340 (109,282)
Add back interest payable 4,117 3,322
Profit/(loss) on investments held at fair value through profit or loss (75,521) 127,252
Purchases of investments (89,274) (109,395)
Sales of investments 91,583 114,384
Decrease/(increase) in receivables 36 (38)
Decrease in amounts due from brokers 506 1,394
Increase in accrued income (9,113) (316)
Decrease in payables (54) (66)
Increase/(decrease) in amounts due to brokers 579 (2,081)
Net cash inflow from operating activities before interest and taxation 16,199 25,174
Interest paid (3,968) (3,303)
Net cash inflow from operating activities(1) 12,231 21,871
Financing activities
Buyback of ordinary shares (1,598) -
6 Equity dividends paid (19,794) (17,928)
Drawdown of bank loans 5,072 404
Net cash outflow from financing activities (16,320) (17,524)
(Decrease)/increase in cash and cash equivalents (4,089) 4,347
Cash and cash equivalents at the start of the year 13,338 8,991
Cash and cash equivalents at the end of the year 9,249 13,338
(1) In accordance with IAS 7.31 cash inflow from dividends was £24,346,000
(2023: £24,000,000) cash inflow from interest was £198,000 (2023 £74,000)
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 Company is a single reporting entity and there is no
ultimate controlling party. The financial statements of the Company for the
year ended 31 May 2024 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 below. 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.
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 continued macroeconomic and
geopolitical uncertainty following Russia's invasion of Ukraine, heightened
tensions between the US and China, conflict in the Middle East, the current
cost-of-living crisis, a new government in the UK, 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 they are able to meet
their 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
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
2024 2023
Income from companies listed or quoted in the United Kingdom: £'000 £'000
Divide 23, 2
nds 182 2
,
5
5
3
Specia 602 1
l ,
divide 1
nds 7
7
Proper 872 5
ty 6
income 5
distri
bution
s
Total investment income 24,656 24,295
3 Other income
2024 2023
£'000 £'000
Bank 190 9
and 5
other
intere
st
190 9
5
4 Management fees
2024 2023
Revenue Capital Total Revenue Capital Total
return return return return return return
£'000 £'000 £'000 £'000 £'000 £'000
Management fee 679 1,584 2,263 710 1,657 2,367
679 1,584 2,263 710 1,657 2,367
A summary
of the
management
agreement
is given
in the
Annual
Report.
5 Earnings/(loss) per ordinary share
The earnings per ordinary share figure is based on the net profit for the year
of £93,345,000 (2023: net loss of £109,287,000) and on 74,684,351 (2023:
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 can be further analysed
between revenue and capital, as below:
2024 2023
£'000 £'000
Net revenue profit 22, 21
290 ,9
47
Net capital profit/(loss) 71, (1
055 31
,2
34
)
Net total profit/(loss) 93, (1
345 09
,2
87
)
Weighted average number of ordinary shares in issue during the year 74, 74
684 ,7
,35 01
1 ,7
96
202 20
4 23
Revenue earnings per ordinary share 29. 29
85p .3
8p
Capital earnings/(loss) per ordinary share 95.14p (175.68p)
Total earnings/(loss) per ordinary share 124.99p (146.30p)
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
2024 2023
Record Date Pay date £'000 £'000
Final dividend 19.0p (2023: 17.00p)
for the year ended 31 May 2023 25 August 2023 9 October 2023 14,193 12,699
Interim dividend of 7.50p (2023: 7.00p)
for the year ended 31 May 2024 9 February 2024 5 March 2024 5,603 5,229
Unclaimed dividends (2) (3)
19,794 17,925
Subject to approval at the AGM, the proposed final dividend of 19.5p per
ordinary share will be paid on 7 October 2024 to shareholders on the register
of members at the close of business on 30 August 2024. The shares will be
quoted ex-dividend on 29 August 2024.
The proposed final dividend for the year ended 31 May 2024 has not been
included as a liability in these financial statements. Under IFRS, the final
dividend is not recognised until approved by shareholders.
The total dividends payable in respect of the financial year which form the
basis of the test under section 1158 of the Corporation Tax Act 2010 are set
out below:
2024 2023
£'000 £'000
Revenue available for distribution by way of dividends for the year 22,290 21,947
Interim dividend for the year ended 31 May 2024: 7.5p (2023: 7.0p) (5,603) (5,229)
Final dividend for the year ended 31 May 2023: 19.0p (based on 74,701,796 -
shares in issue at 1 August 2023)
Proposed final dividend for the year ended 31 May 2024: 19.5p (based on (14,505) (14,193)
74,385,131 shares in issue at 29 July 2024)
Transfer to reserves 2,182 2,525
7 Share capital
2024 2023
£'000 £'000
Allotted, issued, authorised and fully paid:
74,505,131 ordinary shares of 25p each (2023: 74,701,796) 18,627 1
8
,
6
7
6
Duri
ng
the
year
the
Comp
any
purc
hase
d
196,
665
of
its
own
issu
ed
ordi
nary
shar
es
(202
3:
nil)
at a
cost
of
£1,5
98,0
00
(202
3:
£nil
).
Sinc
e
the
year
end
120,
000
shar
es
have
been
boug
ht
back
for
canc
ella
tion
at a
cost
of
£1,0
51,0
00.
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 £747,340,000 (2023: £675,387,000) and on the 74,505,131
ordinary shares in issue at 31 May 2024 (2023: 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:
2024 2023
£'000 £'000
Net assets attributable to the ordinary shares at 1 June 675,387 802,599
Buyback of shares for cancellation (1,598) -
Net gains/(losses) for the year 93,345 (109,287)
Ordinary dividends paid in the year (19,794) (17,925)
Net assets attributable to the ordinary shares at 31 May 747,340 675,387
9 2024 Financial information
The figures and financial information for the year ended 31 May 2024 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 2024 have been audited but have not yet been
delivered to the Registrar of Companies. The Independent Auditor's Report on
the 2024 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 2023 Financial information
The figures and financial information for the year ended 31 May 2023 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 2023 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 2024 will be sent to shareholders
in August 2024 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 Wednesday, 2 October 2024. The
Board invites shareholders to attend the meeting at the registered office at
201 Bishopsgate, London EC2M 3AE, or via videoconference if preferable. Only
shareholders present in person or by proxy will be able to participate in the
vote. The Fund Manager and Deputy Fund Manager will present their 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), Kevin
Carter (Senior Independent Director), Alexandra Mackesy (Audit and Risk
Committee Chair), Victoria Sant, Michael Warren and Yen Mei Lim.
The Corporate Secretary is Janus Henderson Secretarial Services UK Limited,
represented by Johana Woodruff.
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 Director
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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