TIDMASCI
RNS Number : 3824U
abrdn Smaller Companies Inc Tst plc
28 March 2023
Performance Highlights
abrdn Smaller Companies Income Trust plc
ANNUAL FINANCIAL REPORT FOR THE YEARED 31 DECEMBER 2022
Net asset value total return(A) Numis Smaller Companies ex Inv Trust
Index
2022: 2022:
-33.2% -17.9%
2021: +30.4% 2021: +21.9%
Share price total return(A) Earnings per Ordinary share (revenue)
2022: 2022:
-33.7% 11.24p
2021: +22.9% 2021: 9.69p
Dividend per share Discount to net asset value(A)
2022: 2022:
9.80p 16.3%
2021: 8.85p 2021: 15.3%
(A) Considered to be an Alternative Performance Measure. Further details
can be found below.
Financial Calendar, Dividends and Highlights
Payment dates of quarterly dividends January 2023,
April 2023,
July 2023,
October 2023
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Annual General Meeting (London) 14 June 2023
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Half year end 30 June 2023
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Expected announcement of results September 2023
for the six months ending 30 June
2023
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Financial year end 31 December 2023
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Expected announcement of results March 2024
for the year ending 31 December
2023
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Dividends
Rate per share xd date Record date Payment date
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First interim dividend 2.40p 7 April 2022 8 April 2022 25 April 2022
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Second interim dividend 2.40p 30 June 2022 1 July 2022 22 July 2022
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Third interim dividend 2.40p 6 October 7 October 28 October
2022 2022 2022
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Fourth interim dividend 2.60p 5 January 6 January 27 January
2023 2023 2023
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2022 9.80p
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First interim dividend 2.15p 1 April 2021 6 April 2021 23 April 2021
======================= ============== ============ ============ =============
Second interim dividend 2.15p 1 July 2021 2 July 2021 23 July 2021
======================= ============== ============ ============ =============
Third interim dividend 2.15p 7 October 8 October 29 October
2021 2021 2021
======================= ============== ============ ============ =============
Fourth interim dividend 2.40p 6 January 7 January 28 January
2022 2022 2022
----------------------- -------------- ------------ ------------ -------------
2021 8.85p
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Financial Highlights
31 December 31 December % change
2022 2021
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Total investments GBP68,732,000 GBP102,183,000 -32.7
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Shareholders' funds GBP63,520,000 GBP97,840,000 -35.1
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Market capitalisation GBP53,174,000 GBP82,912,000 -35.9
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Net asset value per Ordinary share 287.29p 442.52p -35.1
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Share price (mid market) 240.50p 375.00p -35.9
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Discount to net asset value per Ordinary
share(A) 16.3% 15.3%
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Net gearing(A) 8.2% 4.5%
========================================= ============= ============== ==========
Ongoing charges ratio(A) 1.34% 1.20%
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Dividends and earnings
========================================= ============= ============== ==========
Earnings per Ordinary share (revenue)(B) 11.24p 9.69p +16.0
========================================= ============= ============== ==========
Dividends per Ordinary share(C) 9.80p 8.85p +10.7
========================================= ============= ============== ==========
Dividend cover(A) 1.15 1.09 +5.5
========================================= ============= ============== ==========
Revenue reserves(D) GBP3,562,000 GBP3,200,000 +11.3
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(A) Considered to be an Alternative Performance Measure. Further details
can be found below.
(B) Measures the revenue earnings for the year divided by the weighted
average number of Ordinary shares in issue (see Statement of Comprehensive
Income).
(C) The figures for dividends per share reflect the years in which
they were earned (see note 8 on page 78 of the 2023 Annual Report).
(D) The revenue reserve figure does not take account of the fourth
interim dividend amounting to GBP575,000 (2021 - GBP531,000).
Strategic Report
Chair's Statement
Following the Company's year end the Board commenced a strategic
review, announced on 13 February 2023. The Board recognises that
whilst the Company has continued to deliver on its investment
objective of providing a high and growing dividend, its small size
coupled with a persistent and material discount to net asset value
(NAV) has created challenges in liquidity and has prevented the
Company from growing. The Company received an unsolicited proposal
from another investment trust and the Board believes it is in the
best interests of shareholders to seek proposals from all
potentially interested parties.
The Company has received proposals from a number of investment
companies and investment management groups, almost all of which
envisage shareholders being offered the option to roll over some or
all of their investment into a successor vehicle or to receive cash
for some or all of their shareholding through a reconstruction
under section 110 of the Insolvency Act. The strategic review
process is now at a stage where a short list of candidates have
been requested to prepare detailed proposals and responses to the
Board's specific questions. The Board will review all the proposals
fully and revert to you, as shareholders, with our recommendation
as soon as practicable.
The Board's statement on its consideration of the Company's
ability to continue as a going concern (with material uncertainty)
is on page 44 of the 2023 Annual Report.
Performance
In 2022 investors were faced with two events that most had hoped
they would not see in their lifetime; the return of double-digit
inflation and a war in Europe as Russia invaded Ukraine. The
consequences of the latter sent the price of oil and gas to
unprecedented levels, which, coupled with post-pandemic supply
issues, has triggered an inflation shock. In financial markets,
there were very few places to hide. We witnessed sharp falls at the
same time in equity and bond markets, interest rates and bond
yields rose dramatically, reversing a 40 year trend, and we saw a
widening of investment trust discounts across the sector.
During times of macro uncertainty, there tends to be rotation
into the "cheapest" stocks in markets and this factor rotation is
driven primarily by top-down influences, (for example, sectors, oil
price, FX rates etc.) rather than at the individual company
fundamentals level. This rotation in terms of style into 'value'
stocks dominated the year and the combination of events meant that
the Manager's Quality, Growth and Momentum investment process was
out of favour. Despite this we have been pleased with the dividend
growth achieved. Against this backdrop, the Company suffered
under-performance over one year against its index, the Numis
Smaller Companies (excluding investment trusts) Index, returning a
NAV total return of -33.2% vs an index return of -17.9%.
Share price performance for the period was -33.7%.
The Company's three and five year performance also now reflects
the difficult markets we have endured, with a NAV total return of
-16.4% and a share price return of
-22.6%, versus a benchmark return of -4.2% over three years and
a NAV return of -4.0%, a share price return of
-2.6% and a composite index return of -2.8% over the five year
period.
The Company's one and three year performance is measured against
the Numis Smaller Companies (excluding investment trusts) Index,
which was introduced by the Company on 1 January 2020. Prior to
that date, the Company's benchmark was the FTSE Small Cap
(excluding investment trusts) Index. Performance over a five year
period is therefore measured against a composite of both
indices.
Dividend
On a positive note, the Company's revenue return for the year
ended 31 December 2022 was 11.24p per share (2021: 9.69p). This
represents an increase of almost 16% on last year's figure and is a
reflection of the resilience shown by the Company's portfolio
holdings. Further details on this are covered in the Investment
Manager's Review on pages 11 to 18 of the 2023 Annual Report.
As a result of this increase, we are delighted to be able to
declare a rise in this year's dividend to 9.80p (2021: 8.85p). This
is, as it was last year, fully covered by a combination of this
year's earnings.
With the year end share price at 240.5p, this represents a
dividend yield of 4.1%. Over three and five years, the dividend has
increased by 18.8% and 39.0% respectively.
The undistributed balance of the revenue account will be added
to the Company's revenue reserve and will represent 13.5p per share
following payment of the Company's fourth interim dividend. On 3
March the Board declared its first interim dividend for the new
financial year to 31 December 2023 of 2.60p per share, which will
be payable on 28 April 2023 to shareholders on the register at
close of business on 31 March 2023.
Ongoing Charges
The Company's ongoing charges have increased in the year to the
end of December 2022 to 1.30%, compared to last year's figure of
1.20%. The principal reason for the increase was the decrease in
average net assets during the year. The Company's ongoing charges
are subject to regular review by the Board.
Discount
With discounts widening across the sector during 2022, the
Company's discount at the end of December 2022 stood at -16.3%, a
slight widening to the discount of -15.3% at the end of December
2021.
Gearing/Debt
The Company's use of its GBP10 million credit facility, GBP5
million of which is at a fixed interest rate and GBP5 million at a
variable interest rate, has remained unchanged, with GBP7 million
of the facility being utilised at the year end. The GBP5 million
variable element of the facility was renewed in April 2022 with the
Royal Bank of Scotland International, London Branch for a 2 year
period. The Company's GBP5 million fixed rate loan will expire at
the end of April 2023.
The Company's net gearing position as at 31 December 2022 was
8.2%, compared to 4.5% at the end of 2021.
Board Composition
Rosalyn Breedy was appointed to the Board of the Company as an
independent Non-Executive Director on 5 January 2022.
Rosalyn is a corporate, funds and financial services lawyer and
has brought with her vast experience of regulated funds, as well as
a unique and diverse background which complements the Board's
skills and experience.
At the Company's 2022 Annual General Meeting (AGM), Robert
Lister retired from the Board after serving ten years as a
Director, with seven years as Chairman. In accordance with the
Board's succession plan, I assumed the role of Chair upon his
retirement. The Board would like to formally note Robert's
contribution to the Company during his tenure and thank him for his
stewardship and guidance.
Following these changes, the Board comprises two male and two
female independent Non-Executive Directors.
Biographies of each Board member can be found in the Director's
Report in page 42 of the 2023 Annual Report.
Environmental, Social and Corporate Governance ("ESG")
The Manager continues its active engagement with portfolio
companies on ESG matters on a regular basis and updates are
provided to the Board at each Board meeting. As well as being able
to draw on a team of 20 individuals in this area, the team also
have their own on desk Smaller Companies ESG analyst.
More information concerning the Manager's ESG investment process
can be found in the Manager's Review on pages 19 to 21 of the 2023
Annual Report.
Change of Name of abrdn Entities
Following Standard Life Aberdeen plc's change of name to abrdn
plc in July 2021, we have, more recently, seen the Company's
Manager, Investment Manager and Company Secretary change company
name as part of abrdn's rebranding exercise.
You will find the new names for each Company in the Corporate
Information section on page 100 of the 2023 Annual Report.
Company Change of Name
As referenced in the last Annual Report, the Board decided to
also change the Company's name, from Aberdeen Smaller Companies
Income Trust plc to abrdn Smaller Companies Income Trust plc, to
align itself with abrdn's new brand. This change came into effect
on 7 January 2022.
Change of Lead Fund Manager
Abby Glennie and Amanda Yeaman have co-managed the Company
assets since November 2020. Following changes to the Smaller
Companies team at abrdn, Amanda has assumed the role of lead
manager of the Company's portfolio, supported by Abby. Both
individuals are still very much involved in the management of the
Company's assets.
abrdn's London Office Move
In December 2022, abrdn relocated its London office to 280
Bishopsgate, London, EC2M 4AG, having been at Bow Bells House for
over 13 years. As a result, the Company's forthcoming AGM will be
held at a different location to last year and further details can
be found below.
Annual General Meeting
The Company's AGM is schedule d to take place at 11:00am on
Wednesday 14 June 2023 at Wallacespace, 15 Artillery Lane, London,
E1 7HA, a short walk from Liverpool Street Station.
At the meeting, shareholders will have the opportunity to hear
an update from the Manager and ask questions of the Manager and the
Board. We are looking forward to welcoming you to this new venue
near abrdn's London office.
As mentioned above, at the time of writing the Board is
undergoing a strategic review and will notify shareholders of any
updates through an announcement to the London Stock Exchange and on
the Company's website. We therefore encourage shareholders to check
for such updates.
The Board strongly encourages all shareholders, irrespective of
whether they are able to attend the AGM or not, to lodge their
proxy votes in advance of the meeting. Should shareholders have any
questions that they would like to submit in advance of the meeting,
please do so by emailing smallercompaniesincome@abrdn.com.
Outlook
At the time of writing there is uncertainty about how long the
bear market will last, notwithstanding the future of the Company,
and every cycle that we have experienced has been different. This
dynamic makes it harder to say with confidence how any recession or
market recovery will develop, not least because there is also
uncertainty on what any policy response from central banks will
be.
The outlook for both economies and businesses, globally, is
tough and, whilst a high degree of earnings forecast reductions
have already been seen, areas of risk remain. Smaller Companies
indices have sold-off aggressively versus others, particularly
within the UK, and so the opportunity for relative strength in the
smaller end of the market remains attractive. Whilst market timing
is difficult, smaller companies typically lead a market
recovery.
Looking to the coming year we believe that the Quality focus
will prove relatively resilient in a recessionary environment. The
Manager continues to adhere to a long-established investment
process that selects high quality smaller companies with resilient
earnings that lead to robust dividend payments. Given that we could
be entering a recession, it would be unusual if this was dominated
by cheaper value cyclical business where earnings are likely to be
more challenged over the next year, although the Manager will
continue to monitor the likelihood and depth and breadth of a
recession as a factor in their decision making.
Dagmar Kent Kershaw
Chair
27 March 2023
Investment Manager's Review
Overview
After a very challenging 2021 we had hoped for a more stable
backdrop for 2022, but one thing we have learned over recent years
is to expect shocks and surprises. At the beginning of the year,
policymakers still expected inflation to be 'transitory' and
commentators and economists expected a contained, if modest post
pandemic recovery for the UK economy. Yet what followed was a year
dominated by top-down macro factors rather than bottom-up company
fundamentals. Russia's invasion of Ukraine, together with the very
hawkish pivot of central banks in the US and the UK, meant that any
hopes for a controlled recovery from the pandemic were no longer a
reality. Markets suffered a number of macroeconomic shocks, most
notably the return of inflation and an end to years of record low
interest rates. Large increases in the prices of food and energy
sparked fears about a 'cost of living' crisis and declines in
household disposable incomes. For businesses, investors worried
that inflation would result in higher input costs and potentially
lower profit margins leading to a reduction in company earnings. In
October, analysts delivered the highest proportion of downgrades
since June 2020 and the divergence across the market cap bands was
pronounced. The FTSE 100 recorded net upgrades thanks to the global
dollar earners and energy constituents in the index. In contrast,
the Mid 250 stocks suffered twice as many downgrades as
upgrades.
Global value stocks performed relatively well as investors
rotated away from growth stocks and looked for opportunities among
lowly valued, out of favour companies. To some extent, this shift
could be seen as a reversal of pandemic trends, when internet and
technology stocks were in demand. In terms of currencies, the US
dollar was a standout performer, supported by higher interest rates
in the US. The result was a UK market that was essentially divided
into two camps. The FTSE 100, with its large exposure to oil and
gas, banks and mining companies was neutral for the year while the
more domestically focused FTSE 250 and Numis Smaller Companies
indices declined -19.7% and -17.9% respectively.
The UK also saw political change with Liz Truss' appointment as
Prime Minister and the disastrous budget from her Chancellor Kwazi
Kwarteng which put further pressure on UK markets. We saw some
stability as both Liz Truss and Chancellor Kwarteng were replaced
by Rishi Sunak and Jeremy Hunt respectively, who reversed the
actions of their predecessors.
Equity capital markets came to a standstill in 2022 with very
few IPOs in the year. We believe many IPOs scheduled for 2022 have
only been postponed, not cancelled, and will come to the market
eventually. Similarly, mergers and acquisitions ("M&A") volumes
have declined substantially, often driven by private equity firms
deploying less capital than in previous years as well as challenges
posed by the rising cost of debt. However, in the global M&A
market, the UK was a hot spot of activity. Attracted by a cheap
currency and many attractively valued assets, we saw two of the
Company's best performers come as a result of bids.
The differing performance of the large and small cap indices was
mirrored in fund flows. Large cap funds suffered small outflows in
2022 of c.2.0% of starting assets under management ("AUM"); mid-cap
funds tracking the FTSE 250 saw outflows of 18.4% of starting AUM;
whereas, Small cap funds saw outflows of 11.8% of starting AUM.
Equity markets were volatile in 2022 and, influenced by multiple
exogenous forces, we saw irrational responses to news flow. In
2023, a recession seems inevitable. Central banks have stopped
talking about a 'soft landing' and the UK seems to be the first
major market to accept that it has already entered a downturn. Even
in a recession, there are still opportunities for the market. Stock
picking becomes important, and our Quality Growth and Momentum
process has historically performed relatively well against this
backdrop.
Performance
The UK smaller companies sector as represented by the Numis
Smaller Companies including AIM (excluding Investment Companies)
Index delivered a total return of -17.9% in the year ended 31
December 2022. This compares with a NAV total return for the
Company of -33.2%. Over the same period the FTSE100 Index of the
largest UK listed companies returned 4.6%.
We thank shareholders for their support during a year of market
turmoil. It has been impossible to deny that the year has not been
painful for investors yet this is no reason to lose faith in
holding investment trusts. The volatility for anyone who hasn't
lived through a bear market before must have been alarming but we
remain resolute in the merits of our long established investment
process over the long term, and indeed of the long term performance
of smaller companies. Income focused mandates tend to be more
value-orientated, as growth stocks tend not to pay out a dividend
and our Quality Growth and Momentum process with income bias has
not afforded the resilience of income mandates with that Value
focus .
The Company's underperformance was most keenly felt in the first
half of the year where the market de rating did the most damage.
This coincided with the most extreme period of value outperformance
and lack of rationality within the market. The second half of the
year saw an improvement in the market environment but there were
still periods where there was a disconnect between fundamentals and
share prices. It wasn't until the final months of the year that the
market began to reward Quality, yet Value remains as a positive
contributor as well. The market also felt more rational in the
final quarter of the year in its reaction to reporting results,
which feels like a more manageable environment for us. Typically,
market recoveries are characterised by cyclical value names leading
the way, yet in the latter months of the year this was not the
case. This gives us more comfort to look at each cycle uniquely,
and not be overly led by the past. We believe there is potential
for a market recovery during a recession and that, particularly
given the sharp derating seen in Quality Growth names in the first
half of 2022, this could be led by those resilient Growth
businesses. Valuations are a consideration in our process.
Portfolio Attribution
Telecom Plus, Alpha Financial Markets Consulting and Games
Workshop were the top contributors to performance in the year,
while Hilton Foods, Mortgage Advice Bureau and Seraphine were the
largest detractors.
Telecom Plus , the UK's only fully integrated multi-service
provider, was the top contributor to performance as the shares
responded to five upgrades to earnings during the year, as momentum
in the story gathered pace. The business is well positioned in the
current economic backdrop and is a 'cost of living crisis' winner
as it has accelerated growth in its customer base and benefited
from operational leverage. The company has a compelling proposition
in a very tough consumer environment. This should drive strong
profit growth and dividend growth. The company has a c.3% share of
households and so there is plenty of room for the business to be
materially larger and more profitable, aided by alternative
providers having gone bust and tighter regulation in the industry.
Further detail on Telecom Plus can be found in the case study
section on page 39 of the 2023 Annual Report.
Alpha Financial Markets Consulting (Alpha FMC) is a global
provider of specialist consultancy services to the asset/wealth
management industry. Since listing on AIM in October 2017
management have developed a consistent track record of operational
delivery and upgrades to earnings estimates and this year was no
different. The business had another great year with sustained
momentum driving strong organic growth across all regions and
service lines. A testament to the strength of the model and end
markets where growing demand for consulting services is a powerful
structural driver of growth. The outlook from here remains strong,
as industry tailwinds remain firmly intact, with Alpha FMC's
expansion into insurance, alternative investment areas and the
United States.
Games Workshop , the designer and manufacturer of miniature
figures and games was also a positive contributor to performance in
the year. Whilst not immune from supply chain challenges in the
first half of the year, the business delivered an encouraging
second quarter update with revenue trends remaining robust and a
return to growth in core operating profit. In December, Games
Workshop announced that it has agreed in principle with Amazon to
develop the company's reach into film and TV, to which the shares
responded well. Management gave us a clear signal of confidence by
announcing that it will pay a dividend of 45p. This makes a total
of 165p declared in the year to 31 December 2022, which compares to
65p in the same period last year. This is encouraging given that
the company pays dividends out of 'truly surplus cash'. As a
result, dividends are an important signpost for cash generation
(and profit performance). Hobbies tend to be recession resilient
and Games Workshop's revenues are driven more by the strength of
the product launches than the background economy.
Hilton Foods (Hilton) was a detractor from performance as shares
fell sharply in response to a downgrade to profitability. This was
based on a surge in the price of salmon and other seafood, which
has been exacerbated by the war in Ukraine. It is important to
note, however, that the company's established meat business model
has remained robust in the face of severe cost pressures, protected
by the cost-plus nature of its contracts. The warning was largely
due to cost inflation in its multi-customer businesses, an area in
which the company has increased exposure through acquisitions in
recent years. In our meeting with management we took comfort that
profitability in these businesses will be restored over the next
two years as Hilton increases prices and generates operational
efficiencies, while commodities normalise. Importantly, these
businesses improve Hilton's overall offering, which will help drive
organic growth in its core single customer business. Although
underlying volumes in its core business have been affected by a
channel rebalancing and a softening consumer outlook, Hilton has a
number of levers to offset this over the next few years and a
recovery in its multi-customer businesses and the entry into a new
geography will make the greatest difference to Hilton's earnings
over the next few years. We reduced our holding but retained a
position because Hilton's offering is highly valuable to grocers,
offering them a way to meaningfully reduce cost, improve the
company's supply chains and deepen its product offering. We believe
that the issue is short-term and should not distract from future
opportunities which allow Hilton to generate exceptional returns on
capital.
Mortgage Advice Bureau (MAB) shares fell, as visibility over
MAB's shorter term financial outlook was clouded by turmoil in the
mortgage market following the mini budget. In a perfect storm of
external factors MAB's share price was hit by fears over sterling
weakness, gyrations in interest rate expectations and dislocation
in mortgage markets. The rationale for retaining the holding is its
position at the strategic forefront of the industry, it is not
totally at the mercy of market conditions. From here we are likely
to see a strategy acceleration as the business tends to gain market
share more rapidly in weak market conditions, as advisers have more
need of the support which MAB can provide compared to other
mortgage networks. The potential to expand the franchise has been
significantly augmented by MAB's capacity to generate leads for
network members, reinforced by the acquisition of Fluent which
materially strengthens access to national lead sources. Analysts'
medium term expectations are unchanged.
The retail sector has had a torrid start to the year on fears of
a consumer collapse and we have seen material downgrades across the
sector. Share prices, in turn, have plummeted in the face of macro
concerns and rising costs. Seraphine , the online maternity wear
retailer detracted from performance as shares fell sharply
following a profit warning due to supply chain pressure and poor
management of duties. We exited the position given its poor matrix
score, and fears over the ability of the business to manage ongoing
supply chain and inflationary challenges against a weakening
consumer backdrop.
Portfolio activity
During the year we added eleven new holdings and exited
eight.
We added a new position in Pets at Home a leading player in the
UK pet care market. The business is set to benefit from
post-pandemic trends which will serve to underpin group growth into
future years. Its customer centric, omnichannel model, spanning
healthcare and retail can not only drive incremental share gains
but is also differentiated and difficult to replicate.
Notwithstanding short term, industry wide pressures on retailers,
the long term story remains intact and the business is generally
assumed to have better defensiveness than most retailers from the
service levels attaching to pet ownership. Clearly an element of
that is discretionary spend and subject to weakness, but Pets at
Home is in the buildout phase of a number of major upgrades to
warehouse, digital and vet practice systems and these should
underpin longer term sales growth at a premium rate to 4% market
growth. The shares have an attractive free cashflow yield of 5.5%
giving a well-funded 3% dividend yield. The balance sheet is net
cash, providing optionality for M&A.
We initiated a holding in gas exploration and production
business Energean . The business is founder run with a strong track
record of growing reserves and resources. The company's management
is focused on maximising production from its large scale gas
focused portfolio to deliver material free cash flow and maximise
total shareholder return in a sustainable way. Energean is
insulated from commodity price volatility because of contracted
floor pricing in gas sale and purchase agreements (GSPAs) providing
long-term visibility. Management announced the company will pay
$1billion back to shareholders at least by 2025 which will see them
paying a sector leading dividend. The policy implies a 7.5% yield
from Q4 2022, growing to 15% in 2024/25. This is underpinned by a
Free Cash Flow yield of around 25% from 2023-2030 and should enable
Energean to continue reducing net debt and to retain flexibility
for organic and inorganic growth.
We added a new position in high matrix scoring FRP Advisory . A
leading mid-market advisory business, which provides services
across five different pillars comprising restructuring advisory,
corporate finance, debt advisory, forensic services and pensions
advisory. FRP benefits from strong regulatory drivers and
counter-cyclical services such as litigation, distressed sale and
conveyancing. The business is more than just a counter cyclical
play, we see a number of levers for growth as FRP provides
solutions for the entire corporate lifecycle and its strategy is to
develop across five pillars which will help to develop
cross-selling capabilities. The market backdrop is becoming more
favourable with challenges faced by UK firms greater now than a
decade ago. An increase in the number of overleveraged businesses
in the UK suggests that a significant proportion are vulnerable to
a rise in interest rates and the number of insolvencies and
administrations are also slowly increasing as government support
ends. The mini budget then caused further market turmoil and
heightened near term uncertainty. FRP has highly experienced
management, a strong culture and entrepreneurial motivated talent,
given them the opportunity to drive its 27% margin higher. Strong
cash generation funds the attractive 3.5% dividend yield. FRP has a
net cash balance sheet with negligible capex requirements.
We added 4imprint , the direct marketing business which supplies
a range of promotional products and branded apparel. It operates
primarily in North America. The business has a strong history of
organic sales growth in the highly fragmented US market. Low
capital employed results in strong cash flow, particularly relative
to peers. 4imprint has delivered an impressive step change in
marketing efficiency that management believe stems from sustained
investment through the pandemic and a mix shift towards brand
awareness from print. The success of marketing efficiency has in
part driven a number of upgrades to earnings during 2022. Going
forward we believe 4imprint is well placed to take a greater share
of the market. The business scores well on our stock screening tool
the Matrix, has a net cash balance sheet and its shares yield c.3%.
Please see the case study section for further detail in the case
study section on page 38 of the 2023 Annual Report .
We also added a holding in Smart Metering Services (SMS) the
fully integrated energy infrastructure business, who both own and
manage meter assets, energy data, grid-scale batteries and other
carbon reduction assets. The meters help consumers manage their
energy usage and provide inflation linked and visible revenue
streams. Inflation linkage has become particularly valuable in the
current macro-economic climate. The ongoing roll out of smart
meters is predicted to continue to 2025, providing a long term
visible revenue stream, and limited need for additional capital.
The newer and potentially high growth part of the business is grid
like battery storage. The business has a growing pipeline with a
huge forecast demand increase for these assets and SMS is well
placed to keep a strong share given relationships and experience.
We note the increasing debt levels expected over the next few years
(from net cash currently), to fund the battery rollout. This is a
business which should be able to support structural debt levels
given the revenue generating asset base, as its private peers do.
The dividend yield is 3.5% with a 10% div CAGR that is 2x cash
covered from the existing meter/data assets.
We participated in a placing to add a new holding in Coats Group
, a global market leader in the manufacture of sewing thread and
supplies. The business has a leading c.23% share of the apparel and
footwear thread market, partly thanks to its global scale, colour
matching technology and longstanding reputation for quality
products. Coats has a strong track record of managing its cost
base, through increased manufacturing automation, a higher value
mix from greater performance materials thread sales, and other
self-help initiatives. While the current macroeconomic backdrop
could present near term risks, we are positive on the longer term
opportunities. Recent investment in inventory management,
digitalisation and ESG credentials have driven further market share
gains, as an enabler of moving textile industries towards
sustainability. The business is poised for the delivery of its
strategic projects, which look to optimise the portfolio and
footprint. The shares yield 2.9%.
We added a new holding in high matrix scoring Spirent . The
business provides products and services that enable testing and
validation of the global wireless and cloud networks. The mission
critical nature of this industry makes the barriers to entry high,
which has allowed them to earn outsized returns on capital. Owning
through a consumer recession makes sense because telecom carriers
and network equipment makers are unlikely to materially reduce
their multi-year 5G network build-out plans, given the significant
capex already spent on spectrum and research and development. The
strength of the order book gives visibility and confidence in the
outlook for this year and beyond. We've seen well disciplined cost
control and selective price increases, which has allowed the
company to protect its margins despite inflationary headwinds. This
is a clear sign of the company's pricing power and this is all
supported by a dividend yield of 2.4%.
We added a new position in defence name Chemring . Over the
recent past we watched the management team realign the portfolio
and transition to a higher quality business. Strong progress has
been made, evidenced by solid earnings growth, strong cash
conversion and improved safety metrics. Visibility has improved
underpinned by a strong order book and sole source positions on key
growth programmes. Such improvements in the business have been
evidenced by the delivery of consistent upgrades to earnings.
Russia's invasion of Ukraine has seen a sea change in opinion
towards defence spending in the West, and it has also seen a reset
in terms of how the sector is viewed from an ESG perspective. While
there remains much uncertainty as to the speed at which defence
spend materialises into orders for the sector, we appear to be
entering a multi-year period of elevated defence and security
spending and Chemring's refocused portfolio is well aligned to
areas of growing spend. In addition to end market strength we see
multiple stock specific drivers particularly around 'Roke' a high
margin division with expertise around Artificial Intelligence,
Machine Learning and Cyber and Data Networks. Chemring's
significantly improved balance sheet also provides optionality for
M&A alongside returns to shareholders. Chemring has a high
matrix score and the shares yield around 2.2%.
We added a new position in the Aberdeen based Serica Energy , a
North Sea producer of gas with a strong net cash balance sheet and
good cash generation. The management team have a strong track
record on the improvement of assets, acquiring those and improving
the production, efficiency and profitability relative to
expectations. Whilst the gas price is a driver and has proved
volatile, the structural lack of storage for gas in the UK provides
price support. Whilst Serica was set up to be profitable in a low
gas price environment, strongly rising gas prices have translated
into a record financial performance this year and a large jump in
free cash flow which enabled the balance sheet to continue
strengthening. Whilst the windfall taxes on the industry announced
in Q4 2022 is negative and reduces valuation, balance sheet
strength means that this backdrop could lead to a new set of
opportunities for nimble players such as Serica with proven track
records to find ways to capitalise. This played out in the last
week of December when management announced the proposed deal to buy
Tailwind plc to create a more balanced and diversified portfolio of
assets with a complementary combination of skills. The transaction
marks a new phase for growth as it materially increases reserves
and production whilst maintaining a significant net cash position
for further potential deals. The shares yield c.3%. ESG credentials
are strong, reflected in the MSCI A rating.
We added a new position in Paragon Bank . The specialist
buy-to-let lender in the UK, with strong credit quality and
resilient stress testing in tougher macro environments. Compared to
previous cycles Paragon has a banking license, and is funded by
retail deposits, making it a beneficiary of higher interest rates.
Paragon is a defensive, well capitalised secured specialist lender
benefitting from highly attractive market economics generating
consistent and sustainable Return on Tangible Equity (ROTE) of
c.15%. Paragon is highly capital generative which in turn supports
a rolling buy-back programme. The company has returned capital of
c.GBP675m to shareholders since 2015, which is 50% of the current
market cap. Trading on a 7x P/E the valuation remains attractive
with a 5.5% dividend yield.
In January we initiated a new position in high matrix scoring
and high yielding developer Watkin Jones . End market demand for
high quality student accommodation, built-to-rent and affordable
housing are supportive. The company's value-add is in site
selection, design, and construction, and because it is paid on a
percentage of completion basis, the return on capital is very high.
In early October 2022, Watkin Jones issued a profit warning
relating to the forward sale announcements which did not complete
in time for the full year, since transitions came to a standstill
following the mini budget. In addition to two forward sales being
pushed back beyond the planned September completion and into the
end of 2023, management also flagged pricing and margin softness on
the sales concluded in the second half of 2022. Moreover, the
increasingly difficult outlook for near-term pricing and customers'
confidence/ability to contract forward sales also led to a 35%
downgrade to FY2023, a significant impact on 2023 profitability.
Whilst we've always appreciated that contracts could be lumpy in
the business, this was an unwelcome miss and called the quality of
the business into question. The net cash balance sheet and the
capital light model means the risk of financial distress should be
low. However, it has cast doubt over the credibility of the
management team and we exited the position.
We exited our position in Moneysupermarket . A series of
concerns ranging from management change to regulation to volatile
end markets has led to a gradually declining earnings momentum. The
business has had to deal with supply shocks in all of its key
segments. While the money and travel segments are seeing recovery
post pandemic, trading in the home services division remains
difficult as a result of the ongoing energy crisis, and regulatory
review clouds the outlook for the insurance market. Whilst the
forecast free cash flow should be sufficient to support the
dividend, the poor matrix score together with concerns over the
future trajectory of the competitive landscape lead us to exit the
position.
The June 2022 update from retailer ProCook revealed that, while
the company is winning market share, the kitchenware sector has
struggled in recent months given weaker footfall and conversion.
The business has good long term growth prospects; however, the lack
of conversion and the uncertainty around how quickly consumer
behaviour normalises led us to exit the position. We expect that
the company will suffer a decline in its earnings progression this
year.
We exited our position in language translation business RWS
following a strategic review that pointed to slower growth for the
business, and near-term margin pressure. We also exited our
position in Clipper Logistics following the bid from US listed
GXO.
The position in Synthomer was sold off on concerns around
elevated risks of destocking, margin pressure and balance sheet
debt, compounded by an uncertainty in the nitrile market outlook.
We suspect that increased competitor expansion could lead to some
market share loss. The company subsequently posted weak interim
results, suggesting a slower recovery in nitriles and a poor
outlook, validating our decision to exit.
Since 31 December 2022, we have exited our small position in CMC
Markets (CMC). While cost overruns are becoming a feature of
trading updates in the year, the size of this one was unexpected at
CMC. While the business is making progress on its strategic
initiative to broaden out and increase visibility, which is the
right thing to do longer term, profit warnings and poor
communication with the market are becoming a trend so we decided to
exit the position.
Halfords management has made progress against its strategy to
become an increasingly services led multi-channel specialist, it is
leaning into favourable secular trends, and it has strategic and
operational initiatives; however, we took the decision to exit the
position in view of the consumer backdrop and headwinds from
inflation.
We also exited our position in Strix , the global leader in the
design, manufacture and supply of kettle safety controls, heating
controls and water filtration technologies. Due to COVID-19
("COVID") disruption in China, and demand disruption outside China
the company advised that profit after tax was expected to be lower
than expected. This was the second cut to earnings in as many
months and we were surprised that the first cut wasn't enough.
Whilst the dividend yield is high and well covered, supply chain
issues in China, linked to the pandemic, are difficult to assess,
since the company relies partly on the Chinese zero-COVID policy.
This means that earnings visibility will remain low throughout the
first half of 2023 .
Dividends
Despite the difficult backdrop, the Company has made good
progress on dividend income. This is aligned with our sentiment,
earlier in the report, that the reporting overall from companies in
the portfolio, and the earnings growth being delivered, remains
strong. The combination of more cautious attitudes, as well as
earnings pressures mean that we are entering a period of earnings,
therefore dividend risk, and we are pleased to report resilient
dividend income projections for our holdings in these challenging
marketing conditions. Seven stocks in the Company's portfolio have
issued special dividends this year, a testament to the quality
focus within the portfolio.
Fixed Income Portfolio
2022 proved to be the worst year for bond markets in living
memory. Stubborn inflation led to higher interest rates across
jurisdictions as policymakers swung into action after an extended
period of relatively easy monetary policy. The impact of Russia's
invasion of Ukraine and the continued effects of COVID were cited
as major inflationary forces along with de-globalisation and
already tight labour markets. Bond yields rose significantly as a
result and corporate bond spreads were wider through the first nine
months of the year as a risk-off tone prevailed. The final quarter
brought some respite as risk assets rallied and bond yields
stabilised, helped by suggestions and evidence that inflation has
peaked. In the UK, headline data suggests that price rises are more
challenging but even here markets are pricing-in some respite over
the coming months. Although policy rates have not yet peaked,
financial markets are pricing-in a less aggressive path for the
months ahead and potentially some more dovish action
from some major central banks.
The bonds in the trust are largely short-dated which provided
some defence against the worst bond market outcomes. While the
overall sterling market (measured by the BAML Corporate and
Collateralised index) was down almost 20% over the course of the
year, the bonds in the Company's portfolio fared materially better.
While four year bonds issued by Informa and Anglian Water were down
7% and 10% respectively short dated bonds issued by Heathrow and
HSBC fared much better with the former generating a positive return
over the period. The holdings in the Company are of relatively high
quality and the issuers held have performed well over the course of
the year.
With policy rates potentially peaking and spreads at relatively
wide levels compared to historic averages, bonds appear to offer
some good value as we enter the new year. Many investors have
avoided the asset class for some time as a result of the low yields
on offer and are now being tempted back into the market.
Additionally, there is evidence that both pension funds and
insurance companies have begun allocating money into the asset
class at the end of 2022 and at the start of the new year. This
positive technical backdrop is pushing spread levels down once
again. A lingering threat of economic slowdown hangs over financial
markets but bond markets seem set to deliver some positive returns
for the period ahead.
Outlook
UK valuations have de-rated significantly and are at attractive
levels relative to other regions. Within that, UK small and mid cap
companies look very attractive relative to large caps, with the
strong sector focus in the FTSE 100 Index combined with the
"risk-off" trade driving significant divergence in index returns
this year. The last couple of months has seen the market test some
of these levels and we've seen a strong bounce in UK SMID cap
stocks through October and November 2022. With some more political
stability in the UK, company valuations attractive relative to
other geographies, and also a solid degree of overseas revenue
exposure in the index, we are starting to see international
investors look towards their UK allocations, which have been rock
bottom for some time.
We caveat this with some caution; there are still many areas of
challenge including inflation, consumer squeeze, China supply
uncertainty and many of these might be testing again over the
winter period. We were not surprised to see markets decline in
December 2022 and believe that may continue before we begin to see
a more sustained recovery. Russia's invasion of Ukraine remains an
overhang for markets, particularly given its inflationary impacts,
and for social and humanitarian reasons more than any, we would be
pleased to see a peaceful resolution.
At the time of writing, signals are pointing towards a shallower
and perhaps shorter recession than many expected, and the Bank of
England has also relaxed its degree of caution stated in November
2022. In the UK we've seen strong reporting from retailers and
travel businesses, providing some optimism that the UK consumer is
not as cash strapped as the media might suggest.
The UK didn't enter this cycle from peak earnings due to
sentiment relating to Brexit and GDP growth relative to other
regions over recent years. Therefore, there are reasons to believe
UK earnings could be nearer troughs than other geographies, and
that UK markets could recover earlier in this cycle than we have
often seen historically.
There could be a range of outcomes for 2023 and as uncertainty
remains, we think our quality focus will prove relatively
resilient. In late 2022 there were broad areas of downgrades across
the market, although there were, conversely, lots of areas of
resilience and strength in the Company's portfolio. This is due to
our quality focus, as well as the companies in the portfolio being
more self-fulfilling in their growth strategies; which we believe
is increasingly valuable when growth becomes scarcer. Lastly, with
the derating of growth businesses seen throughout 2022, many of our
quality growth businesses are trading on significantly lower
valuations than historically and have been taking part strongly in
the recent market recovery. This gives us some confidence in
relative performance potential during a market recovery,
At this early stage in the economic cycle, we continue to
believe many cheaper value cyclical businesses will see earnings
pressures over the short term; however, with sentiment low for many
sectors in this space, a lighter recession may see share price
strength amongst some areas.
The level of uncertainty continues into 2023; however, we expect
a lot of the most painful changes in market conditions, seen in
early 2022, are behind us. As such, we would hope for a more
settled environment, where stock focus returns to markets, and
share price returns are less dependent on top-down macro factors.
Whilst inflation persists, more stabilisation in interest rate
expectations has been observed, and the degree of macro surprise
seems far less than in 2022, which we think is supportive for
markets.
Amanda Yeaman & Abby Glennie
abrdn Investments Limited
27 March 2023
ESG Engagement by the Manager
Introduction
Whilst ESG factors are not the over-riding criteria in relation
to the investment decisions taken by the Manager for the Company,
significant prominence is given to ESG throughout the Manager's
investment process. The following section highlights the way that
ESG factors are considered by the Manager. These processes are
reviewed regularly and liable to change. The latest information is
available on the Company's website.
Responsible investing - integration of ESG into the Manager's
investment process
"By embedding ESG factors into our active equity investment
process we aim to reduce risk, enhance potential value for our
investors and foster companies that can contribute positively to
the world." abrdn
Core beliefs: assessing risk, enhancing value
Whilst the management of the Company's investments is not
undertaken with any specific instructions to exclude certain asset
types or classes, the consideration of ESG factors is a fundamental
part of the Manager's investment process and has been for over 30
years. It is one of the key dimensions on which the Manager
assesses the investment case for any company in which it invests
for three key reasons:
Financial returns ESG factors can be financially material - the level
of consideration they are given in a company will
ultimately have an impact on corporate performance,
either positively or negatively. Those companies
that take their ESG responsibilities seriously tend
to outperform those that do not.
====================== ========================================================
Fuller insight Systematically assessing a company's ESG risks and
opportunities alongside other financial metrics allows
the Manager to make far better investment decisions.
====================== ========================================================
Corporate advancement Informed and constructive engagement helps foster
better companies, protecting and enhancing the value
of the Company's investments.
====================== ========================================================
"We believe that the market systematically undervalues the
importance of ESG factors. We believe that in-depth ESG analysis is
part of both fundamental company research and portfolio
construction and will lead to better client outcomes." abrdn
Researching companies: deeper company insights for better
investor outcomes
The Manager conducts extensive and high-quality fundamental and
first-hand research to fully understand the investment case for
every company in its global universe. A key part of the Manager's
research involves focusing its extensive resources on analysis of
ESG issues. The Manager's investment managers, ESG Equity Analysts
and central ESG Investment Team collaborate to generate a deep
understanding of the ESG risks and opportunities associated with
each company. Stewardship and active engagement with every company
are also fundamental to the investment process helping to produce
positive outcomes that lead to better risk-adjusted returns.
The Manager's global ESG infrastructure
abrdn has around 150 equity professionals globally. Each
systematically analyses ESG risks and opportunities as part of the
Manager's research output for each company. Its central team and
ESG equity analysts support the investment managers' first-hand
company analysis, producing research into specific themes (e.g.
labour relations or climate change), sectors (e.g. forestry) and
ESG topics to understand and highlight best practice. Examples of
thematic and sector research can be found on
abrdn.com/corporate/corporate-sustainability.
Investment Managers All abrdn equity investment managers seek to engage
actively with companies to gain insight into their
specific risks and opportunities and provide a positive
ongoing influence on their corporate strategy for
governance and environmental and social impact.
==================== ==========================================================
ESG Equity Analysts abrdn has dedicated and highly experienced ESG equity
analysts located across the UK, US, Asia and Australia.
Working as part of individual investment desks -
rather than as a separate department - these specialists
are integral to pre-investment due diligence and
post-investment ongoing company engagement. They
are also responsible for taking thematic research
produced by the central ESG Investment Team (see
below), interpreting and translating it into actionable
insights and engagement programmes for our regional
investment strategies.
==================== ==========================================================
ESG Investment This central team of more than 20 experienced specialists
Team is based in Edinburgh and London, and provides ESG
consultancy and insight for all asset classes. Taking
a global approach both identify regions, industries
and sectors that are most vulnerable to ESG risks
and identify those that can take advantage of the
opportunities presented. Working with investment
managers, the team is key to the Manager's active
stewardship approach of using shareholder voting
and corporate engagement to drive positive change.
==================== ==========================================================
From laggards to best in class: rating company ESG
credentials
A systematic and globally-applied approach to evaluating stocks
allows the Manager to compare companies consistently on their ESG
credentials - both regionally and against their peer group. The
Manager captures the findings from its research and company
engagement meetings in formal research notes. Some of the key
questions include:
Which ESG issues are relevant for this company, how material are
they, and how are they being addressed?
What is abrdn's assessment of the quality of this company's
governance, ownership structure and management?
Are incentives and key performance indicators aligned with the
company's strategy and the interests of shareholders?
Having considered the regional universe and peer group in which
the company operates, the Manager's equity team then allocates it
an ESG Quality score ("ESG Q Score") between one and five (see
below) which will be applied across every stock that the Manager
covers globally.
1. Best in 2. Leader 3. Average 4. Below average 5. Laggard
class
====================== =================== ====================== ======================= ========================
ESG considerations ESG considerations ESG risks are Evidence of Many financially
are a material not market considered as some financially material controversies
part of the leading a part of principal material controversies Severe governance
company's core Disclosure is business Poor governance concerns
business strategy good, but not Disclosure in or limited oversight Poor treatment
Excellent disclosure best in class line with regulatory of key ESG issues of minority
Makes opportunities Governance is requirements Some issues shareholders
from strong generally very Governance is in treating
ESG risk management good generally good minority shareholders
but some minor poorly
concerns
====================== =================== ====================== ======================= ========================
The Manager also uses a combination of external and proprietary
in-house quantitative scoring techniques to complement and
cross-check analyst-driven ESG assessments. ESG analysis is
peer-reviewed within the equities team, and ESG factors impacting
both sectors and stocks are discussed as part of the formal sector
reviews. To be considered 'best in class', the management of ESG
factors must be a material part of the company's core business
strategy. It must provide excellent disclosure of data on key
risks. It must also have clear policies and strong governance
structures, among other criteria.
Working with companies: staying engaged, driving change
Once abrdn invests in a company, it is committed to helping that
company maintain or raise their ESG standards further, using the
Manager's position as a shareholder to press for action as needed.
abrdn actively engages with the companies in which it invests to
help them stay good companies and become even better
businesses.
The Manager sees this programme of regular engagement as a
necessary fulfilment of its duty as a responsible steward of
clients' assets. It is also an opportunity to share examples of
best practice seen in other companies and to use the Manager's
influence to effect positive change. The Manager's engagement is
not limited to the company's management team. It can include many
other stakeholders such as non-government agencies, industry and
regulatory bodies, as well as activists and the company's clients.
What gets measured gets managed - so the Manager strongly
encourages companies to set clear targets or key performance
indicators on all material ESG risks where appropriate.
The investment process consists of four interconnected and
equally important stages.
Monitor Contact Engage Act
============================================ =========================================== ==================================================== ============================================
Ongoing due diligence Frequent dialogue Exercise rights Consider all options
* Business performance * Senior executives * Attend AGM/EGMs * Increase or decrease our shareholding
* Company financials * Board members * Always vote * Collaborate with other investors
* Corporate governance * Heads of departments and specialists * Explain voting decisions * Take legal action if necessary
* Company's key risks and opportunities * Site visits * Maximise influence to drive positive outcomes
============================================ =========================================== ==================================================== ============================================
ESG considerations within abrdn's Smaller Companies team
investment process
abrdn's Smaller Companies team (the "Team") considers ESG risks
and opportunities for all of its investments and thus, ESG
considerations are inextricably embedded into the investment
process in order to achieve a successful and sustainable
performance for the longer term. There is a broad understanding
within abrdn and the Team that a full and thorough assessment of
ESG factors allows better investment decisions to be made that lead
to better outcomes for clients; with ESG aspects considered
alongside other financial and fundamental factors in order to make
the best possible investment decisions at a stock picking and at a
portfolio construction level.
ESG analysis is a core constituent in the "Quality" analysis of
the Team's fundamental research. Especially for smaller companies,
both risks and opportunities matter, and thus the research approach
and analysis reviews this accordingly. As stated above, all of the
analysts are required to undertake an ESG quality assessment (ESG Q
Score analysis) which will be reflected in the research note
provided for each of the companies under coverage. The ESG Q Score
of a company is one of the core considerations in ensuring that the
traditionally lower risk investment approach continues and
portfolios will be weighted towards companies with higher
scores.
The Team has a very close relationship with the ESG specialists
within abrdn, while at the same time having an on-desk ESG analyst
to assist in the above research process and ESG engagements with
companies. Tzoulianna Leventi is the on-desk ESG analyst for the
Smaller Companies team, having joined the team in 2020. Through the
utilisation of third party provided research such as MSCI and, more
recently abrdn's in-house ESG rating tools, the Team is able to
identify, where appropriate, leaders and laggards, areas of
weakness and areas of strength. Ratings processes for smaller
companies can be less accurate given data availability and
coverage, and therefore the engagement and fundamental research the
Managers and ESG Equity Analyst do with the investee companies is
critical in adding value and ensuring the most important ESG risks
and opportunities are well identified. Given the importance of ESG
matters these factors are reviewed on an ongoing basis in addition
to monitoring the actions of companies to assess the need for
further engagement and/or changes to the internal investment view.
Finally, as part of broader stewardship activities, the team
participates actively in the voting process of the holdings, in
line with best practice.
Overview of Strategy
Business Model
The business of the Company is that of an investment company
which conducts its affairs in order to qualify as an investment
trust for UK capital gains tax purposes.
The Company aims to attract long term private and institutional
investors looking to benefit from the income and capital growth
prospects of UK smaller companies. The Directors do not envisage
any change in this activity in the foreseeable future.
Investment Objective and Purpose
The objective and purpose of the Company is to provide a high
and growing dividend and capital growth from a portfolio invested
principally in the ordinary shares of UK smaller companies and UK
fixed income securities.
Investment Policy
The Company invests in equities, corporate bonds and preference
shares. The primary aim of the Company is to invest in the equity
shares of smaller companies listed on a regulated UK stock market
in order to gain growth in dividends and capital. The Company
employs gearing with the primary intention of enhancing income and
to a lesser extent, long-term total returns. The majority of the
additional funds raised by gearing are invested in investment grade
corporate bonds and preference shares.
Gearing
The level of gearing varies with opportunities in the market and
the Board adopts a prudent approach to the use of gearing. The
total level of gearing will not exceed 25% of the Company's net
assets at the time it is instigated, and, within that gearing
limit, the equity portfolio gearing will not exceed 10% at the time
it is instigated.
Risk diversification
The investment risk within the portfolio is managed through a
diversified portfolio of equities, corporate bonds and preference
shares. The Company does not invest in securities that are unquoted
at the time of investment. A maximum of 5% of the Company's total
assets can be invested in the securities of one company at the time
of purchase. Although the Company is not permitted to invest more
than 15% of its total assets in other listed investment companies
(including investment trusts), the Board currently does not intend
to invest in other listed investment companies.
Benchmark index
Numis Smaller Companies (excluding Investment Trusts) Index
(total return) - effective from 1 January 2020; FTSE Small Cap
Index (excluding Investment Trusts) Index (total return) - up to 31
December 2019.
Management
The Board has appointed AFML (the "Manager") to act as the
alternative investment fund manager ("AIFM"). The Company's
portfolio is managed on a day-to-day basis by abrdn Investments
Limited ("AIL" or the "Investment Manager") by way of a delegation
agreement between AFML and AIL. Both the Manager and the Investment
Manager are wholly owned subsidiaries of abrdn plc.
Delivering the Investment Policy
Equity Investment Process
The equity investment process is active and bottom-up, based on
a disciplined evaluation of companies through company meetings with
the Investment Manager. Stock selection is the major source of
added value, concentrating on quality, growth and momentum
characteristics.
Great emphasis is placed on understanding a company's business
and understanding how it should be valued. New investments are not
made without the Investment Manager having first met management of
the investee company and undertaking further analysis to outline
the underlying investment merits. Top-down investment factors are
secondary in the equity portfolio construction, with
diversification and formal controls guiding stock and sector
weights.
Fixed Income Investment Process
The fixed income investment process is an active investment
style which identifies value between individual securities. This is
achieved by combining bottom-up security selection with a top-down
investment approach. Investments in corporate bonds and preference
shares are also managed by investment guidelines drawn up by the
Board in conjunction with the Investment Manager which include:
- No holding in a single fixed interest security to exceed 5% of
the total bond issue of the investee company; and
- Maximum acquisition cost of an investment grade bond is GBP1
million and of a non-investment grade bond is GBP500,000.
Key Performance Indicators ("KPIs")
The Board uses a number of financial performance measures to
assess the Company's success in achieving its objective and
determining the progress of the Company in pursuing its investment
policy. The main KPIs identified by the Board in relation to the
Company which are considered at each Board meeting are as
follows:
KPI Description
======================== ================================================================
Performance of net The Board considers the Company's net asset value
asset value against total return figures to be the best indicator of
the benchmark index performance over time and is therefore the main
indicator of performance used by the Board. The
Board measures performance against the benchmark
index. The returns over one, three and five years
are provided on page 29 of the 2023 Annual Report
and a graph showing performance against the benchmark
index is shown on page 30 of the 2023 Annual Report.
======================== ================================================================
Revenue return and The Board monitors the Company's net revenue return
dividend growth and dividend growth through the receipt of detailed
income forecasts and considers the level of income
at each meeting. The Company aims to grow the dividend
at a level above CPI when taken over a number of
years. A graph showing the dividends and yields
over five years is provided on page 30 of the 2023
Annual Report .
======================== ================================================================
Share price performance The Board monitors the performance of the Company's
share price on a total return basis. A graph showing
the share price total return performance against
the benchmark index is shown on page 31 of the 2023
Annual Report .
======================== ================================================================
Share Price Discount/ The discount/premium relative to the net asset value
Premium to NAV per share represented by the share price is monitored
by the Board. A graph showing the share price discount/premium
relative to the net asset value is shown on page
31 of the 2023 Annual Report .
======================== ================================================================
Ongoing Charges The Company's OCR is provided on page 92 of the
Ratio (OCR) 2023 Annual Report . The Board reviews the OCR,
taking account of its total assets.
======================== ================================================================
Principal Risks and Uncertainties
There are a number of risks which, if realised, could have a
material adverse effect on the Company and its business model,
financial position, future performance, solvency or liquidity and
prospects. The Board has in place a robust process to identify,
assess and monitor the principal risks and uncertainties facing the
Company. A summary of the principal risks together with their
mitigating action is set out below.
The Board also regularly identifies and evaluates newly emerging
risks, for example, the geopolitical risks, and monitors these
closely, as appropriate for the Company.
The Board has adopted a risk matrix which identifies the key
risks for the Company and covers strategy, investment management,
operations, shareholders, regulatory and financial obligations and
third party service providers. This risk matrix is reviewed
formally every six months but risks, including emerging risks, are,
if appropriate, discussed by the Board at, or between, formal Board
quarterly meetings.
The principal risks associated with an investment in the
Company's shares are published monthly in the Company's factsheet
or they can be found in the pre-investment disclosure document
("PIDD") published by the Manager, both of which are on the
Company's website.
Description Mitigating Action
============================================ ==========================================
Investment and Market risk The Board has appointed AFML to
The Company is exposed to fluctuations manage the portfolio within the
in share prices and a fall in the remit of the investment policy.
value of its investment portfolio The Board monitors the results and
will have an adverse effect on the implementation of the Manager's
value of shareholders' funds. The investment process and reviews the
Company invests in smaller companies investment portfolio, including
which may be subject to greater diversification and performance,
volatility than similar larger companies. at each meeting.
============================================ ==========================================
Investment portfolio management The Board is responsible for ensuring
Investing outside of the investment that the investment policy is met.
restrictions and guidelines set The day-to-day management of the
by the Board could result in poor Company's assets has been delegated
performance and inability to meet to the Manager under investment
the Company's objectives. guidelines determined by the Board.
The Board regularly reviews these
guidelines to ensure they remain
appropriate and monitors compliance
with the guidelines through regular
reports from the Manager, including
performance reporting.
============================================ ==========================================
Major market event, climate change External risks over which the Company
or geo-political risk has no control are always a risk.
The Company is exposed to stockmarket The Company does what it can to
volatility or illiquidity as a result address these risks where possible,
of a major market shock due to a not least operationally and to try
national or global crisis, geo-political and meet the Company's investment
developments or the effects of climate objectives.
change. The impact of such risks, The Board is cognisant of its reliance
associated with the portfolio or on the operations of the third-party
the Company itself, could result suppliers, including the Manager,
in disruption on the operations to mitigate risks arising from market
of the Company and losses. events, climate change and geo-political
developments, such as a global pandemic
and Russia's invasion of Ukraine.
The Manager has undertaken an assessment
of the Company's portfolio and is
in close communication with the
underlying investee companies in
order to navigate and guide the
Company through the current challenges.
The Manager assesses and reviews
the investment risks arising such
events on companies in the portfolio,
including but not limited to: employee
absence, reduced demand, supply
chain breakdown, balance sheet strength,
increasing inflation, carbon emissions,
ability to pay dividends, and it
makes investment decisions accordingly.
The Manager has extensive business
continuity procedures and contingency
arrangements to ensure they are
able to service their clients, including
investment trusts. The services
from third parties, including the
Manager, have continued to be supplied
effectively and the Board will continue
to monitor arrangements through
regular updates from the Manager.
The impact of climate change is
not considered to be material to
the financial statements as the
entire investment portfolio consists
of listed equities and corporate
bonds and the quoted market (being
bid) price is expected to reflect
market participants' view of climate
change risk.
============================================ ==========================================
Gearing risk The Board monitors the Company's
Gearing has the effect of accentuating actual gearing levels (including
market falls and market gains. The equity gearing) in relation to its
inability of the Company to meet assets and liabilities and reviews
its financial obligations, or an the Company's compliance with the
increase in the level of gearing, principal
could result in the Company becoming loan covenants.
over-geared or unable to take advantage The Company's gearing consists of
of potential opportunities and result a GBP10 million facility comprised
in a loss of value to the Company's of a GBP5 million five year fixed
shares. rate loan and a
GBP5 million three year variable
rate loan. As at 31 December 2022,
GBP7 million was drawn down (GBP5
million fixed rate and GBP2 million
variable interest rate).
============================================ ==========================================
Income and dividend risk The Board monitors this risk through
The ability of the Company to pay the receipt of detailed income forecasts
dividends and any future dividend and considers the level of income
growth will depend over the longer at each
term on the level of income generated Board meeting and the Manager has
from its investments and the timing developed detailed and sophisticated
of receipt of such income by the models for forecasting and monitoring
Company. In the shorter term the dividend payments.
size of the Company's revenue reserves
will determine the extent that shareholder
dividend payments can be less volatile
than the dividends actually paid
by the companies in which the Company
invests. Accordingly, there is no
guarantee that the Company's dividend
objective will continue to be met.
============================================ ==========================================
Operational risk Written agreements are in place
The Company is dependent on third defining the roles and responsibilities
parties for the provision of services of third party providers and their
and systems, in particular those performance is reviewed on an annual
of the Manager and the Depositary. basis. The Board reviews regular
Failure by a third party provider reports from the Manager on its
to carry out its contractual obligations internal controls and risk management
could result in loss or damage to systems, including internal audit
the Company. Disruption, including and compliance monitoring functions.
that caused by information technology The Manager reports to the Board
breakdown or other cyber-related on the control environment and quality
issue, could prevent the functioning of service provided by third parties,
of the Company. including business continuity plans
and policies to address cyber crime.
Further details of internal controls
are set out in the Audit Committee's
Report on page 49 of the 2023 Annual
Report.
============================================ ==========================================
Promoting the Success of the Company
The Board is required to report on how it has discharged its
duties and responsibilities under section 172 of the Companies Act
2006 (the "s172 Statement"). Under section 172, the Directors have
a duty to promote the success of the Company for the benefit of its
members as a whole, taking into account the likely long term
consequences of decisions, the need to foster relationships with
the Company's stakeholders and the impact of the Company's
operations on the environment.
The Board currently comprises four Directors and has no
employees or customers in the traditional sense. Without a variety
of external stakeholders, the Company can neither exist nor
flourish. Our shareholders own us and the Company's Manager, AFML,
provides investment management services. A number of other
stakeholders support us by providing regulatory and other services,
including secretarial, administration, depositary, custodial,
banking and audit services. For example, BNP Paribas Trust
Corporation UK Limited is the Company's Depository and Ernst &
Young LLP is the Company's external auditor.
The Board's relationship with each stakeholder is different. We
meet the Manager on a quarterly basis but might meet our investors,
both institutional and retail, only once a year. We often need to
balance the interests of different stakeholders, for example, in
agreeing their fees.
The Board's principal concern has been, and continues to be, the
interests of the Company's shareholders and potential investors.
The Manager undertakes an annual programme of meetings with the
largest shareholders and reports back to the Board on issues raised
at these meetings. The Board encourage all shareholders to attend
and participate in the Company's AGM and note that they can contact
the Directors via the Company Secretary. Shareholders and investors
can obtain up-to-date information on the Company through its
website and the Manager's information services and have direct
access to the Company through the Manager's customer services team
or the Company Secretary.
The Board believes that one of the key strategies of the
Company, for its long-term stability and sustainability, is to
develop share ownership among the growing retail and self-directed
investors. Approximately 49% of the shares are currently held by
such investors. In order to raise and maintain awareness of the
Company, the Board participates in the promotional programme run by
the Manager on behalf of a number of investment trusts under its
management. The purpose of the programme is both to communicate
effectively with existing shareholders and to reach more new
shareholders, thus improving liquidity and enhancing the value and
rating of the Company's shares. Regular reports are provided to the
Board on promotional activities as well as analysis of the
shareholder register.
As the Company has no employees, the culture of the Company is
embodied in the Board of Directors. In seeking to deliver the
Company's investment objective for shareholders, our values are
trust and fairness while challenging constructively, and in a
respectful way, our advisers and other stakeholders.
The Board undertakes a robust evaluation of the Manager,
including investment performance and responsible stewardship, to
ensure that the Company's objective of providing sustainable income
and capital growth for its investors is met. The portfolio
activities undertaken by the Manager on behalf of the Company can
be found in the Manager's Review and details of the Board's
relationship with the Manager and other third party providers,
including oversight, is provided in the Statement of Corporate
Governance.
Key decisions and actions during the year to 31 December 2022,
which required the Directors to have greater focus on stakeholders
included:
Strategic Review
The Board keeps under review the strategic direction of the
Company, particularly in view of the prolonged period in which the
Company's shares have traded at a material discount to their net
asset value which, coupled with the Company being of a small scale,
presents challenges in its ability to grow. An announcement was
made on 13 February 2023 that the Board intends to undertake a
strategic review, including consideration of the combination of the
Company's assets with another suitable investment trust, possibly
coupled with a cash exit.
Renewal of Debt Facility
The Company has a loan agreement with RBSI to provide it with a
GBP10 million credit facility, GBP5 million of which is at a fixed
interest rate and GBP5 million at a variable interest rate. The
GBP5 million fixed element of the facility expires at the end of
April 2023. During the year, the Board approved the renewal of the
GBP5 million variable rate facility, which will expire in April
2024. The Board believes that the modest use of gearing by the
Company is of long term benefit to shareholders.
Directorate and Succession Planning
The Board has continued to progress its succession plans during
the year and, following the appointment of Rosalyn Breedy in
January 2022 and the retirement of the Chairman in May 2022, there
were no requirements for any further action in the financial year.
Shareholders' interests are best served by ensuring a smooth and
orderly refreshment of the Board which serves to provide continuity
and maintain the Board's open and collegiate style.
Board Diversity
The Board recognises the importance of having a range of
skilled, experienced individuals with the appropriate knowledge
represented on the Board in order to allow the Board to fulfil its
obligations. Each Director brings different skills and experience
to the Board. The Board takes the benefits of diversity into
account in its recruitment of new Board members and recent Board
changes reflect an appropriate mix of diversity, skills and
experience. At 31 December 2022, the Board consisted of two female
and two male directors.
Employee, Environmental, Social and
Human Rights Issues
The Company has no employees as the Board has delegated the
day-to-day management and administrative functions to the Manager.
There are therefore no disclosures to be made in respect of
employees. The Company's socially responsible investment policy is
outlined in the Statement of Corporate Governance.
Modern Slavery Act
Due to the nature of the Company's business, being a company
that does not offer goods and services to customers, the Board
considers that it is not within the scope of the Modern Slavery Act
2015 because it has no turnover or employees. The Company is
therefore not required to make a slavery and human trafficking
statement. In any event, the Board considers the Company's supply
chains, dealing predominantly with professional advisers and
service providers in the financial services industry, to be low
risk in relation to this matter.
Global Greenhouse Gas Emissions
The Company has no greenhouse gas emissions to report from the
operations of its business, nor does it have responsibility for any
other emissions producing sources under the Companies Act 2006
(Strategic Report and Directors' Report) Regulations 2013.
The Company qualifies as a "low energy user" under the
Streamlined Energy and Carbon Reporting Requirements (SECR), and
its energy and carbon information is not disclosed for that
reason.
Viability Statement
The Directors have made an assessment of the viability of the
Company, in order to meet the requirements of the UK Code,
notwithstanding the announcement on 13 February 2023 of a strategic
review and the material uncertainty identified in relation to this
matter.
The Company does not have a formal fixed period strategic plan
but the Board formally considers risks and strategy at least
annually. The Board considers the Company, with no fixed life, to
be a long term investment vehicle, but for the purposes of this
viability statement has decided that a period of three years is an
appropriate period over which to report.
The Board considers that this period reflects a balance between
looking out over a long term horizon and the inherent uncertainties
of looking out further than three years.
In assessing the viability of the Company over the review period
the Directors have focused upon the following factors:
- The principal risks detailed in the Strategic Report on pages
24 to 25 of the 2023 Annual Report and the steps taken to mitigate
these risks. In particular, the Board has considered the
operational resilience of the Company to continue in the current
environment and the ability of key third party suppliers to
continue to provide essential services to the Company. Third party
services have continued to be provided effectively;
- The strategic review announced by the Company on
13 February 2023, the outcomes of which have not been determined
as of the date of this Report.
- Notwithstanding the strategic review, the investment objective
in the current environment remains attractive. The Company has
continued to deliver sustained dividend growth as well as good
capital growth over the longer term.
- The outlook for the Company and its portfolio are detailed in
the Chair's Statement and the Investment
Manager's Review;
- The Company is invested in readily realisable listed securities;
- The level of revenue surplus generated by the Company over a
number of years and its ability to achieve its dividend objective;
and
- The level of gearing is closely monitored. Covenants are
actively monitored and there is adequate headroom in place. The
Company has the ability to renew its gearing or repay its
borrowings through proceeds from sales of investments.
Following the strategic review, should the Board conclude that a
merger or liquidation is not in the best interests of shareholders,
the Board believes that the Company remains in a position to
continue to generate attractive returns for all shareholders, the
Company's long-term performance is satisfactory, and the Company
will continue to have access to sufficient capital.
When considering the risk of under-performance, the Board
reviewed the impact of stress testing on the portfolio, including
the effects of any substantial future falls in investment values.
The Board also considered that matters such as significant economic
or stock market volatility, a substantial reduction in the
liquidity of the portfolio, the emerging risk of climate change or
changes in investor sentiment could have an impact on its
assessment of the Company's prospects and viability in the future
and the period over which the performance of the Company is
monitored. The results of the stress tests have given the Board
comfort over the viability of
the Company.
Accordingly, taking into account all of these factors, the
Company's current position and the potential impact of its
principal risks and uncertainties, notwithstanding the outcome of
the strategic review, the Board has a reasonable expectation that
the Company will be able to continue in operation and meet its
liabilities as they fall due for a period of three years from the
date of this Report.
Dagmar Kent Kershaw,
Chair
27 March 2023
Performance
Performance (total return)
1 year 3 year 5 year
% return % return % return
============================================ ========= ========= =========
Net asset value(A) -33.2 -16.4 -4.0
============================================ ========= ========= =========
Share price (based on mid price)(A) -33.7 -22.6 -2.6
============================================ ========= ========= =========
Composite Index(B) -17.9 -4.2 -2.8
============================================ ========= ========= =========
Numis Smaller Companies ex Inv Trust
Index -17.9 -4.2 +1.6
-------------------------------------------- --------- --------- ---------
A Considered to be an Alternative Performance Measure. Further details
can be found below.
(B) FTSE Small Cap ex Inv Trust Index up to 31 December 2019 and Numis
Smaller Companies ex Inv Trust Index from 1 January 2020.
Cumulative Performance(A)
Rebased to 100 at 31 December 2012
As at 31 December 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
=============================== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
NAV performance 100.0 140.4 133.7 147.5 155.2 201.3 168.3 220.6 204.0 260.9 169.5
=============================== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
NAV total return(A) 100.0 145.0 142.0 160.9 174.1 231.4 197.7 265.8 254.1 330.2 220.9
=============================== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Share price performance 100.0 147.2 121.5 141.6 134.3 190.1 147.9 226.4 206.6 247.5 158.7
=============================== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Share price total
return(A) 100.0 152.1 129.4 155.8 153.0 223.4 178.2 281.0 266.6 325.6 216.0
=============================== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Composite Index performance(B) 100.0 140.2 133.4 146.7 160.2 180.0 150.1 170.8 160.6 191.6 152.3
=============================== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Composite Index total
return(B) 100.0 143.9 140.0 158.2 178.0 205.8 177.4 208.8 199.8 243.6 200.1
=============================== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Numis Smaller Companies
ex Inv Trust performance 100.0 133.1 127.0 136.5 147.4 171.3 140.7 170.4 160.2 191.1 151.9
=============================== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Numis Smaller Companies
ex Inv Trust total
return 100.0 136.9 134.4 148.6 165.1 197.3 167.0 209.1 200.1 244.0 200.4
------------------------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(A) Total return figures are considered to be an Alternative Performance
Measure and based on reinvestment of net income.
(B) FTSE Small Cap ex Inv Trust Index up to 31 December 2019 and Numis
Smaller Companies ex Inv Trust Index from 1 January 2020.
Ten Year Financial Record
Year to 31 December 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
============================== ===== ====== ===== ===== ===== ======= ===== ======= ====== ========
Revenue available for
Ordinary dividends (GBP'000) 1,496 1,579 1,666 1,622 1,716 1,997 2,206 1,238 2,143 2,486
------------------------------ ----- ------ ----- ----- ----- ------- ----- ------- ------ --------
Per share (p)
============================== ===== ====== ===== ===== ===== ======= ===== ======= ====== ========
Net revenue return 6.77 7.14 7.54 7.34 7.76 9.03 9.98 5.60 9.69 11.24
============================== ===== ====== ===== ===== ===== ======= ===== ======= ====== ========
Net dividends paid/proposed 6.25 6.45 6.65 6.85 7.05 7.35 8.25 8.24 8.85 9.80
============================== ===== ====== ===== ===== ===== ======= ===== ======= ====== ========
Total return 74.73 (5.00) 29.96 19.79 85.19 (48.74) 96.49 (16.37) 102.11 (145.62)
============================== ===== ====== ===== ===== ===== ======= ===== ======= ====== ========
Net asset value per share 238.0 226.6 249.9 262.9 341.1 285.2 373.9 348.9 442.5 287.3
============================== ===== ====== ===== ===== ===== ======= ===== ======= ====== ========
Shareholders' funds (GBPm) 52.6 50.1 55.3 58.1 75.4 63.1 82.7 77.1 97.8 63.5
------------------------------ ----- ------ ----- ----- ----- ------- ----- ------- ------ --------
Ten Largest Investments
As at 31 December 2022
Telecom Plus Alpha Financial Markets Consulting
Reseller of telecom and utilities Leading global consulting company
services, under the Utility Warehouse to assist asset management, wealth
brand. management and insurance industries.
Hollywood Bowl discoverIE
Operator of bowling centres. International group of businesses
that designs, manufactures and
supplies highly differentiated
components for electrical applicants.
Tatton Asset Management 4imprint
UK discretionary fund manager providing Direct marketer of promotional
services to UK's financial advisers products, with a focus on US.
enabling them to provide a better
service to their clients.
Softcat Energean
Value added technology reseller International exploration and
in UK. production company with a focus
on natural gas.
Games Workshop AJ Bell
Global retailer of hobbyist products, Investment platform.
selling through own retail stores,
online, and through trade partners.
Owner of the IP of Warhammer.
Equity Investments
At 31 December 2022
==================================================================================================
Valuation Total Valuation
2022 portfolio 2021
Company Sector classification GBP'000 % GBP'000
=========================== ==================================== ========= ========= =========
Telecommunications Service
Telecom Plus Providers 3,184 4.6 3,347
=========================== ==================================== ========= ========= =========
Alpha Financial Markets
Consulting Industrial Support Services 2,523 3.7 2,697
=========================== ==================================== ========= ========= =========
Hollywood Bowl Travel & Leisure 2,251 3.3 2,050
=========================== ==================================== ========= ========= =========
discoverIE Technology Hardware & Equipment 2,143 3.1 3,909
=========================== ==================================== ========= ========= =========
Investment Banking & Brokerage
Tatton Asset Management Services 2,122 3.1 3,031
=========================== ==================================== ========= ========= =========
4imprint Media 2,084 3.0 -
=========================== ==================================== ========= ========= =========
Softcat Software & Computer Services 1,978 2.9 3,147
=========================== ==================================== ========= ========= =========
Energean Oil, Gas & Coal 1,923 2.8 -
=========================== ==================================== ========= ========= =========
Games Workshop Leisure Goods 1,922 2.8 2,876
=========================== ==================================== ========= ========= =========
Investment Banking & Brokerage
AJ Bell Services 1,903 2.8 2,016
--------------------------- ------------------------------------ --------- --------- ---------
Ten largest investments 22,033 32.1
--------------------------- ------------------------------------ --------- --------- ---------
Morgan Sindall Construction & Materials 1,898 2.8 4,284
=========================== ==================================== ========= ========= =========
Somero Enterprises Industrial Engineering 1,812 2.6 2,596
=========================== ==================================== ========= ========= =========
Safestore Real Estate Investment Trusts 1,739 2.5 3,243
=========================== ==================================== ========= ========= =========
Personal Care, Drug & Grocery
Greggs Stores 1,714 2.5 2,219
=========================== ==================================== ========= ========= =========
Bytes Technology Software and Computer Services 1,709 2.5 2,857
=========================== ==================================== ========= ========= =========
Assura Real Estate Investment Trusts 1,645 2.4 2,051
=========================== ==================================== ========= ========= =========
FDM Industrial Support Services 1,581 2.3 2,044
=========================== ==================================== ========= ========= =========
Chesnara Life Insurance 1,566 2.3 1,653
=========================== ==================================== ========= ========= =========
Investment Banking & Brokerage
Paragon Banking Services 1,553 2.3 -
=========================== ==================================== ========= ========= =========
Robert Walters Industrial Support Services 1,479 2.2 2,853
--------------------------- ------------------------------------ --------- --------- ---------
Twenty largest investments 38,729 56.5
--------------------------- ------------------------------------ --------- --------- ---------
Investment Banking & Brokerage
Liontrust Asset Management Services 1,430 2.1 4,058
=========================== ==================================== ========= ========= =========
Real Estate Investment &
Sirius Real Estate Services 1,381 2.0 4,608
=========================== ==================================== ========= ========= =========
Close Brothers Banks 1,340 1.9 1,796
=========================== ==================================== ========= ========= =========
Serica Energy Oil, Gas & Coal 1,321 1.9 -
=========================== ==================================== ========= ========= =========
Personal Care, Drug & Grocery
Kesko(A) Stores 1,317 1.9 2,326
=========================== ==================================== ========= ========= =========
Investment Banking & Brokerage
Intermediate Capital Services 1,268 1.8 3,213
=========================== ==================================== ========= ========= =========
Investment Banking & Brokerage
Rathbone Brothers Services 1,237 1.8 1,206
=========================== ==================================== ========= ========= =========
Chemring Aerospace & Defense 1,200 1.7 -
=========================== ==================================== ========= ========= =========
Pets at Home Retailers 1,064 1.5 -
=========================== ==================================== ========= ========= =========
Midwich Industrial Support Services 1,046 1.5 1,161
--------------------------- ------------------------------------ --------- --------- ---------
Thirty largest investments 51,333 74.6
--------------------------- ------------------------------------ --------- --------- ---------
Spirent Communications Telecommunications Equipment 1,043 1.5 -
=========================== ==================================== ========= ========= =========
Unite Real Estate Investment Trusts 1,005 1.5 2,216
=========================== ==================================== ========= ========= =========
Hilton Food Food Producers 993 1.4 2,033
=========================== ==================================== ========= ========= =========
Dunelm Retailers 971 1.4 2,155
=========================== ==================================== ========= ========= =========
Investment Banking & Brokerage
Polar Capital Services 939 1.4 1,905
=========================== ==================================== ========= ========= =========
Investment Banking & Brokerage
Impax Asset Management Services 937 1.4 1,909
=========================== ==================================== ========= ========= =========
Coats General Industrials 935 1.4 -
=========================== ==================================== ========= ========= =========
Mortgage Advice Bureau Finance & Credit Services 914 1.3 1,957
=========================== ==================================== ========= ========= =========
Forterra Construction & Materials 912 1.3 1,511
=========================== ==================================== ========= ========= =========
Severfield Construction & Materials 897 1.3 1,014
--------------------------- ------------------------------------ --------- --------- ---------
Forty largest investments 60,879 88.5
--------------------------- ------------------------------------ --------- --------- ---------
FRP Advisory Industrial Support Services 832 1.2 -
=========================== ==================================== ========= ========= =========
Gateley Industrial Support Services 802 1.2 1,058
=========================== ==================================== ========= ========= =========
Victrex Chemicals 744 1.1 1,608
=========================== ==================================== ========= ========= =========
Electronic & Electrical
XP Power Equipment 732 1.1 1,838
=========================== ==================================== ========= ========= =========
Smart Metering Systems Industrial Support Services 694 1.0 -
=========================== ==================================== ========= ========= =========
Hill & Smith Industrial Metals & Mining 665 1.0 1,015
=========================== ==================================== ========= ========= =========
MJ Gleeson Household Goods & Home Construction 644 0.9 1,419
=========================== ==================================== ========= ========= =========
Marshalls Construction & Materials 636 0.9 1,146
--------------------------- ------------------------------------ --------- --------- ---------
Total Equity investments 66,628 96.9
--------------------------- ------------------------------------ --------- --------- ---------
(A) All equity investments are listed on the London Stock Exchange
(sterling based), except those marked, which are listed on overseas
exchanges based in sterling.
Other Investments
At 31 December 2022
=================================================== ========= ========= =========
Valuation Total Valuation
2022 portfolio 2021
Company GBP'000 % GBP'000
=================================================== ========= ========= =========
Corporate Bonds(A)
=================================================== ========= ========= =========
NGG Finance 5.625% 377 0.6 433
=================================================== ========= ========= =========
Barclays Bank 9% Perp 317 0.5 346
=================================================== ========= ========= =========
HSBC Holdings 6.5% 304 0.4 224
=================================================== ========= ========= =========
Heathrow Funding 5.225% 300 0.4 312
=================================================== ========= ========= =========
Northumbrian Water 1.625% 263 0.4 -
=================================================== ========= ========= =========
Anglian Water Service Finance 4.5% 197 0.3 -
=================================================== ========= ========= =========
Informa 3.125% 180 0.3 -
=================================================== ========= ========= =========
NatWest Group 2.105% 166 0.2 -
--------------------------------------------------- --------- --------- ---------
Total Corporate Bonds 2,104 3.1
--------------------------------------------------- --------- --------- ---------
Total Investments 68,732 100.0
--------------------------------------------------- --------- --------- ---------
(A) All investments are listed on the London Stock
Exchange (Sterling based).
Distribution of Assets and Liabilities
At 31 December 2022
=============================================================================================
Valuation at Movement during the Valuation at
year
31 December 31 December
2021 Purchases Sales (Losses) 2022
GBP'000 % GBP'000 GBP'000 GBP'000 GBP'000 %
============================= ======= ===== ========= ======== ======== ======= ======
Listed investments
============================= ======= ===== ========= ======== ======== ======= ======
Equity investments 100,566 102.8 20,724 (20,720) (33,942) 66,628 104.9
============================= ======= ===== ========= ======== ======== ======= ======
Corporate bonds 1,617 1.7 1,009 (300) (222) 2,104 3.3
----------------------------- ------- ----- --------- -------- -------- ------- ------
102,183 104.5 21,733 (21,020) (34,164) 68,732 108.2
----------------------------- ------- ----- --------- -------- -------- ------- ------
Current assets 2,968 3.0 2,127 3.3
============================= ======= ===== ========= ======== ======== ======= ======
Other current liabilities (316) (0.3) (340) (0.5)
============================= ======= ===== ========= ======== ======== ======= ======
Loans (6,995) (7.2) (6,999) (11.0)
----------------------------- ------- ----- --------- -------- -------- ------- ------
Net assets 97,840 100.0 63,520 100.0
----------------------------- ------- ----- --------- -------- -------- ------- ------
Net asset value per Ordinary
share 442.52p 287.29p
----------------------------- ------- ----- --------- -------- -------- ------- ------
Investment Case Studies
4imprint
4imprint is a direct marketing business which supplies a range
of promotional products and branded apparel to individuals in all
business areas within all types of organisation. It operates
primarily in North America and has a small business in the UK.
The business has a strong history of organic sales growth in the
highly fragmented US market. It has its own proprietary ordering
& distribution technology and customer satisfaction drives
customer loyalty. 4imprint is a high quality business that is
financially strong. Low capital employed results in strong cash
flow, particularly relative to peers.
4imprint has delivered an impressive step change in marketing
efficiency that management believe stems from sustained investment
through the pandemic and a mix shift towards brand awareness from
print (enabling it to also exit marginal search engine activity).
This has been enhanced by prioritised access to product supply amid
supply chain strains in the first half of 2022, plus broader post
pandemic rebound trends. Still, marketing efficiency has changed
significantly, which has produced a number of upgrades to earnings
during 2022.
Whilst we have upgraded revenues, the key driver of profit
growth is margins. Operating profit is increasing due to increased
revenue, the productivity of the reconfigured marketing portfolio
and operational gearing relating to semi -- variable and fixed
costs in the business. In addition, the shift from catalogues to TV
in the marketing mix is driving an increase in the revenue per
marketing dollar.
We believe that the strength of the model is such that we expect
the business to continue the current (and significant) upgrade
cycle. Whilst we do acknowledge that the business ultimately sells
into cyclical corporate marketing budgets, 4imprint should be
better placed for a recession given the macro outlook. We think
marketing cost (and therefore earnings) will react very differently
to 2009. This ultimately relates to diversification: print, which
dominated marketing spend then, is not flexible and does not
benefit from material cost reductions in a downturn; however, in
contrast, the television (brand) and online business, which
dominate now, are flexible and do. Estimates are cautiously set
with prudent assumptions about the US economy.
The company's continued investment in marketing over the
pandemic, with stronger emphasis on brand, is paying off. Going
forward, we believe 4imprint is well placed to take a greater share
of the market.
We had an encouraging ESG specific meeting with management to
learn more about their sustainability, supply chain due diligence,
data protection, carbon neutrality plans and development of
staff.
4imprint scores well on our stock screening tool the Matrix, the
business has a net cash balance sheet and shares yield around
3%.
Telecom Plus
As the UK's only fully integrated multi-service provider,
Telecom Plus derives significant ongoing operating efficiencies by
spreading a single set of overheads across multiple revenue streams
it receives from its customers. The business has a unique route to
market that uses a highly motivated network of over 50,000
self-employed partners and word of mouth to drive customer
numbers.
Trading under the brand name 'Utility Warehouse', the customer
proposition is compelling. The company bundles together customers'
home services - energy, broadband, mobile and insurance - into one,
great value, monthly bill, saving customers time and money by
providing all their home services in one. The model is based on the
motivation of a self-employed salesforce to generate a second
income from selling Utility Warehouse services. Salesforce
motivation gains momentum when the cost of living rises and a
second income increases in significance.
As is evident from performance in 2022, we expect new partner
sign ups and new customer sign ups, driving revenue from the
bundled services sold, to deliver a growing gross profit. This in
turn delivers capacity for investment in further growth. This
combination is the perfect situation for Telecom Plus, with direct
positive consequences for the company and its shareholders through
a generous dividend policy.
The business remains in a strong position post the Energy Price
Guarantee (EPG). The government action to cap customer bills using
the EPG until April 2024 has a number of important ramifications
for Telecom Plus. It effectively embeds the company's competitive
advantage in terms of customer growth and it means that the
company's churn should be minimal, thus protecting its existing
customer base. It also materially reduces the potential for bad
debts, which we saw as a key risk this winter. Importantly, the
action has no impact on Telecom Plus' long-term wholesale energy
supply agreement, which should continue to work well for both
parties.
The stock scores well on our stock screening tool, the "Matrix",
and with their compelling customer offer and a highly motivated
partner network, the company is at the early stages of a multi-year
growth opportunity.
As a sizeable supplier of electricity and gas to households
throughout the UK, the company has a significant role to play in
the transition to net zero. Recognising the challenge ahead,
management is fully committed to playing an active part in reducing
the company's impact on the climate. Management's ambitions and
commitments align with the UN Sustainable Development Goals.
Directors' Report
The Directors present their report and the audited financial
statements for the year ended 31 December 2022.
Results and Dividends
The financial statements for the year ended 31 December 2022 are
outlined below.
A fourth interim dividend of 2.60p per share was declared by the
Board in December 2022 with a record date of 6 January 2023 and ex
dividend date of 5 January 2023. It was paid on 27 January 2023.
Under accounting standards this dividend will be accounted for in
the financial year ended 31 December 2023.
Investment Trust Status
The Company is registered as a public limited company and is an
investment company within the meaning of Section 833 of the
Companies Act 2006. The Company's registration number is SC137448.
The Company has been approved by HM Revenue & Customs as an
investment trust subject to the Company continuing to meet the
relevant eligibility conditions of Section 1158 of the Corporation
Tax Act 2010 and the on-going requirements of Part 2 Chapter 3
Statutory Instrument 2011/2999 for all financial years commencing
on or after 1 January 2012. The Directors are of the opinion that
the Company has conducted its affairs for the year ended 31
December 2022 so as to enable it to comply with the on-going
requirements for investment trust status.
Individual Savings Accounts ("ISAs")
The Company has conducted its affairs so as to satisfy the
requirements as a qualifying security for ISAs. The Directors
intend that the Company will continue to conduct its affairs in
this manner in the future.
Corporate Governance
The Statement of Corporate Governance, which forms part of the
Directors' Report is provided on pages 46 to 48 of the 2023 Annual
Report.
Capital Structure
At 31 December 2022, the Company had 22,109,765 fully paid
Ordinary shares of 50p each (2021- 22,109,765 Ordinary shares).
There have been no changes in the Company's issued share capital
subsequent to the year end, up to the date of this Report. Each
Ordinary share holds one voting right and shareholders are entitled
to vote on all resolutions which are proposed at general meetings
of the Company. The Ordinary shares carry a right to receive
dividends. On a winding up or other return of capital, after
meeting the liabilities of the Company, the surplus assets will be
paid to Ordinary shareholders in proportion to their shareholdings.
There are no restrictions on the transfer of Ordinary shares in the
Company other than certain restrictions which may be applied from
time to time by law.
Management Agreement
The Company has appointed abrdn Fund Managers Limited ("AFML" or
the "Manager"), a wholly owned subsidiary of abrdn plc, as its
alternative investment fund manager ("AIFM"). AFML has been
appointed to provide investment management, risk management,
administration and company secretarial services as well as
promotional activities. The Company's portfolio is managed by abrdn
Investments Limited ("AIL" or the "Investment Manager") by way of a
group delegation agreement in place between AFML and AIL. In
addition, AFML has sub-delegated promotional activities to AIL and
administrative and secretarial services to abrdn Holdings Limited.
The management fee, details of which are shown in note 4 to the
financial statements, is 0.75% per annum of net assets. The Company
is entitled to terminate the management agreement upon giving the
AIFM twelve months' prior notice in writing, or immediately upon
the payment to the AIFM of six months' fees in lieu of notice.
Substantial Interests
The Board has been advised that the following shareholders owned
3% or more of the issued Ordinary share capital of the Company at
31 December 2022:
Number
of shares
Shareholder held % held
========================== ========== ======
abrdn Trust Savings
Plans 4,519,690 20.4
========================== ========== ======
Shires Income plc 3,103,726 13.6
========================== ========== ======
Interactive Investor 2,778,142 12.6
========================== ========== ======
Hargreaves Lansdown 2,343,737 10.6
========================== ========== ======
Philip J Milton & Company 1,466,159 6.6
========================== ========== ======
1607 Capital Partners 917,499 4.2
========================== ========== ======
AJ Bell 911,348 4.1
========================== ========== ======
Charles Stanley 854,643 3.9
========================== ========== ======
In the period between 31 December 2022 and 27 March 2023, the
Company was notified that Philip J Milton & Company Plc held
1,550,853 shares (7.0% of shares in issue) as at 14 February 2023.
There have been no other changes to the above interests in the
Company's shares notified as at 27 March 2023.
Going Concern with a Material Uncertainty
The Company's assets consist substantially of securities in
companies listed on recognised stock exchanges and in normal
circumstances are realisable within a short timescale.
The Board has set gearing limits and regularly reviews actual
exposures, cash flow projections and compliance with banking
covenants. The Company has a GBP10 million credit facility
comprised of a fixed rate GBP5 million loan facility which expires
in April 2023 and a variable rate GBP5 million loan facility which
expires in April 2024. Should the Board decide not to renew this
facility, any outstanding borrowing would be repaid through the
proceeds of the sale of investments as required. GBP7 million was
drawn down (GBP5 million fixed rate and GBP2 million variable
interest rate) at the date of writing this report.
The Company's portfolio comprises primarily "Level One" assets
(listed on a recognisable exchange and realisable within a short
timescale) and the Company has a relatively low level of gearing.
As such, the Company has the ability to raise sufficient funds in
order to remain within its debt covenants and pay expenses.
Taking the above factors into consideration, the Directors
believe that the Company has adequate financial resources to
continue in operational existence for the foreseeable future and
has the ability to meet its financial obligations as they fall due
for a period until at least 31 March 2024.
Material Uncertainty
The Company announced a strategic review on 13 February 2023.
This followed an unsolicited proposal from another investment
trust, which led the Board to initiate a formal process in order to
ensure that shareholders receive the best possible outcome.
Since the announcement of the strategic review the Company has
received proposals from a number of investment companies and
investment management groups, almost all of which envisage
shareholders being offered the option to roll over some or all of
their investment into a successor vehicle or to receive cash for
some or all of their shareholding. The strategic review process is
now at a stage where a short list of candidates have been requested
to prepare detailed proposals and responses to the Board's specific
questions. The Board currently believes that it is likely that the
strategic review will result in the Company being liquidated and a
rollover being implemented pursuant to a tax efficient scheme of
reconstruction under section 110 of the Insolvency Act 1986.
However, there can be no certainty that this will be the outcome
within twelve months from the date of approval of these financial
statements and therefore, while there remains a material
uncertainty, the Board has prepared the financial statements on a
going concern basis.
Accountability and Audit
The respective responsibilities of the Directors and the auditor
in connection with the financial statements appear on page 63 of
the 2023 Annual Report. In accordance with Section 418 (2) of the
Companies Act 2006, the Directors confirm that, so far as each
Director is aware, there is no relevant audit information of which
the Company's auditor is unaware, and they have taken all the steps
that they could reasonably be expected to have taken as a Director
in order to make themselves aware of any relevant audit information
and to establish that the Company's auditor is aware of that
information. Additionally, there have been no important events
since the year end.
Annual General Meeting
The Annual General Meeting ("AGM") is scheduled to be held on 14
June 2023 at 11.00 am. The Notice of Annual General Meeting and
related notes are set out on pages 104 to 107 of the 2023 Annual
Report. Amongst the resolutions to be considered at the AGM
are:
Section 551 authority to allot shares
Resolution 10, which is an ordinary resolution, will, if
approved, give the Directors a general authority to allot new
securities up to an aggregate nominal value of GBP3,684,111,
representing approximately one third of the total Ordinary share
capital of the Company in issue as at the date of this document,
such authority to expire on 30 June 2024 or, if earlier, at the
conclusion of the next AGM of the Company (unless previously
revoked, varied or extended by the Company in general meeting).
Disapplication of Pre-emption Provisions
Resolution 11 is to enable the Directors to issue new shares and
to resell shares held in treasury up to an aggregate nominal amount
of GBP1,105,488 (representing approximately 10 per cent of the
total Ordinary share capital in issue). Resolution 11, which is a
special resolution, will, if approved, give the Directors power to
allot Ordinary shares (including Ordinary shares held in treasury)
for cash, otherwise than pro rata to existing shareholders, up to a
maximum aggregate nominal amount of GBP1,105,488. Ordinary shares
would only be issued for cash at a price not less than the net
asset value per share. This authority will expire on 30 June 2024
or, if earlier, at the conclusion of the next AGM of the Company
(unless previously revoked, varied or extended by the Company in
general meeting). As noted, this disapplication of pre-emption
rights also applies in respect of treasury shares which the Company
may sell. The Company has no shares held in treasury as at the date
of this report.
Purchase of the Company's own Ordinary Shares
Resolution 12, which is a special resolution, will be proposed
to renew the Company's authorisation to make market purchases of
its own shares. The maximum number of Ordinary shares which may be
purchased pursuant to the authority shall be 14.99% of the issued
share capital of the Company as at the date of the passing of the
resolution (3,314,253 Ordinary shares). The minimum price which may
be paid for an Ordinary share (exclusive of expenses) shall be 50p.
The maximum price for an Ordinary share (again exclusive of
expenses) shall be an amount not more than the higher of (i) 105%
of the average of the middle market quotations for the Company's
Ordinary shares for the five business days immediately preceding
the date of purchase and (ii) the higher of the price of the last
independent trade and the highest current independent bid relating
to an Ordinary share on the trading venue where the purchase is
carried out.
This authority, if conferred, will only be exercised if to do so
would enhance the net asset value per share and is in the best
interests of shareholders generally. Shares so repurchased will be
held in treasury. No dividends will be paid on treasury shares and
no voting rights attach to them. Any purchase of shares will be
made within guidelines established from time to time by the Board.
This authority will expire on 30 June 2024 or, if earlier, at the
conclusion of the next AGM of the Company (unless previously
revoked, varied or extended by the Company
in general meeting.
Recommendation
The Directors believe that the resolutions to be proposed at the
AGM are in the best interests of the Company and its shareholders
as a whole and recommend that shareholders vote in favour of the
resolutions, as the Directors intend to do in respect of their own
beneficial shareholdings totalling 31,786 Ordinary shares,
representing 0.1% of the issued Ordinary share capital of the
Company.
By order of the Board
Dagmar Kent Kershaw,
Chair
27 March 2023
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Annual Report
and the financial statements in accordance with applicable law and
regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law they have
elected to prepare the financial statements in accordance with
UK-adopted international accounting standards.
Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Company and of the profit or
loss of the Company for that period. In preparing these financial
statements, the Directors are required to:
- select suitable accounting policies in accordance with IAS 8
and then apply them consistently;
- make judgements and estimates that are reasonable and prudent;
- state whether they have been prepared in accordance with
UK-adopted international accounting standards; and
- prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company's
transactions and disclose with reasonable accuracy at any time the
financial position of the Company and enable them to ensure that
the financial statements comply with the Companies Act 2006. They
have general responsibility for taking such steps as are reasonably
open to them to safeguard the assets of the Company and to prevent
and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also
responsible for preparing a Strategic Report, Directors' Report,
Directors' Remuneration Report and Corporate Governance Statement
that complies with that law and those regulations.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company's website. Legislation in the UK governing the preparation
and dissemination of financial statements may differ from
legislation in other jurisdictions.
Responsibility statement of the Directors in respect of the
annual financial report
We confirm that to the best of our knowledge:
- the financial statements, prepared in accordance with the
applicable set of accounting standards, give a true and fair view
of the assets, liabilities, financial position and profit or loss
of the Company taken as a whole; and
- the Strategic Report includes 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 they face.
- We consider the annual report and accounts, taken as a whole,
is fair, balanced and understandable and provides the information
necessary for shareholders to assess the Company's position and
performance, business model and strategy.
For and on behalf of abrdn Smaller
Companies Income Trust plc
Dagmar Kent Kershaw,
Chair
27 March 2023
Statement of Comprehensive Income
Year ended Year ended
31 December 2022 31 December 2021
=============================== ====== ============================ ============================
Revenue Capital Total Revenue Capital Total
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
=============================== ====== ======== ======== ======== ======== ======== ========
(Losses)/gains on investments
at fair value 10 - (34,164) (34,164) - 21,035 21,035
=============================== ====== ======== ======== ======== ======== ======== ========
Income 3
=============================== ====== ======== ======== ======== ======== ======== ========
Dividend income 3,037 - 3,037 2,741 - 2,741
=============================== ====== ======== ======== ======== ======== ======== ========
Interest income from
investments 90 - 90 80 - 80
=============================== ====== ======== ======== ======== ======== ======== ========
Other income 37 - 37 1 - 1
------------------------------- ------ -------- -------- -------- -------- -------- --------
3,164 (34,164) (31,000) 2,822 21,035 23,857
------------------------------- ------ -------- -------- -------- -------- -------- --------
Expenses
=============================== ====== ======== ======== ======== ======== ======== ========
Investment management
fee 4 (160) (373) (533) (203) (472) (675)
=============================== ====== ======== ======== ======== ======== ======== ========
Other administrative
expenses 5 (435) - (435) (394) - (394)
=============================== ====== ======== ======== ======== ======== ======== ========
Finance costs 6 (62) (145) (207) (56) (130) (186)
------------------------------- ------ -------- -------- -------- -------- -------- --------
Profit/(loss) before
tax 2,507 (34,682) (32,175) 2,169 20,433 22,602
=============================== ====== ======== ======== ======== ======== ======== ========
Taxation 7 (21) - (21) (26) - (26)
------------------------------- ------ -------- -------- -------- -------- -------- --------
Profit/(loss) attributable
to equity holders 9 2,486 (34,682) (32,196) 2,143 20,433 22,576
------------------------------- ------ -------- -------- -------- -------- -------- --------
Return per Ordinary share
(pence) 9 11.24 (156.86) (145.62) 9.69 92.42 102.11
------------------------------- ------ -------- -------- -------- -------- -------- --------
The total column of this statement represents the Company's Statement
of Comprehensive Income, prepared in accordance with International
Accounting Standards ("IAS"). The supplementary revenue and capital
columns are both prepared under guidance published by the Association
of Investment Companies. All items in the above statement derive from
continuing operations.
The Company does not have any income or expense that is not included
in profit for the year, and therefore the "Profit attributable to equity
holders " is also the "Total comprehensive income attributable to equity
holders" as defined in IAS 1 (revised).
All of the profit and comprehensive income are attributable to the
equity holders of the Company.
All items in the above statement derive from continuing operations.
The accompanying notes are an integral part of these financial statements.
Balance Sheet
As at As at
31 December 31 December
2022 2021
Notes GBP'000 GBP'000
=========================================== ======== ============ ============
Non-current assets
=========================================== ======== ============ ============
Equities 66,628 100,566
=========================================== ======== ============ ============
Corporate bonds 2,104 1,617
------------------------------------------- -------- ------------ ------------
Securities at fair value 10 68,732 102,183
=========================================== ======== ============ ============
Current assets
=========================================== ======== ============ ============
Cash and cash equivalents 1,786 2,592
=========================================== ======== ============ ============
Other receivables 11 341 376
------------------------------------------- -------- ------------ ------------
2,127 2,968
------------------------------------------- -------- ------------ ------------
Current liabilities
=========================================== ======== ============ ============
Bank loan 12 (6,999) (2,000)
=========================================== ======== ============ ============
Trade and other payables 12 (340) (316)
------------------------------------------- -------- ------------ ------------
(7,339) (2,316)
------------------------------------------- -------- ------------ ------------
Net current (liabilities)/assets (5,212) 652
------------------------------------------- -------- ------------ ------------
Total assets less current liabilities 63,520 102,835
------------------------------------------- -------- ------------ ------------
Non-current liabilities
=========================================== ======== ============ ============
Bank loan 13 - (4,995)
------------------------------------------- -------- ------------ ------------
Net assets 63,520 97,840
------------------------------------------- -------- ------------ ------------
Share capital and reserves
=========================================== ======== ============ ============
Called-up share capital 15 11,055 11,055
=========================================== ======== ============ ============
Share premium account 11,892 11,892
=========================================== ======== ============ ============
Capital redemption reserve 2,032 2,032
=========================================== ======== ============ ============
Capital reserve 34,979 69,661
=========================================== ======== ============ ============
Revenue reserve 3,562 3,200
------------------------------------------- -------- ------------ ------------
Equity shareholders' funds 63,520 97,840
------------------------------------------- -------- ------------ ------------
Net asset value per Ordinary share
(pence) 16 287.29 442.52
------------------------------------------- -------- ------------ ------------
The financial statements were approved by the Board of Directors and
authorised for issue on 27 March 2023 and were signed on its behalf
by:
D. Kent Kershaw
Chair
The accompanying notes are an integral part of these financial statements.
Statement of Changes in Equity
Year ended 31 December 2022
===============================================================================================
Share Capital
Share premium redemption Capital Revenue
capital account reserve reserve reserve Total
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
======================== ====== ======== ======== =========== ======== ======== ========
As at 31 December 2021 11,055 11,892 2,032 69,661 3,200 97,840
======================== ====== ======== ======== =========== ======== ======== ========
(Loss)/profit for the
year - - - (34,682) 2,486 (32,196)
======================== ====== ======== ======== =========== ======== ======== ========
Dividends paid in the
year 8 - - - - (2,124) (2,124)
------------------------ ------ -------- -------- ----------- -------- -------- --------
As at 31 December 2022 11,055 11,892 2,032 34,979 3,562 63,520
------------------------ ------ -------- -------- ----------- -------- -------- --------
Year ended 31 December 2021
Share Capital
Share premium redemption Capital Revenue
capital account reserve reserve reserve Total
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
======================== ====== ======== ======== =========== ======== ======== ========
As at 31 December 2020 11,055 11,892 2,032 49,228 2,937 77,144
======================== ====== ======== ======== =========== ======== ======== ========
Profit for the year - - - 20,433 2,143 22,576
======================== ====== ======== ======== =========== ======== ======== ========
Dividends paid in the
year 8 - - - - (1,880) (1,880)
------------------------ ------ -------- -------- ----------- -------- -------- --------
As at 31 December 2021 11,055 11,892 2,032 69,661 3,200 97,840
------------------------ ------ -------- -------- ----------- -------- -------- --------
The revenue reserve represents the amount of the Company's reserves
distributable by way of dividend.
The accompanying notes are an integral part of the financial statements.
Statement of Cash Flows
Year ended Year ended
31 December 31 December
2022 2021
Notes GBP'000 GBP'000
=========================================== ====== =========== ===========
Cash flows from operating activities
=========================================== ====== =========== ===========
Dividend income from investments received 3,071 2,699
=========================================== ====== =========== ===========
Interest income from investments received 102 98
=========================================== ====== =========== ===========
Interest from AAA-rated money market
funds received 29 1
=========================================== ====== =========== ===========
Bank interest received 3 -
=========================================== ====== =========== ===========
Investment management fee paid (447) (650)
=========================================== ====== =========== ===========
Other cash expenses (476) (379)
------------------------------------------- ------ ----------- -----------
Cash generated from operations 2,282 1,769
=========================================== ====== =========== ===========
=========================================== ====== =========== ===========
Interest paid (213) (166)
=========================================== ====== =========== ===========
Overseas taxation suffered (33) (38)
------------------------------------------- ------ ----------- -----------
Net cash inflows from operating activities 2,036 1,565
------------------------------------------- ------ ----------- -----------
Cash flows from investing activities
=========================================== ====== =========== ===========
Purchases of investments (21,738) (20,109)
=========================================== ====== =========== ===========
Sales of investments 21,020 21,401
------------------------------------------- ------ ----------- -----------
Net cash (outflow)/inflow from investing
activities (718) 1,292
------------------------------------------- ------ ----------- -----------
Cash flows from financing activities
=========================================== ====== =========== ===========
Equity dividends paid 8 (2,124) (1,880)
------------------------------------------- ------ ----------- -----------
Net cash outflow from financing activities (2,124) (1,880)
------------------------------------------- ------ ----------- -----------
Net (decrease)/increase in cash and
cash equivalents (806) 977
------------------------------------------- ------ ----------- -----------
Analysis of changes in cash and cash
equivalents during the year
=========================================== ====== =========== ===========
Opening balance 2,592 1,615
=========================================== ====== =========== ===========
(Decrease)/increase in cash and cash
equivalents as above (806) 977
------------------------------------------- ------ ----------- -----------
Closing balances 1,786 2,592
------------------------------------------- ------ ----------- -----------
Notes to the Financial Statements
For the year ended 31 December 2022
1. Principal activity
The Company is a closed-end investment company, registered in Scotland
No SC137448, with its Ordinary shares being listed on the London
Stock Exchange.
2. Accounting policies
(a) Basis of accounting. The financial statements of the Company
have been prepared in accordance with UK-adopted International
Accounting Standards ("IAS").
Going concern with a Material Uncertainty. The Company's assets
consist substantially of securities in companies listed on recognised
stock exchanges and in normal circumstances are realisable within
a short timescale to meet funding commitments if necessary.
The Board has set gearing limits and regularly reviews actual
exposures, cash flow projections and compliance with banking
covenants. The Company has a GBP10 million credit facility comprised
of a fixed rate GBP5 million loan which expires in April 2023
and a variable rate GBP5 million loan which expires in April
2024. Should the Board decide not to renew this facility, any
outstanding borrowing would be repaid through the proceeds of
the sale of investments as required. GBP2 million of the variable
rate loan was drawn down at the date of this report.
The Company undertakes a continuation vote every five years.
The last continuation vote was passed at the AGM held in June
2020 with 99.7% of votes in favour.
The Company's portfolio comprises primarily "Level One" assets
(listed on a recognisable exchange and realisable within a short
timescale) and the Company has a relatively low level of gearing.
As such, the Company has the ability to raise sufficient funds
in order to remain within its debt covenants and pay expenses.
Taking the above factors into consideration, the Directors reasonably
believe that the Company has adequate financial resources to
continue in operational existence for the foreseeable future
and has the ability to meet its financial obligations as they
fall due for a period until at least 31 March 2024. Accordingly,
the Board continues to adopt the going concern basis in preparing
the financial statements.
The Company announced a strategic review on 13 February 2023.
This followed an unsolicited approach from another investment
trust and preliminary discussions about a combination of the
two trusts, which led the Board to initiate a formal process
in order to ensure that shareholders receive the best possible
outcome.
Since the announcement of the strategic review the Company has
received proposals from a number of investment companies and
investment management groups, almost all of which envisage shareholders
being offered the option to roll over some or all of their investment
into a successor vehicle or to receive cash for some or all
of their shareholding. The strategic review process is now at
a stage where a short list of candidates have been requested
to prepare detailed proposals and responses to the Board's specific
questions. The Board currently believes that it is likely that
the strategic review will result in the Company being liquidated
and a rollover being implemented pursuant to a tax efficient
scheme of reconstruction under section 110 of the Insolvency
Act 1986. However, there can be no certainty that this will
be the outcome within twelve months from the date of approval
of these financial statements and therefore, while there remains
a material uncertainty, the Board has prepared the financial
statements on a going concern basis.
In preparing these financial statements the Directors have considered
the impact of climate change risk as an emerging risk, as set
out on page 24 of the 2023 Annual Report, and have concluded
that it does not have a material impact on the Company's investments.
In line with IAS, investments are valued at fair value, which
for the Company are quoted bid prices for investments in active
markets at the Balance Sheet date and therefore reflect market
participants' view of climate change risk.
The financial statements have also been prepared in accordance
with the Statement of Recommended Practice (SORP), "Financial
Statements of Investment Trust Companies and Venture Capital
Trusts" issued in July 2022 to the extent that it is consistent
with IAS.
Significant accounting judgements, estimates and assumptions
. The preparation of financial statements requires the use of
certain significant accounting judgements, estimates and assumptions
which requires the Board to exercise its judgement in the process
of applying the accounting policies and are continually evaluated.
One area of judgement includes the assessment of whether special
dividends should be allocated to revenue or capital based on
their individual merits. The Directors do not consider there
to be any significant accounting judgements, estimates and assumptions
within the financial statements.
New and amended accounting standards and interpretations . There
were no new and amended accounting standards and interpretations
applied to the financial statements of the Company during the
year.
Future amendments to standards and interpretations . At the
date of authorisation of these financial statements, the following
amendments to Standards and Interpretations were assessed to
be relevant and are all effective for annual periods beginning
on or after 1 January 2023 and are not expected to have a material
impact on the financial statements:
Standards
IAS 1 Amendments - Classification of Liabilities as Current
or Non-Current (effective from 1 January 2023)
IAS 1 Amendments - Disclosure of Accounting Policies (effective
from 1 January 2023)
IAS 1 Amendments - Non-current Liabilities with Covenants (effective
from 1 January 2023)
IAS 8 Amendments - Definition of Accounting Estimates (effective
from 1 January 2023)
IAS 12 Amendments - Deferred Tax related to Assets and Liabilities
arising from a Single Transaction (effective from 1 January
2023)
(b) Investments. The Company has adopted the classification and
measurement provisions of IFRS 9 'Financial Instruments'.
The Company classifies its equity investments and debt instruments
based on their contractual cash flow characteristics and the
Company's business model for managing the assets. Equity investments
fail the contractual cash flows test so are measured at fair
value. For debt instruments, the business model is the determining
feature and they are managed, performance monitored and risk
evaluated, on a fair value basis. The Manager is also compensated
based on the fair value of the Company's assets. Consequently,
all investments are measured at fair value through profit or
loss.
Investments are recognised and de-recognised at trade date where
a purchase or sale is under a contract whose terms require delivery
within the timeframe established by the market concerned, and
are measured at fair value. For listed investments, the valuation
of investments at the year end is deemed to be bid market prices
or closing prices for SETS (London Stock Exchange's electronic
trading service) stocks sourced from the London Stock Exchange.
Gains and losses arising from the changes in fair value are
included in net profit or loss for the period as a capital item.
Transaction costs are treated as a capital cost.
(c) I ncome. Dividend income from equity investments, including
preference shares which have a discretionary dividend is recognised
when the shareholders' rights to receive payment have been established,
normally the ex-dividend date. Special dividends are allocated
to revenue or capital based on their individual merits.
Interest from debt securities, and income from preference shares
which do not have a discretionary dividend are accounted for
on an accruals basis. Any write-off of the premium or discount
on acquisition as a result of using this basis is allocated
against the revenue reserve in accordance with the SORP.
Interest receivable on AAA rated money market funds and short
term deposits are accounted for on an accruals basis.
(d) Expenses. All expenses are accounted for on an accruals basis.
In respect of the analysis between revenue and capital items
presented within the Statement of Comprehensive Income, all
expenses have been presented as revenue items except those where
a connection with the maintenance or enhancement of the value
of the investments held can be demonstrated. Accordingly the
management fee and finance costs have been allocated 30% to
revenue and 70% to capital (2021 - same), in order to reflect
the Directors' expected long-term view of the nature of the
investment returns of the Company. This allocation is reviewed
on a regular basis.
(e) Cash and cash equivalents . Cash comprises cash in hand and
demand deposits. Cash equivalents includes bank overdrafts repayable
on demand and short term, highly liquid investments, that are
readily convertible to known amounts of cash and that are subject
to an insignificant risk of change in value. Cash equivalents
are held to meet short term cash commitments.
(f) Borrowings. At and after initial measurement, bank borrowings
are measured at amortised cost. Amortised cost is calculated
by taking into account any discount or premium on issue, and
costs that are an integral part of the effective interest rate.
The finance costs of such borrowings are accounted for on an
accruals basis using the effective interest rate method and
are charged 30% to revenue and 70% to capital in the Statement
of Comprehensive Income to reflect the Company's investment
policy and prospective income and capital growth.
(g) Taxation . The tax expense represents the sum of tax currently
payable and deferred tax. Any tax payable is based on the taxable
profit for the year. Taxable profit differs from net profit
as reported in the Statement of Comprehensive Income because
it excludes items of income or expense that are taxable or deductible
in other years and it further excludes items that are never
taxable or deductible. The Company's liability for current tax
is calculated using tax rates that were applicable at the Balance
Sheet date.
Deferred tax is recognised in respect of all temporary differences
at the Balance Sheet date, where transactions or events that
result in an obligation to pay more tax in the future or right
to pay less tax in the future have occurred at the Balance Sheet
date. This is subject to deferred tax assets only being recognised
if it is considered more likely than not that there will be
suitable profits from which the future reversal of the temporary
differences can be deducted. Deferred tax assets and liabilities
are measured at the rates applicable to the legal jurisdictions
in which they arise, using tax rates that are expected to apply
at the date the deferred tax position is unwound.
(h) Foreign currencies . Monetary assets and liabilities and non-monetary
assets held at fair value denominated in foreign currencies
are converted into sterling at the rate of exchange ruling at
the reporting date. Transactions during the year involving foreign
currencies are converted at the rate of exchange ruling at the
transaction date. Gains or losses arising from a change in exchange
rates subsequent to the date of a transaction are included as
a currency gain or loss in the revenue or capital columns of
the Statement of Comprehensive Income, depending on whether
the gain or loss is of a revenue or capital nature.
(i) Nature and purpose of reserves
Share premium account . The balance classified as share premium
includes the premium above nominal value from the proceeds on
issue of any equity share capital comprising ordinary shares
of 50p per share. This reserve is not distributable.
Capital redemption reserve. The capital redemption reserve is
used to record the amount equivalent to the nominal value of
any of the Company's own shares purchased and cancelled in order
to maintain the Company's capital. This reserve is not distributable.
Capital reserve . This reserve reflects any gains or losses
on investments realised in the period along with any increases
and decreases in the fair value of investments held that have
been recognised in the Statement of Comprehensive Income. These
include gains and losses from foreign currency exchange differences.
Additionally, expenses, including finance costs, are charged
to this reserve in accordance with (e) above. This reserve is
not distributable except for the purpose of funding share buybacks
to the extent that gains are deemed realised.
Revenue reserve. This reserve reflects all income and costs
which are recognised in the revenue column of the Statement
of Comprehensive Income. The revenue reserve represents the
amount of the Company's reserves distributable by way of dividend.
(j) Dividends payable. Interim dividends are recognised in the financial
statements in the period in which they are paid.
(k) Segmental reporting. The Directors are of the opinion that the
Company is engaged in a single segment of business activity,
being investment business. Consequently, no business segmental
analysis is provided.
3. Income
================================================ =========== ===========
2022 2021
GBP'000 GBP'000
================================================ =========== ===========
Income from investments
================================================ =========== ===========
Dividend income from UK equity securities 2,367 2,136
================================================ =========== ===========
Dividend income from overseas equity securities 462 403
================================================ =========== ===========
Property income distributions 208 202
------------------------------------------------ ----------- -----------
3,037 2,741
================================================ =========== ===========
Interest income from investments 90 80
------------------------------------------------ ----------- -----------
3,127 2,821
------------------------------------------------ ----------- -----------
Other income
================================================ =========== ===========
Bank interest 4 -
================================================ =========== ===========
Interest from AAA-rated money market funds 33 1
------------------------------------------------ ----------- -----------
Total revenue income 3,164 2,822
------------------------------------------------ ----------- -----------
4. Management fee
===================================================================================
2022 2021
============================ ========================== =========================
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
============================ ======== ======= ======= ======= ======= =======
Management fee 160 373 533 203 472 675
---------------------------- -------- ------- ------- ------- ------- -------
For the year ended 31 December 2022 management services were provided
by abrdn Fund Managers Limited ("aFML"). The management fee was
calculated at an annual rate of 0.75% of the net assets of the
Company, calculated and paid monthly. The balance due to aFML at
the year end was GBP204,000 (2021 - GBP119,000). The fee is allocated
30% (2021 - 30%) to revenue and 70% (2021 - 70%) to capital.
The agreement is terminable on twelve months' written notice from
the Company or the Manager, however, the Company may terminate
the agreement on immediate notice on the payment to the Manager
of six months' fees in lieu of notice.
5. Other administrative expenses
============================================== ============ ===========
2022 2021
GBP'000 GBP'000
============================================== ============ ===========
Directors' fees 131 117
============================================== ============ ===========
Auditor's remuneration:
============================================== ============ ===========
- fees payable for the audit of the annual
accounts 45 36
============================================== ============ ===========
Promotional activities(A) 56 49
============================================== ============ ===========
Legal and professional fees 18 38
============================================== ============ ===========
Registrars' fees 18 17
============================================== ============ ===========
Printing and postage 21 22
============================================== ============ ===========
Broker fees 36 36
============================================== ============ ===========
Directors' & Officers' liability insurance 8 8
============================================== ============ ===========
Trade subscriptions 27 31
============================================== ============ ===========
Other expenses 75 40
---------------------------------------------- ------------ -----------
435 394
---------------------------------------------- ------------ -----------
(A) Expenses of GBP56,000 (2021 - GBP49,000) were paid to aFML
in respect of the promotion of the Company. The balance outstanding
at the year end was GBP14,000 (2021 - GBP37,000).
All of the expenses above, with the exception of the auditor's
remuneration, include irrecoverable VAT where applicable. The VAT
charged on the auditor's remuneration is included within other
expenses.
6. Finance costs
=========================== ======= ======= ======= ======= ======= =======
2022 2021
=========================== ========================= =========================
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
=========================== ======= ======= ======= ======= ======= =======
Bank loans 62 145 207 56 130 186
--------------------------- ------- ------- ------- ------- ------- -------
7. Taxation
===========================================================================================
(a) Analysis of charge for 2022 2021
the year
============================= =========================== =========================
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
============================= ======= ======== ======== ======= ======= =======
Overseas withholding tax 21 - 21 26 - 26
----------------------------- ------- -------- -------- ------- ------- -------
Total tax charge for the
year 21 - 21 26 - 26
----------------------------- ------- -------- -------- ------- ------- -------
(b) Factors affecting tax charge
for the year
The UK corporation tax rate was 19% throughout the year (2021
- same). The tax assessed for the year is lower than the corporation
tax rate. The differences are explained below:
============================= ======= ======== ======== ======= ======= =======
2022 2021
============================= =========================== =========================
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
============================= ======= ======== ======== ======= ======= =======
Profit/(loss) before tax 2,507 (34,682) (32,175) 2,169 20,433 22,602
============================= ======= ======== ======== ======= ======= =======
============================= ======= ======== ======== ======= ======= =======
Taxation of profit/(loss)
at the effective standard
rate of corporation tax 476 (6,590) (6,114) 412 3,882 4,294
============================= ======= ======== ======== ======= ======= =======
Effects of:
============================= ======= ======== ======== ======= ======= =======
Non taxable UK dividend
income (457) - (457) (406) - (406)
============================= ======= ======== ======== ======= ======= =======
Capital losses/(gains)
disallowed for the purposes
of corporation tax - 6,491 6,491 - (3,997) (3,997)
============================= ======= ======== ======== ======= ======= =======
Non taxable overseas income
not subject to tax (88) - (88) (77) - (77)
============================= ======= ======== ======== ======= ======= =======
Excess management expenses
not utilised 69 99 168 71 115 186
============================= ======= ======== ======== ======= ======= =======
Irrecoverable overseas
withholding tax 21 - 21 26 - 26
----------------------------- ------- -------- -------- ------- ------- -------
Total tax charge for the
year 21 - 21 26 - 26
----------------------------- ------- -------- -------- ------- ------- -------
(c) Factors that might affect future tax charges. No provision for
deferred tax has been made in the current or prior accounting
year. The Company has not provided for deferred tax on capital
gains or losses arising on the revaluation or disposal of investments
as it is exempt from tax on these items because of its status
as an investment trust company.
At the year end, the Company has for taxation purposes only,
accumulated unrelieved management expenses and loan relationship
deficits of GBP17,382,000 (2021 - GBP16,503,000). It is unlikely
that the fund will generate sufficient taxable profits in the
future to utilise these amounts and therefore no deferred tax
asset has been recognised.
8. Dividends
=============================================== ============ ============
2022 2021
GBP'000 GBP'000
=============================================== ============ ============
Amounts recognised as distributions to
equity holders in the period:
=============================================== ============ ============
Fourth interim dividend for 2021 of 2.40p
(2020 - 2.06p) per Ordinary share 531 455
=============================================== ============ ============
First interim dividend for 2022 of 2.40p
(2021 - 2.15p) per Ordinary share 531 475
=============================================== ============ ============
Second interim dividend for 2022 of 2.40p
(2021 - 2.15p) per Ordinary share 531 475
=============================================== ============ ============
Third interim dividend for 2022 of 2.40p
(2021 - 2.15p) per Ordinary share 531 475
----------------------------------------------- ------------ ------------
2,124 1,880
----------------------------------------------- ------------ ------------
The fourth interim dividend of 2022 of 2.60p (2021 - 2.40p) per
share was declared after the year end and has therefore not been
included as a liability in these financial statements.
The following table sets out the total dividends payable in respect
of the financial year, which is the basis on which the requirements
of Sections 1158-1159 of the Corporation Tax Act 2010 are considered.
The revenue available for distribution by way of dividend for the
year is GBP2,486,000 (2021 - GBP2,143,000).
=============================================== ============ ============
2022 2021
GBP'000 GBP'000
=============================================== ============ ============
First interim dividend for 2022 of 2.40p
(2021 - 2.15p) per Ordinary share 531 475
=============================================== ============ ============
Second interim dividend for 2022 of 2.40p
(2021 - 2.15p) per Ordinary share 531 475
=============================================== ============ ============
Third interim dividend for 2022 of 2.40p
(2021 - 2.15p) per Ordinary share 531 475
=============================================== ============ ============
Fourth interim dividend for 2022 of 2.60p
(2021 - 2.40p) per Ordinary share 575 531
----------------------------------------------- ------------ ------------
2,168 1,956
----------------------------------------------- ------------ ------------
9. Earnings per Ordinary share
=========================================== =========== ===========
2022 2021
p p
=========================================== =========== ===========
Revenue return 11.24 9.69
=========================================== =========== ===========
Capital return (156.86) 92.42
------------------------------------------- ----------- -----------
Total return (145.62) 102.11
------------------------------------------- ----------- -----------
The returns per share are based on the
following figures:
=========================================== =========== ===========
2022 2021
GBP'000 GBP'000
=========================================== =========== ===========
Revenue return 2,486 2,143
=========================================== =========== ===========
Capital return (34,682) 20,433
------------------------------------------- ----------- -----------
Total return (32,196) 22,576
------------------------------------------- ----------- -----------
Weighted average number of shares in issue 22,109,765 22,109,765
------------------------------------------- ----------- -----------
During the year there were no (2021 -
same) dilutive shares in issue.
10. Non-current assets - securities at fair
value
================================================= ============= =============
2022 2021
GBP'000 GBP'000
================================================= ============= =============
Listed on recognised stock exchanges:
================================================= ============= =============
United Kingdom 67,415 95,248
================================================= ============= =============
Overseas 1,317 6,935
------------------------------------------------- ------------- -------------
68,732 102,183
------------------------------------------------- ------------- -------------
================================================= ============= =============
2022 2021
GBP'000 GBP'000
================================================= ============= =============
Opening book cost 69,027 60,215
================================================= ============= =============
Investment holdings gains 33,156 22,239
------------------------------------------------- ------------- -------------
Opening fair value 102,183 82,454
================================================= ============= =============
Analysis of transactions made during the
year
================================================= ============= =============
Purchases 21,733 20,095
================================================= ============= =============
Sales - proceeds (21,020) (21,401)
================================================= ============= =============
(Losses)/gains on investments (34,164) 21,035
------------------------------------------------- ------------- -------------
Closing fair value 68,732 102,183
================================================= ============= =============
================================================= ============= =============
Closing book cost 64,486 69,027
================================================= ============= =============
Closing investment holdings gains 4,246 33,156
------------------------------------------------- ------------- -------------
Closing fair value 68,732 102,183
------------------------------------------------- ------------- -------------
The Company received GBP21,020,000 (2021 - GBP21,401,000) from
investments sold in the year. The book cost of these investments
when they was purchased were GBP26,274,000 (2021 - GBP11,283,000).
These investments have been revalued over time and until they were
sold any unrealised gains/losses were included in the fair value
of the investments.
Transaction costs . During the year expenses were incurred in acquiring
or disposing of investments classified as fair value through profit
or loss. These have been expensed through capital and are included
within (losses)/gains on investments in the Statement of Comprehensive
Income. The total costs were as follows:
================================================= ============= =============
2022 2021
GBP'000 GBP'000
================================================= ============= =============
Purchases 81 76
================================================= ============= =============
Sales 18 16
------------------------------------------------- ------------- -------------
99 92
------------------------------------------------- ------------- -------------
The above transaction costs are calculated and disclosed in line
with the AIC SORP. The transaction costs in the Company's Key Information
Document are calculated on a different basis and in line with the
PRIIPs regulations.
11. Other receivables
======================================= ============ ===========
2022 2021
GBP'000 GBP'000
======================================= ============ ===========
Accrued income & prepayments 341 376
--------------------------------------- ------------ -----------
341 376
--------------------------------------- ------------ -----------
None of the above amounts are overdue.
12. Current liabilities
========================================= ============== ============
2022 2021
(a) Short-term loan GBP'000 GBP'000
========================================= ============== ============
Short-term bank loan 2,000 2,000
========================================= ============== ============
Fixed rate bank loan 4,999 -
----------------------------------------- -------------- ------------
6,999 2,000
----------------------------------------- -------------- ------------
The Company has in place a GBP10 million loan facility with
The Royal Bank of Scotland International, London Branch (RBSI)
which is comprised of two GBP5 million tranches. Tranche A is
a two year GBP5 million variable loan facility which expires
in April 2024 and GBP2 million was drawn down at 31 December
2022 at a rate of 4.028% until 25 January 2023. At the date
of this Report, GBP2 million was drawn down at a rate of 5.0268%.
Tranche B is a five year GBP5 million fixed rate loan facility
and was fully drawn down at the year end and will expire in
April 2023. The interest on Tranche B is fixed at 2.825% per
annum payable quarterly in arrears.
The Directors are of the opinion that the fair value of the
loans as at 31 December 2022 are not materially different from
the book value.
========================================= ============== ============
2022 2021
(b) Trade and other payables GBP'000 GBP'000
========================================= ============== ============
Investment management fee 204 119
========================================= ============== ============
Interest payable 34 44
========================================= ============== ============
Amounts due to brokers - 5
========================================= ============== ============
Sundry creditors 102 148
----------------------------------------- -------------- ------------
340 316
----------------------------------------- -------------- ------------
13. Non-current liabilities
================================================ ============= =============
2022 2021
GBP'000 GBP'000
================================================ ============= =============
Fixed rate loan - 4,995
------------------------------------------------ ------------- -------------
All financial liabilities are measured at amortised cost. The fair
value of the fixed rate loan as at 31 December 2021 was calculated
at GBP5,105,000 and would have been classified as a Level 2 liability
under Fair Value Hierarchy guidance of IFRS 13 'Fair Value Measurement'.
14. Analysis of changes in financing liabilities during the year
The following table shows the movements during the year of financing
liabilities in the Balance Sheet:
============================================= ============= ===========
2022 2021
GBP'000 GBP'000
============================================= ============= ===========
Opening balance at 1 January 6,995 6,991
============================================= ============= ===========
Amortisation of arrangement costs 4 4
--------------------------------------------- ------------- -----------
Closing balance at 31 December 6,999 6,995
--------------------------------------------- ------------- -----------
15. Called-up share capital
========================================= =========== ==========
Ordinary shares
of 50 pence each
========================================= =======================
Number GBP'000
========================================= =========== ==========
Authorised 35,000,000 17,500
========================================= =========== ==========
Allotted and fully paid
========================================= =========== ==========
At 31 December 2022 and 31 December 2021 22,109,765 11,055
----------------------------------------- ----------- ----------
16. Net asset value per share
The net asset value per Ordinary share and the net asset value
attributable to the Ordinary shares at the year end were as follows:
============================================== ============= ===========
2022 2021
============================================== ============= ===========
Net asset value attributable (GBP'000) 63,520 97,840
============================================== ============= ===========
Number of Ordinary shares in issue 22,109,765 22,109,765
============================================== ============= ===========
Net asset value per share (p) 287.29 442.52
---------------------------------------------- ------------- -----------
At the year end there were no (2021 -
same) dilutive shares in issue.
17. Financial instruments and risk management
The Company's investment activities expose it to various types
of financial risk associated with the financial instruments and
markets in which it invests. The Company's financial instruments
comprise UK and overseas listed equities and corporate fixed interest
bonds, cash balances, debtors and creditors that arise directly
from its operations; for example, in respect of sales and purchases
awaiting settlement, and debtors for accrued income. The Company
may enter into derivative transactions for the purpose of managing
market risks arising from the Company's activities though there
was no exposure to derivative instruments during the year.
The Board has delegated the risk management function to abrdn
Fund Managers Limited ("the AIFM" or "aFML") under the terms of
its management agreement with aFML (further details of which are
included under note 4). The Board regularly reviews and agrees
policies for managing each of the key financial risks identified
with the Manager. The types of risk and the Manager's approach
to the management of each type of risk, are summarised below.
Such approach has been applied throughout the year and has not
changed since the previous accounting period.
Risk management framework. The directors of aFML collectively
assume responsibility for aFML's obligations under the AIFMD including
reviewing investment performance and monitoring the Company's
risk profile during the year.
aFML is a fully integrated member of the abrdn plc group of companies
(referred to as "the Group"), which provides a variety of services
and support to aFML in the conduct of its business activities,
including in the oversight of the risk management framework for
the Company. The AIFM has delegated the day to day administration
of the investment policy to abrdn Investments Limited, which is
responsible for ensuring that the Company is managed within the
terms of its investment guidelines and the limits set out in FUND
3.2.2R (details of which can be found on the Company's website).
The AIFM has retained responsibility for monitoring and oversight
of investment performance, product risk and regulatory and operational
risk for the Company.
The AIFM conducts its risk oversight function through the operation
of the Group's risk management processes and systems which are
embedded within the Group's operations. The Group's Risk Division
supports management in the identification and mitigation of risks
and provides independent monitoring of the business. The Division
includes Compliance, Business Risk, Market Risk, Risk Management
and Legal. The team is headed up by the Group's Chief Risk Officer,
who reports to the Chief Executive Officer of the Group. The Risk
Division achieves its objective through embedding the Risk Management
Framework throughout the organisation using the Group's operational
risk management system ("SHIELD").
The Group's Internal Audit Department is independent of the Group's
Risk Division and reports directly to the Chief Executive Officer
and to the Audit Committee of the Group's Board of Directors.
The Internal Audit Department is responsible for providing an
independent assessment of the Group's control environment.
The Group's corporate governance structure is supported by several
committees to assist the board of directors of the Group, its
subsidiaries and the Company to fulfil their roles and responsibilities.
The Group's Risk Division is represented on all committees, with
the exception of those committees that deal with investment recommendations.
The specific goals and guidelines on the functioning of those
committees are described on the committees' terms of reference.
Risk management . The main risks the Company faces from its financial
instruments are (i) market risk (comprising interest rate risk
and price risk), (ii) liquidity risk and (iii) credit risk.
(i) Market risk . The fair value or future cash flows of a financial
instrument held by the Company may fluctuate because of changes
in market prices. This market risk comprises three elements
- interest rate risk, currency risk and price risk.
Interest rate risk . Interest rate risk is the risk that interest
rate movements will affect:
- the fair value of the investments in fixed interest rate securities;
- the level of income receivable on cash deposits;
- interest payable on the Company's variable rate borrowings.
Management of the risk . The Board will monitor the effects
of interest movements closely when making investment and borrowing
decisions.
The Board reviews on a regular basis the values of the fixed
interest rate securities.
Interest rate profile . The interest rate risk profile of the
portfolio of financial assets and liabilities (excluding equity
shares) at the Balance Sheet date was as follows:
========= ================== ========== =========== ======== ======== ======= =========
Weighted Weighted
average average
period interest Fixed Variable
rate is rate rate rate
fixed
As at 31 December Years % GBP'000 GBP'000
2022
============================= ========== =========== ======== ======== ======= =========
Assets
============================= ========== =========== ======== ======== ======= =========
Corporate bonds 15.08 5.22 2,104 -
============================= ========== =========== ======== ======== ======= =========
Investments in AAA-rated money
market funds 3.36 - 1,450
====================================================== ======== ======== ======= =========
Cash - - - 336
----------------------------- ---------- ----------- -------- -------- ------- ---------
Total assets - - 2,104 1,786
----------------------------- ---------- ----------- -------- -------- ------- ---------
Liabilities
============================= ========== =========== ======== ======== ======= =========
Short-term bank
loan 0.07 4.03 (2,000) -
============================= ========== =========== ======== ======== ======= =========
Fixed rate bank
loan 0.32 2.83 (5,000) -
----------------------------- ---------- ----------- -------- -------- ------- ---------
Total liabilities - - (7,000) -
----------------------------- ---------- ----------- -------- -------- ------- ---------
Total - - (4,896) 1,786
----------------------------- ---------- ----------- -------- -------- ------- ---------
========= ================== ========== =========== ======== ======== ======= =========
Weighted Weighted
average average
period interest Fixed Variable
rate is rate rate rate
fixed
As at 31 December Years % GBP'000 GBP'000
2021
============================= ========== =========== ======== ======== ======= =========
Assets
============================= ========== =========== ======== ======== ======= =========
Corporate bonds 30.72 5.56 1,617 -
============================= ========== =========== ======== ======== ======= =========
Investments in AAA-rated money
market funds 0.19 - 2,406
====================================================== ======== ======== ======= =========
Cash - - - 186
============================= ========== =========== ======== ======== ======= =========
Total assets - - 1,617 2,592
============================= ========== =========== ======== ======== ======= =========
Liabilities
============================= ========== =========== ======== ======== ======= =========
Short-term bank
loan 0.07 0.85 (2,000) -
============================= ========== =========== ======== ======== ======= =========
Fixed rate bank
loan 1.32 2.83 (5,000) -
----------------------------- ---------- ----------- -------- -------- ------- ---------
Total liabilities - - (7,000) -
----------------------------- ---------- ----------- -------- -------- ------- ---------
Total - - (5,383) 2,592
----------------------------- ---------- ----------- -------- -------- ------- ---------
The weighted average interest rate is based on the current yield
of each asset, weighted by its market value. The weighted average
interest rate on the bank loan is based on the interest rate
payable, weighted by the total value of the loan. The maturity
date of the Company's loan is shown in note 12 to the financial
statements.
The cash assets consist of cash deposits on call earning interest
at prevailing market rates.
Short-term debtors and creditors, with the exception of bank
loans, have been excluded from the above tables.
All financial liabilities are measured at amortised cost.
Interest rate sensitivity. The sensitivity analysis below has
been determined based on the exposure to interest rates for
non-derivative instruments at the Balance Sheet date and the
stipulated change taking place at the beginning of the financial
year and held constant throughout the reporting period in the
case of instruments that have variable rates.
If interest rates had been 100 basis points higher or lower
(based on the current parameter used by the Manager's Investment
Risk Department on risk assessment) and all other variables
were held constant, the Company's;
- revenue return for the year ended 31 December 2022 would decrease/increase
by approximately GBP52,000 (2021 - decrease/increase by GBP44,000).
This is mainly attributable to the Company's exposure to interest
rates on its variable rate cash balances. These figures have
been calculated based on cash positions at each year end.
- The capital return would decrease/increase by GBP127,000 (2021
- increase/decrease by GBP105,000) using VaR ("Value at Risk")
analysis based on 100 observations of weekly VaR computations
of fixed interest portfolio positions at each year end.
Currency risk. A small proportion of the Company's investment
portfolio is invested in overseas securities whose values are
subject to fluctuation due to changes in exchange rates.
Management of the risk. The revenue account is subject to currency
fluctuations arising on dividends received in foreign currencies
and, indirectly, due to the impact of foreign exchange rates
upon the profits of investee companies. The Company does not
hedge this currency risk. The Company does not have any exposure
to foreign currency liabilities. No currency sensitivity analysis
has been prepared as the Company considers any impact to be
immaterial to the financial statements.
Price risk . Price risks (i.e. changes in market prices other
than those arising from interest rates) will affect the value
of the quoted investments. The Company's stated objective is
to provide a high and growing dividend with capital growth from
a portfolio invested principally in the ordinary shares of smaller
UK companies and UK fixed income securities.
Management of the risk. It is the Company's policy to hold an
appropriate spread of investments in the portfolio in order
to reduce the risk arising from factors specific to a particular
sector. The allocation of assets to specific sectors and the
stock selection process, as detailed on pages 95 and 96 of the
2023 Annual Report, both act to reduce market risk. The Manager
actively monitors market prices throughout the year and reports
to the Board, which meets regularly in order to review investment
strategy.
Price sensitivity. If market prices at the Balance Sheet date
had been 10% higher while all other variables remained constant,
net capital gains attributable to ordinary shareholders for
the year ended 31 December 2022 would have increased by GBP6,663,000
(2021 - GBP10,057,000). If market prices at the Balance Sheet
date had been 10% lower while all other variables remained constant,
net capital gains attributable to ordinary shareholders for
the year ended 31 December 2022 would have decreased by GBP6,663,000
(2021 - GBP10,057,000).This is based on the Company's equity
investments held at each year end.
(ii) Liquidity risk . This is the risk that the Company will encounter
difficulty raising funds to meet its cash commitments as they
fall due. Liquidity risk may result from either the inability
to sell financial instruments quickly at their fair value or
from the inability to generate cash inflows as required.
Management of the risk . Liquidity risk is not considered to
be significant as the Company's assets comprise mainly readily
realisable securities, which can be sold to meet funding commitments
if necessary. Short-term flexibility is achieved through the
use of loan facilities (note 12).
Maturity profile . The maturity profile of the Company's financial
liabilities at the Balance Sheet date was as follows:
===== ===== ============ ======= ======== ===== ===== ===== ==== ===== ======== ======= =========
Within Within Within Within
1 year 1-2 2-3 3-4 years
years years
At 31 December GBP'000 GBP'000 GBP'000 GBP'000
2022
========================== ======= ======== ===== ===== ===== =========== ======== ======= =========
Trade and other payables (340) - - -
============================================= ===== ===== ===== =========== ======== ======= =========
Bank loans (7,000) - - -
========================== ======= ======== ===== ===== ===== =========== ======== ======= =========
Interest on
bank loans (84) - - -
-------------------------- ------- -------- ----- ----- ----- ----------- -------- ------- ---------
(7,424) - - -
----- ----- ------------ ------- -------- ----- ----- ----- ----------- -------- ------- ---------
===== ===== ============ ======= ======== ===== ===== ===== ==== ===== ======== ======= =========
Within Within Within Within
1 year 1-2 2-3 3-4 years
years years
At 31 December GBP'000 GBP'000 GBP'000 GBP'000
2021
========================== ======= ======== ===== ===== ===== =========== ======== ======= =========
Trade and other payables (316) - - -
============================================= ===== ===== ===== =========== ======== ======= =========
Bank loans (2,000) (5,000) - -
========================== ======= ======== ===== ===== ===== =========== ======== ======= =========
Interest on
bank loans (143) (70) - -
-------------------------- ------- -------- ----- ----- ----- ----------- -------- ------- ---------
(2,459) (5,070) - -
----- ----- ------------ ------- -------- ----- ----- ----- ----------- -------- ------- ---------
(iii) Credit risk . This is failure of the counter party to a transaction
to discharge its obligations under that transaction that could
result in the Company suffering a loss.
Management of the risk . The Company considers credit risk not
to be significant as it is actively managed as follows:
- where the Manager makes an investment in a bond, corporate
or otherwise, the credit rating of the issuer is taken into
account so as to minimise the risk to the Company of default;
- investments in quoted bonds are made across a variety of industry
sectors so as to avoid concentrations of credit risk;
- investment transactions are carried out on a delivery versus
payment basis with a large number of brokers, whose credit-standing
is reviewed periodically by the Manager, and limits are set
on the amount that may be due from any one broker;
- the risk of counterparty exposure due to failed trades causing
a loss to the Company is mitigated by the review of failed
trade reports on a daily basis. In addition, both stock and
cash reconciliations to the custodian's records are performed
on a daily basis to ensure discrepancies are investigated
on a timely basis. The Manager's compliance department carries
out periodic reviews of the custodian's operations and reports
its finding to the Manager's risk management committee.
- cash is held only with reputable banks with high quality external
credit ratings.
None of the Company's financial assets are secured by collateral
or other credit enhancements.
Credit risk exposure . In summary, compared to the amounts in
the Balance Sheet, the maximum exposure to credit risk at 31
December was as follows:
===== ===== ============ ======= ======== ===== ===== ===== ==== ===== ======== ======= =========
2022 2021
===== ===== ============ ======= ======== ===== ===== ===== ===================== ==================
Balance Maximum Balance Maximum
Sheet exposure Sheet exposure
GBP'000 GBP'000 GBP'000 GBP'000
===== ===== ============ ======= ======== ===== ===== ===== =========== ======== ======= =========
Non-current
assets
========================== ======= ======== ===== ===== ===== ==== ===== ======== ======= =========
Quoted convertibles, bonds and preference
shares at fair value through profit
or loss 2,104 2,104 1,617 1,617
================================================================== =========== ======== ======= =========
Current assets
========================== ======= ======== ===== ===== ===== ==== ===== ======== ======= =========
Accrued income 341 341 376 376
========================== ======= ======== ===== ===== ===== =========== ======== ======= =========
Cash and cash equivalents 1,786 1,786 2,592 2,592
================================================================== ----------- -------- ------- ---------
4,231 4,231 4,585 4,585
----- ----- ------------ ------- -------- ----- ----- ----- ----------- -------- ------- ---------
None of the Company's financial assets are past due and the
application of the expected credit loss model for impairment
under IFRS 9 has not had a material impact on the Company.
Credit ratings. The table below provides a credit rating profile
using Fitch's credit ratings for the quoted bonds at 31 December
2022 and 31 December 2021:
===== ===== ============ ======= ======== ===== ===== ===== ==== ===== ======== ======= =========
2022 2021
GBP'000 GBP'000
===== ===== ============ ======= ======== ===== ===== ===== ==== =============== ==================
A+ 304 224
========================== ======= ======== ===== ===== ===== ==== =============== ==================
A- 497 312
========================== ======= ======== ===== ===== ===== ==== =============== ==================
BBB+ 166 -
========================== ======= ======== ===== ===== ===== ==== =============== ==================
BBB 317 346
========================== ======= ======== ===== ===== ===== ==== =============== ==================
BBB- 180 433
========================== ======= ======== ===== ===== ===== ==== =============== ==================
BB+ 377 302
-------------------------- ------- -------- ----- ----- ----- ---- --------------- ------------------
Non-rated(A) 263 -
-------------------------- ------- -------- ----- ----- ----- ---- --------------- ------------------
2,104 1,617
----- ----- ------------ ------- -------- ----- ----- ----- ---- --------------- ------------------
(A) Rated BBB by S&P ratings agency.
Fair value of financial assets and liabilities . The book value
of cash at bank and short-term bank loans and overdrafts included
in these financial statements approximate to fair value because
of their short-term maturity. The carrying values of fixed asset
investments are stated at their fair values, which have been
determined with reference to quoted market prices and have been
categorised as Level 1 and Level 2 within the Fair Value Hierarchy
table on page 89 of the 2023 Annual Report. For details of bond
maturities and interest rates, see page 37 of the 2023 Annual
Report. For all other short-term debtors and creditors, their
book values approximate to fair values because of their short-term
maturity. As at 31 December 2022, as the debt is close to repayment,
the Directors consider its book value to be a reasonable approximation
of its fair value. The fair value of the long-term loan had
been calculated at GBP5,105,000 as at 31 December 2021 compared
to an accounts value in the financial statements of GBP4,995,000
(note 13). The fair value of each loan is determined by aggregating
the expected future cash flows for that loan discounted at a
rate comprising the borrower's margin plus an average of market
rates applicable to loans of a similar period of time and currency.
Gearing . The Company has in place a GBP10 million unsecured
loan facility of which GBP7 million has been drawn down. Although
this gearing increases the opportunity for gain, it also increases
the risk of loss in falling markets. The risk of increased gearing
is managed by retaining the flexibility to reduce short term
borrowings as appropriate. Gearing levels are monitored so that
they remain within guidelines set by the Board.
18. Fair value hierarchy
Under IFRS 13 'Fair Value Measurement' an entity is required to
classify fair value measurements using a fair value hierarchy that
reflects the significance of the inputs used in making the measurements.
The fair value hierarchy has the following levels:
- Level 1: quoted prices (unadjusted) in active markets for identical
assets or liabilities;
- Level 2: inputs other than quoted prices included within Level
1 that are observable for the assets or liabilities, either directly
(ie as prices) or indirectly (ie derived from prices); and
- Level 3: inputs for the asset or liability that are not based
on observable market data (unobservable inputs).
The financial assets and liabilities measured at fair value in
the Balance Sheet are grouped into the fair value hierarchy at
31 December 2022 as follows:
======== ============ ========================= ===== ======= ======= ======= =========
Level Level Level Total
1 2 3
Note GBP'000 GBP'000 GBP'000 GBP'000
======== ============ ========================= ===== ======= ======= ======= =========
Financial assets at fair value through
profit or loss
================================================= ===== ======= ======= ======= =========
Quoted equities a) 66,628 - - 66,628
====================== ========================= ===== ======= ======= ======= =========
Quoted bonds b) - 2,104 - 2,104
---------------------- ------------------------- ----- ------- ------- ------- ---------
Total 66,628 2,104 - 68,732
---------------------- ------------------------- ----- ------- ------- ------- ---------
As at 31 December 2021
================================================= ===== ======= ======= ======= =========
Level Level Level Total
1 2 3
Note GBP'000 GBP'000 GBP'000 GBP'000
======== ============ ========================= ===== ======= ======= ======= =========
Financial assets at fair value through
profit or loss
================================================= ===== ======= ======= ======= =========
Quoted equities a) 100,566 - - 100,566
====================== ========================= ===== ======= ======= ======= =========
Quoted bonds b) - 1,617 - 1,617
---------------------- ------------------------- ----- ------- ------- ------- ---------
Total 100,566 1,617 - 102,183
---------------------- ------------------------- ----- ------- ------- ------- ---------
a) Quoted equities. The fair value of the Company's investments
in quoted equities has been determined by reference to their
quoted bid prices at the reporting date. Quoted equities included
in Fair Value Level 1 are actively traded on recognised stock
exchanges.
b) Quoted bonds . The fair value of the Company's investments in
quoted convertibles, bonds and preference shares has been determined
by reference to their quoted bid prices at the reporting date.
Investments categorised as Level 2 are not considered to trade
in active markets.
There have been no transfers of assets or liabilities between levels
of the fair value hierarchy during any of the above periods.
19. Related party transactions
Directors fees and interests. Fees payable during the year to the
Directors and their interests in the shares of the Company are
disclosed within the Directors' Remuneration Report on page 54
of the 2023 Annual Report and fees payable also within note 5 on
page 76 of the 2023 Annual Report.
Transactions with the Manager. Management, promotional activities,
secretarial and administration services are provided by aFML with
details of transactions during the year and balances outstanding
at the year end disclosed in notes 4 and 5.
At the year end the Company had GBP1,450,000 (31 December 2021
- GBP2,406,000) invested in Aberdeen Standard Liquidity Fund (Lux)
- Sterling Fund which is managed and administered by abrdn plc.
The Company pays a management fee on the value of these holdings
but no fee is chargeable at the underlying fund level.
20. Capital management policies and procedures
The objective of the Company is to provide a high and growing dividend
and capital growth from a portfolio invested principally in the
ordinary shares of smaller UK companies and UK fixed income securities.
The Company manages its capital to ensure that it will be able
to continue as a going concern while maximising the return to shareholders
through the optimisation of the debt and equity balance. The capital
of the Company consists of equity, comprising issued capital, reserves
and retained earnings as per the Company's Balance Sheet on page
69 of the 2023 Annual Report.
The Board monitors and reviews the broad structure of the Company's
capital on an ongoing basis. This review includes:
- the planned level of gearing, which takes account of the Investment
Manager's views on the market;
- the level of equity shares in issue; and
- the extent to which revenue in excess of that which is required
to be distributed should be retained.
The Company's objectives, policies and processes for managing capital
are unchanged from the preceding accounting period.
The Company does not have any externally imposed capital requirements.
21. Subsequent events
As noted on pages 8 and 72 of the 2023 Annual Report, the Company
announced a strategic review on 13 February 2023 and at the date
of this Report is currently reviewing its options.
Alternative Performance Measures
Alternative performance measures are numerical measures of the Company's
current, historical or future performance, financial position or cash
flows, other than financial measures defined or specified in the applicable
financial framework. The Company's applicable financial framework includes
IFRS and the AIC SORP. The Directors assess the Company's performance
against a range of criteria which are viewed as particularly relevant
for closed-end investment companies.
Discount to Net Asset Value per Ordinary Share
Discount to Net Asset Value per Ordinary Share is the amount by which
the market price per Ordinary share is lower than the net asset value
per Ordinary share, expressed as a percentage of the net asset value
per Ordinary share.
============================================== ============== =========== ===========
2022 2021
============================================== ============== =========== ===========
NAV per Ordinary share (p) a 287.29 442.52
============================================== ============== =========== ===========
Share price (p) b 240.50 375.00
============================================== ============== =========== ===========
Discount (b-a)/a -16.3% -15.3%
---------------------------------------------- -------------- ----------- -----------
Dividend cover
Dividend cover is the revenue return per share divided by total dividends
per share, expressed as a ratio.
============================================== ============== =========== ===========
2022 2021
============================================== ============== =========== ===========
Revenue return per share a 11.24p 9.69p
============================================== ============== =========== ===========
Dividends per share b 9.80p 8.85p
============================================== ============== =========== ===========
Dividend cover a/b 1.15 1.09
---------------------------------------------- -------------- ----------- -----------
Net gearing
Net gearing measures the total borrowings less cash and cash equivalents
dividend by shareholders' funds, expressed as a percentage. Under AIC
reporting guidance cash and cash equivalents includes amounts due to
and from brokers at the year end as well as cash and cash equivalents.
============================================== ============== =========== ===========
2022 2021
============================================== ============== =========== ===========
Borrowings (GBP'000) a 6,999 6,995
============================================== ============== =========== ===========
Cash (GBP'000) b 336 186
============================================== ============== =========== ===========
Investments in AAA-rated money market
funds c 1,450 2,406
============================================== ============== =========== ===========
Amounts due to brokers (GBP'000) d - 5
============================================== ============== =========== ===========
Amounts due from brokers (GBP'000) e - -
============================================== ============== =========== ===========
Shareholders' funds (GBP'000) f 63,520 97,840
---------------------------------------------- -------------- ----------- -----------
Net gearing (a-b-c+d-e)/f 8.2% 4.5%
---------------------------------------------- -------------- ----------- -----------
Ongoing charges
The ongoing charges ratio has been calculated in accordance with guidance
issued by the AIC as the total of investment management fees and administrative
expenses and expressed as a percentage of the average daily net asset
values with debt at fair value published throughout the year.
============================================== ============== =========== ===========
2022 2021
============================================== ============== =========== ===========
Investment management fees (GBP'000) 533 675
============================================== ============== =========== ===========
Administrative expenses (GBP'000) 435 393
============================================== ============== =========== ===========
Less: non-recurring charges(A) (GBP'000) (30) (25)
---------------------------------------------- -------------- ----------- -----------
Ongoing charges (GBP'000) 938 1,043
---------------------------------------------- -------------- ----------- -----------
Average net assets (GBP'000) 71,863 89,659
---------------------------------------------- -------------- ----------- -----------
Ongoing charges ratio (excluding look-through
costs) 1.31% 1.16%
---------------------------------------------- -------------- ----------- -----------
Look-through costs(B) 0.03% 0.04%
---------------------------------------------- -------------- ----------- -----------
Ongoing charges ratio (including look-through
costs) 1.34% 1.20%
---------------------------------------------- -------------- ----------- -----------
(A) Professional services comprising new Director recruitment costs
and legal fees considered unlikely to recur.
(B) Calculated in accordance with AIC guidance issued in October 2020
to include the Company's share of costs of holdings in investment companies
on a look-through basis.
The ongoing charges ratio provided in the Company's Key Information
Document is calculated in line with the PRIIPs regulations, which includes
financing and transaction costs.
Total return
NAV and share price total returns show how the NAV and share price
has performed over a period of time in percentage terms, taking into
account both capital returns and dividends paid to shareholders. Share
price and NAV total returns are monitored against open-ended and closed-ended
competitors, and the benchmark, respectively.
============================================== ============== =========== ===========
Share
Year ended 31 December 2022 NAV Price
============================================== ============== =========== ===========
Opening at 1 January 2022 a 442.6p 375.0p
============================================== ============== =========== ===========
Closing at 31 December 2022 b 287.3p 240.5p
============================================== ============== =========== ===========
Price movements c=(b/a)-1 -35.1% -35.9%
============================================== ============== =========== ===========
Dividend reinvestment(A) d 1.9% 2.2%
---------------------------------------------- -------------- ----------- -----------
Total return c+d -33.2% -33.7%
---------------------------------------------- -------------- ----------- -----------
============================================== ============== =========== ===========
Share
============================================== ============== =========== ===========
Year ended 31 December 2021 NAV Price
============================================== ============== =========== ===========
Opening at 1 January 2021 a 348.9p 313.0p
============================================== ============== =========== ===========
Closing at 31 December 2021 b 442.6p 375.0p
============================================== ============== =========== ===========
Price movements c=(b/a)-1 26.8% 19.8%
============================================== ============== =========== ===========
Dividend reinvestment(A) d 3.6% 3.1%
---------------------------------------------- -------------- ----------- -----------
Total return c+d +30.4% +22.9%
(A) NAV total return involves investing the net dividend in the NAV
of the Company with debt at fair value on the date on which that dividend
goes ex-dividend. Share price total return involves reinvesting the
net dividend in the share price of the Company on the date on which
that dividend goes ex-dividend.
ADDITIONAL NOTES TO THE ANNUAL FINANCIAL REPORT
The financial information set out above does not constitute the
Company's statutory accounts for the years ended 31 December 2022
or 2021 but is derived from those accounts. Statutory accounts for
2021 have been delivered to the registrar of companies, and those
for 2021 will be delivered in due course. The auditor has reported
on those accounts; their reports were (i) unqualified, (ii) did not
include a reference to any matters to which the auditor drew
attention by way of emphasis without qualifying their report and
(iii) did not contain a statement under section 498 (2) or (3) of
the Companies Act 2006
The statutory accounts for the financial year ended 31 December
2022 were approved by the Directors on 27 March 2023 but will not
be filed with the Registrar of Companies until after the Company's
Annual General Meeting which is to be held at 11.00am on 14 June
2023 at Wallacespace Spitalfields, 15-25 Artillery Lane, London, E1
7HA, a short walk from Liverpool Street Station.
The 2023 Annual Report will be posted to shareholders in April
2023 and additional copies will be available from the Manager
(Investor Helpline - Tel. 0808 500 4000) or by download from the
Company's webpage ( www.abrdnsmallercompaniesincome.co.uk )
Please note that past performance is not necessarily a guide to
the future and that the value of investments and the income from
them may fall as well as rise. Investors may not get back the
amount they originally invested.
For abrdn Smaller Companies Income Trust plc
abrdn Holdings Limited, Company Secretary
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END
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