Smaller Companies Value Trust PLC
Smaller Companies Value Trust plc
Interim Report
31 October 2006
Smaller Companies Value Trust plc is registered in England and Wales no. 4388908
and is an investment company within the meaning of section 266 of the Companies
Act 1985.
Registered office: 10 Fleet Place, London, EC4M 7RH
Smaller Companies Value Trust plc
Chairman's Statement
The period under review has seen the UK economy continue to grow against a
background of geopolitical issues, fluctuating commodity prices and persistent
concern over whether US economic growth will weaken. In the six months to 31
October 2006, the net asset value (NAV) of the Company's capital shares rose by
1.81% (or 1.49% on an ungeared basis). Over the same period its benchmark, the
Hoare Govett Smaller Companies Index (excluding investment companies) (the
"Index"), rose by 3.85%* (capital only basis). Over the longer time frame the
NAV of the capital shares outperformed the Index in the year to 31 October 2006
by 8.13%** on a geared basis but was approximately in line with the Index on an
ungeared basis.
However, over the last three calendar years the UK smaller companies sector has
enjoyed an unprecedented run. From a low point in March 2003 the Hoare Govett
Index has risen 190%. The annual total return of the Hoare Govett
Index was +20.7% in 2004 and +27.9% in 2005. This year to date it stands at
+21.2%.
The FTSE All-Share Index rose by just 3.7% during the last six months - a modest
rise, which approximated the change in the Hoare Govett over the same period.
While the UK's economy has performed better than most, the market's more
cautious mood has, as a rule, tended to hold smaller companies back, because of
their higher risk profiles. Moreover, smaller companies are now valued at a
premium to larger companies on a trailing price-earnings ratio of 23.1 times
compared to the FTSE 100 of 12.7 times whereas historically they have stood at a
discount***.
Dividend
Your Board recommends an interim dividend of 1.95 pence per income share: an
increase of 0.05 pence per income share from the same period last year.
Outlook
Given the current levels of household debt and the limited potential for further
increases in government spending, the relatively strong performance of the UK
economy is unlikely to be sustained for much longer. Nevertheless, UK equity
valuations still look reasonable against historic averages and relative to gilts
and equities in other regions. The longer -term performance of the Company
remains encouraging and the manager's stock-picking record should mean that the
portfolio is well positioned for the future.
A F Bushell
Chairman
8 December 2006
* Source: Datastream
** Source: Scottish Widows Investment Partnership Limited
*** Source: Oriel Securities using IBES consensus estimates 4 December 2006
Investment Manager's Review
Global and market background
The period under review proved rather more challenging for equities than the
previous one. A sharp sell-off in May led many to believe that the prolonged
bull run had come to an end, while the summer brought a number of geopolitical
concerns to the fore. Escalating violence in the Middle East, anxieties over the
scale of Iran's nuclear ambitions, and the unveiling of an alleged terrorist
plot against US and UK aircraft jolted the market briefly, although investor
sentiment proved robust enough to recover the lost ground.
One of the prominent themes during the period has been the good performance of
mid-cap shares relative to the rest of the market, largely on the back of strong
company earnings and takeover activity. We have taken the opportunity to invest
in such companies. Since the Company had limited exposure to the Alternative
Investment Market (AIM), this has minimised the impact of the largely poor
performance of AIM shares over the period. During the six months under review,
the FTSE Mid 250 index rose by around 4.5% while the FTSE AIM 100 fell by close
to 28%.
The good performance of mid-caps can partly be explained by the relative
underperformance of small and large-cap stocks. Large companies have been
adversely affected by developments within the industries to which many of them
belong. Competitive pressures, for example, have taken their toll on the
telecoms sector, while the pharmaceuticals have found it difficult to produce
new blockbuster drugs and are facing pressures to produce cheaper, generic
equivalents. At the other end of the market, smaller companies have most keenly
felt the effects of a change in investor mood, since the share price of smaller
firms is often more closely allied to the market's appetite for risk than to
company performance.
Moreover, mid-size companies, particularly those in the �500m to �1bn range (the
top-end of firms in the Hoare Govett Index), have made particularly popular
acquisition targets. The market is still reasonably busy with merger and
acquisition activity, and mid-caps tend to benefit disproportionately from
takeovers, re-structurings and new share issues.
Portfolio activity
Few significant changes in portfolio strategy occurred during the period. With
the medium-term outlook for more muted consumer spending in the UK, we reduced
our exposure to the retail sector, taking profits in the leisure company
Restaurant Group, which had performed well in a difficult trading environment.
We also reduced our holdings in Halfords and SCS Upholstery, whose performances
did not match our expectations. Other major disposals included Abbot Group
(reducing our exposure to the UK oil services sector), and spread betting
company IG Group (profit-taking).
Our approach to transactions remains stock-specific. Purchases during the period
included shares in defence suppliers Babcock International and VT Group, both of
which are in a strong position to win substantial government contracts. Sports
and outdoor retailer Blacks Leisure was another major purchase, though its share
price has been affected by unfavourable weather. We believe, though, the company
remains well-positioned.
The Company's performance against the benchmark can be explained partly by its
underweight holdings in financials and consumer goods. Both sectors benefited
from relative strength of the UK economy over the period, as levels of mortgage
and consumer credit reached record highs. Indeed, one of the Company's
top-performing stocks was property developer Rok, a major contractor for social
housing projects. Rok's share price climbed steadily during the second half of
the period and its first-half results were well-received by the market. Other
strong performances came from Axon Group, a provider of business transformation
services, whose first-half figures were also encouraging, and electrical
equipment supplier TT Electronics, which benefited from a healthy increase in
demand.
At the other end, the performance of Wagon, an automotive components
manufacturer, suffered, with the company blaming lower than expected demand from
French manufacturers. We have disposed of our holding. Equipment rental provider
Ashtead Group was another disappointment over the period, its performance
hampered by exposure to the flat US market. The company's most recent results,
however, have boosted its share price, and we believe that the stock represents
good value.
With indices achieving our forecast target levels, we believe the market's
robust performance of the last two years is unlikely to be maintained. The
Company has thus reduced the level of gearing.
Outlook
The UK economy continues to experience strong growth in its labour market, both
from immigration and from the changing demographics of the indigenous workforce.
This has eased pressure on wages, which in turn implies that the economy can
grow at a faster rate without inflationary damage. It is not entirely clear,
though, how much spare capacity remains for this growth, and the Bank of
England's Monetary Policy Committee will probably keep a very watchful eye on
this in the months to come.
Concerns persist over the impact the sluggish US housing market will eventually
have on world markets, though the UK's housing market remains fairly robust. In
terms of global growth, UK exports, consumer spending and business investment,
our forecasts for the medium term are rather subdued.
The outlook for small companies is mixed. Despite the recent interest rate
increase, debt remains cheap in historical terms, and banks seem eager to lend
to corporations and private equity firms. Larger UK companies tend to view the
small company marketplace as a source of quick, top-line growth, while for the
private equity firms it is a fertile place for acquisitions. This backdrop -
corporate cash backed by large amounts of cheap debt chasing relatively few
deals - makes for an exciting trading environment, but ultimately it is likely
to run out of steam.
All this might suggest the market is facing something of a slowdown, but of
course promising investment opportunities can appear at any time. Our strategy
of investing in businesses, which operate in growth markets and are able to
benefit from the prevailing economic environment, remains unaltered. We will
also continue to favour companies with strong management capable of maintaining
competitive advantage. The aim will be to try to identify value situations as
they appear for investment.
Gregor Macdonald
Scottish Widows Investment Partnership Limited
8 December 2006
Smaller Companies Value Trust plc
Investment objective and policy
The Company invests in a diversified portfolio of quoted UK smaller companies
with the objective of providing income shareholders with a dividend yield,
together with the potential for dividend growth and capital shareholders with
the benefit of geared capital growth.
The Board seeks to balance the interests of the holders of the income shares and
capital shares at all times and the investment policy is such that the Company
will be a qualifying investment trust under the Income and Corporation Taxes Act
1988 (as amended).
Smaller Companies Value Trust plc has a life of seven years, ending on 30 April
2009.
Financial calendar
Ex-dividend date 20 December 2006
Record date 22 December 2006
Final dividend payable 8 January 2007
Financial highlights
Period Period Year
ended ended ended
31 October 31 October 30 April
2006 2005 2006
(unaudited) (unaudited) (audited)
Net asset value per package unit(a) (Articles basis)(d) 239.90p 184.09p 234.11p
Share price per package unit (b) 212.00p 170.00p 206.00p
Net asset value per income share (Articles basis)(d) 53.43p 48.46p 50.96p
Share price per income share (b) 64.25p 64.50p 65.25p
Net asset value per capital share (Articles basis) (d) 186.47p 135.63p 183.15p
Share price per capital share (b) 148.50p 105.50p 145.00p
Hoare Govett Smaller Companies Index (excluding investment companies)(c) 8,008.52 6,085.52 7,610.48
Dividend per income share 1.95p 1.90p 4.70p
(a) A package unit consists of one capital share and one income share.
(b) Source : Bloomberg
(c) Source: Datastream
(d) The net asset value (NAV) per share, calculated on an Articles basis is,
effectively, the NAV on a winding up.
Smaller Companies Value Trust plc
Income Statement
For the period ended For the period ended For the period ended
31 October 2006 31 October 2005 30 April 2006
(unaudited) (unaudited) (audited)
Revenue Capital Total Revenue Capital Total Revenue Capital Total
�'000 �'000 �'000 �'000 �'000 �'000 �'000 �'000 �'000
Gains on investments
Gains on investments - 1,638 1,638 - 3,763 3,763 - 14,441 14,441
Transaction costs - (143) (143) - (131) (131) - (336) (336)
------- ------- ------ ------- ------- ------ ------- ------- -------
- 1,495 1,495 - 3,632 3,632 - 14,105 14,105
Income 831 - 831 765 - 765 1,430 - 1,430
Investment management fee (65) (195) (260) (57) (172) (229) (122) (366) (488)
Other expenses (65) - (65) (75) - (75) (150) - (150)
------- ------- ------ ------- ------- ------ ------- ------- -------
Net return before finance costs and taxation 701 1,300 2,001 633 3,460 4,093 1,158 13,739 14,897
Finance costs
Interest payable (64) (191) (255) (63) (189) (252) (127) (380) (507)
Income share dividends and other appropriations (637) - (637) (570) - (570) (1,031) - (1,031)
------- ------- ------ ------- ------- ------ ------- ------- -------
Total finance costs (701) (191) (892) (633) (189) (822) (1,158) (380) (1,538)
Return on ordinary activities before taxation - 1,109 1,109 - 3,271 3,271 - 13,359 13,359
Taxation on ordinary activities - - - - - - - - -
------- ------- ------ ------- ------- ------ ------- ------- -------
Return on ordinary activities after taxation - 1,109 1,109 - 3,271 3,271 - 13,359 13,359
------- ------- ------ ------- ------- ------ ------- ------- -------
Return per capital share 5.46p 16.10p 65.75p
------- ------- ------ ------- ------- ------ ------- ------- -------
The total column of this statement is the profit and loss account of the
Company.
All revenue and capital items in the above statement derive from continuing
operations.
No operations were acquired or discontinued during the period.
A Statement of Recognised Gains and Losses is not required as all gains and
losses of the Company have been reflected in the above statement.
Smaller Companies Value Trust plc
Balance Sheet
As at As at
31 October 31 October As at
2006 2005 30 April 2006
(unaudited) (unaudited) (audited)
�'000 �'000 �'000
Non-Current assets
Investments at fair value through profit or loss 52,185 42,779 54,929
Current assets
Debtors 1,084 1,004 870
Cash at bank and in hand 4,563 1,895 316
-----------------------------------------
Total current assets 5,647 2,899 1,186
-----------------------------------------
Current liabilities
Creditors: amounts falling due within one year (964) (150) (424)
-----------------------------------------
Net current assets 4,683 2,749 762
-----------------------------------------
-----------------------------------------
Total assets less current liabilities 56,868 45,528 55,691
-----------------------------------------
Creditors: amounts falling due after more than one year
Bank loan (8,127) (8,127) (8,127)
Income shares (13,034) (12,891) (12,966)
-----------------------------------------
(21,161) (21,018) (21,093)
-----------------------------------------
-----------------------------------------
Total net assets 35,707 24,510 34,598
-----------------------------------------
Capital and reserves: equity interests
Called up share capital 203 203 203
Special reserve 19,408 19,408 19,408
Capital reserve 16,096 4,899 14,987
-----------------------------------------
Shareholders' Funds 35,707 24,510 34,598
-----------------------------------------
Net asset value per share (Accounts basis):
-----------------------------------------
Income share 64.15p 63.45p 63.82p
-----------------------------------------
Capital share 175.75p 120.64p 170.29p
-----------------------------------------
Net asset value per share (Articles basis):
-----------------------------------------
Income share 53.43p 48.46p 50.96p
-----------------------------------------
Capital share 186.47p 135.63p 183.15p
-----------------------------------------
The net asset values per share (Accounts basis) shown above, have been
calculated in accordance with Financial Reporting Standard 25 (Financial
Instruments: Disclosure and Presentation). The shareholders' funds attributable
to each class of share have also been calculated in accordance with the articles
of association. The difference between these figures relates to the rights,
under the articles of association, of the shareholders on a return of assets,
which gives rise to an adjustment in the finance cost of those shares.
The interim report has been prepared on the basis of the accounting policies set
out in the Company's annual financial statements for the year ended 30 April
2006.
Smaller Companies Value Trust plc
Reconciliation of Movements in Shareholders' Funds
For the period ended
31 October 2006 (unaudited)
Issued Special Capital
Capital Reserve Reserves Total
�'000 �'000 �'000 �'000
Shareholders' funds at 1 May 2005 203 19,408 1,628 21,239
Return on ordinary activities after
taxation - - 3,271 3,271
----------------------------------------
Shareholders' funds at 31 October 2005 203 19,408 4,899 24,510
----------------------------------------
Shareholders' funds at 1 November 2005 203 19,408 4,899 24,510
Return on ordinary activities after
taxation - - 10,088 10,088
----------------------------------------
Shareholders' funds at 30 April 2006 203 19,408 14,987 34,598
----------------------------------------
Shareholders' funds at 1 May 2006 203 19,408 14,987 34,598
Return on ordinary activities after
taxation - - 1,109 1,109
----------------------------------------
Shareholders' funds at 31 October 2006 203 19,408 16,096 35,707
----------------------------------------
Smaller Companies Value Trust plc
Cash Flow Statement
Period ended Period ended Year ended 30
31 October 2006 31 October 2005 April 2006
(unaudited) (unaudited) (audited)
�'000 �'000 �'000
Operating activities
Investment income received 995 795 1,224
Other income received 3 2 4
Deposit interest received 20 91 135
Investment management fees paid (258) (222) (463)
Other cash payments (99) (99) (144)
---------------------------------------------------
Net cash inflow from operating activities 661 567 756
---------------------------------------------------
Servicing of finance
Interest paid on bank loan (257) (256) (507)
Dividends paid on income shares (569) (559) (945)
---------------------------------------------------
Net cash outflow from servicing of finance (826) (815) (1,452)
---------------------------------------------------
Investing activities
Purchases of investments (15,719) (16,071) (41,701)
Disposals of investments 20,131 14,575 39,074
---------------------------------------------------
Net cash inflow/(outflow) from investing
activities 4,412 (1,496) (2,627)
---------------------------------------------------
---------------------------------------------------
Increase/(decrease) in cash 4,247 (1,744) (3,323)
---------------------------------------------------
Reconciliation of net cash flow to movement in
net debt
Increase/(decrease) in cash in the period 4,247 (1,744) (3,323)
Opening net debt (7,811) (4,488) (4,488)
---------------------------------------------------
Closing net debt (3,564) (6,232) (7,811)
---------------------------------------------------
Annual financial statements
These interim financial statements do not represent full financial statements in
accordance with section 240 of the Companies Act 1985. The financial information
for the year ended 30 April 2006 has been extracted from the annual report and
accounts of the Company which have been filed with the Registrar of Companies.
The auditors' report on those accounts was unqualified.
It is intended to send the interim report to shareholders by January
2007.Smaller Companies Value Trust plc
Sector Distribution at 31 October 2006
Oil & Gas 2.58%
Basic Materials 2.52%
Industrials 38.86%
Consumer Goods 6.50%
Healthcare 2.11%
Consumer Services 12.05%
Technology 5.96%
Financials 21.19%
Net current assets 8.23%
-----------------
Total assets less current liabilities 100.00
-----------------
Smaller Companies Value Trust plc
Fifty Largest Holdings at 31 October 2006
Percentage of
total assets
31 October 2006 less current
valuation liabilities
Investment �'000 % Business activity
1 Mapeley 1,680 2.95 Real Estate
2 Fenner 1,389 2.44 Industrial Engineering
3 Workspace Group 1,291 2.27 Real Estate
4 SIG 1,246 2.19 Support services
5 Interserve 1,245 2.19 Support Services
6 Paragon Group of Companies 1,240 2.18 General Financial
7 TT Electronics 1,224 2.15 Electronic & Electrical Equipment
8 Cookson Group 1,203 2.12 General Industrials
9 Axon Group 1,163 2.05 Software & Computer Services
10 Countrywide 1,158 2.04 Real Estate
Top ten investments 12,839 22.58
11 Babcock International Group 1,126 1.98 Support Services
12 ROK Prop Solutions 1,123 1.98 Construction & Materials
13 Premier Oil 1,119 1.97 Oil & Gas Producers
14 Topps Tiles 1,093 1.92 General Retailers
15 Aberdeen Asset Management 1,088 1.91 General Financial
16 Bovis Homes Group 1,085 1.91 Household Goods
17 Luminar 1,057 1.86 Travel & Leisure
18 Cranswick 1,054 1.85 Food Producers
19 Foseco 1,050 1.85 Industrial Engineering
20 Hill & Smith Holdings 1,032 1.81 Industrial Engineering
21 Imprint 1,027 1.81 Support Services
22 Savills 1,026 1.80 Real Estate
23 Ashstead Group 1,001 1.76 Support Services
24 Croda 999 1.76 Chemicals
25 Holidaybreak 981 1.73 Travel & Leisure
26 VT Group 967 1.70 Aerospace & Defence
27 Carter & Carter Group 963 1.69 Support Services
28 Ricardo 953 1.68 Support Services
29 Erinaceous Group 942 1.66 Support Services
30 Spectris 933 1.64 Electronic & Electrical Equipment
31 Chesnara 917 1.61 Life Insurance
32 Dignity 878 1.54 General Retailers
33 Detica Group 873 1.54 Software & Computer Services
34 Carillion 865 1.52 Construction & Materials
35 Bodycote International 858 1.51 Industrial Engineering
36 Rathbone Brothers 857 1.51 General Financial
37 Pendragon 853 1.50 General Retailers
38 Highway Insurance Holdings 840 1.48 Non-life Insurance
39 Kier Group 837 1.47 Construction & Materials
40 Enterprise 826 1.45 Support Services
41 Headlam Group 791 1.39 Household Goods
42 Premier Foods 770 1.35 Food Producers
43 Blacks Leisure Group 735 1.29 General Retailers
44 Morgan Crucible Co 733 1.29 Electronic & Electrical Equipment
45 Morse 724 1.27 Software & Computer Services
46 Charles Taylor Construction 713 1.25 General Financial
47 Euromoney Institutional Investor 703 1.24 Media
48 Intermediate Capital 688 1.21 General Financial
49 Axis Shield 603 1.06 Pharmaceuticals & Biotechnology
50 Gyrus Group 599 1.05 Health Care Equipment & Services
-------------------------------
49,121 86.38
Other equities (8) 3,064 5.39
Net current assets 4,683 8.23
-------------------------------
Total assets less current
liabilities 56,868 100.00
-------------------------------
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