TIDMHSL
RNS Number : 1245I
Henderson Smaller Cos Inv Tst PLC
03 August 2023
JANUS HERSON FUND MANAGEMENT UK LIMITED
THE HERSON SMALLER COMPANIES INVESTMENT TRUST PLC
LEGAL ENTITY IDENTIFIER: 213800NE2NCQ67M2M998
THE HERSON SMALLER COMPANIES INVESTMENT TRUST PLC
ANNUAL FINANCIAL RESULTS FOR THE YEARED 31 MAY 2023
This announcement contains regulated information.
KEY HIGHLIGHTS
-- Final dividend increased to 19.0p per ordinary share (2022:
17.0p)
-- 20th consecutive year of growth in the annual dividend
-- Over the ten years to 31 May 2023, the Company has
outperformed the benchmark by 34.1%
-- Outperformed the benchmark in 16 of the last 20 years
Neil Hermon, Fund Manager, said:
"Despite it being a poor year for performance, as growth stocks
de-rated following the increase in interest rates, the long-term
record of the Company remains strong..."
INVESTMENT OBJECTIVE
The Company aims to maximise shareholders' total returns
(capital and income) by investing in smaller companies that are
quoted in the United Kingdom.
PERFORMANCE
Total Return Performance for the years ended 31 May
1 year 3 years 5 years 10 years
% % % %
------------------------------- ------- -------- -------- ---------
NAV(1) -13.8 12.4 -3.4 108.0
Benchmark(2) -6.5 30.4 3.1 73.9
Average sector NAV(3) -7.4 26.1 5.5 100.8
Share price(4) -12.0 8.8 -7.9 118.7
Average sector share price(5) -5.5 31.4 5.6 107.2
FTSE All-Share Index 0.4 33.9 15.2 67.5
Performance Year ended Year ended
31 May 2023 31 May 2022
--------------------------- -------------- -------------
NAV per share at year end 904.1p 1,074.4p
Share price at year end 785.0p 917.5p
Discount at year end(6) 13.2% 14.6%
Gearing at year end 12.6% 11.2%
Dividend for the year 26.00p(7) 24.00p
Revenue return per share 29.38p 24.57p
Dividend yield(8) 3.3% 2.6%
Total net assets GBP675m GBP803m
Ongoing charge(9) 0.44% 0.42%
1 Net asset value ("NAV") per ordinary share total return with
income reinvested
2 Numis Smaller Companies Index (excluding investment companies)
total return
3 Average NAV total return of the Association of Investment
Companies ("AIC") UK Smaller Companies sector
4 Share price total return using mid-market closing price with
income reinvested
5 Average share price total return of the AIC UK Smaller
Companies sector
6 Calculated using the NAV and mid-market share price at year
end
7 This represents an interim dividend of 7.00p and a proposed
final dividend of 19.00p, subject to shareholder approval at the
AGM
8 Based on the ordinary dividends paid and payable for the year
and the mid-market share price at year end
9 No performance fee is included in this calculation as no
performance fee was paid in 2023 or 2022
A glossary of terms and explanations of alternative performance
measures are included in the Annual Report.
Sources: Morningstar Direct, Janus Henderson, Refinitiv
Datastream
CHAIR'S STATEMENT
Dear Shareholder
Performance
The year under review was disappointing: UK equity markets
experienced difficult and volatile conditions and the Company
suffered negative absolute returns. The Company also underperformed
its benchmark, largely caused by growth stocks remaining out of
favour. In the financial year to 31 May 2023, the Company's net
asset value ("NAV") fell by 13.8% and the share price fell by
12.0%, versus a 6.5% fall in the Numis Smaller Companies Index
benchmark, all on a total return basis. The AIC UK Smaller
Companies NAV sector average total return declined by 7.4%. Over
the longer term, however, your Company's NAV total return remains
well ahead of the benchmark index; over the ten-year period to 31
May 2023 your Company outperformed the benchmark by 34.1%. The Fund
Manager's Report provides a detailed review of the year.
Smaller companies underperformed the wider market in a turbulent
environment of rising interest rates and higher bond yields.
High-quality smaller growth stocks suffered as investors favoured
larger liquid stocks. Some of our cyclical investments saw earnings
downgrades, leading to de-ratings, although the majority of our
companies continued to post strong results and saw no material
change in their investment thesis, trading or outlook.
Dividend and earnings
Positively, the total revenue received from your Company's
portfolio rose from GBP20.7 million to GBP24.4 million over the
year, and our earnings per share rose from 24.6p at 31 May 2022 to
29.4p at 31 May 2023. This reflects the strong financial
performance of the majority of our portfolio companies, which were
able to increase their dividends.
The Board is pleased to recommend an increased final dividend of
19.0p per share which, subject to shareholder approval at the
Annual General Meeting, will be paid on 9 October 2023 to
shareholders on the register at 25 August 2023. When added to the
interim payment of 7.0p, this brings the full-year dividend to
26.0p per share, an 8.3% increase from the 2022 full-year
distribution of 24.0p per share. This will be fully funded from
current-year revenue. I am delighted to report that this will be
our 20th consecutive year of growth in the annual dividend; the
annualised increase in dividends paid since 2003 equates to 21.8%.
Your Company will now gain the AIC accolade of 'Dividend Hero'.
During the year we commenced a tracing and engagement programme
to locate shareholders who have not claimed their dividends for
long periods of time. We believe it is important to reunite
shareholders with their lost assets, and our project is designed to
help them resolve the obstacles that may have hindered claims to
ownership and to take the required action.
Share rating
Your Company's share price discount to NAV fluctuated over the
year between 17.4% and 8.2%, averaging 12.4% and closing the year
at 13.2%. The share price over the year fell from 917p to 785p,
giving a total return of -12.0% and reflecting a slight narrowing
of the discount to net asset value.
During the year to 31 May 2023 no shares were issued or bought
back. Your Board continues to monitor the discount and regularly
discusses the merits of buying back shares. We do not currently
believe that share buy-backs represent the most effective way of
generating long-term shareholder value.
Responsible investing
Our Fund Manager's approach to ESG investing has been embedded
in the Company's investment process for over 20 years. With the
awareness that ESG investment activities are increasingly
important, I would refer shareholders to our 'ESG Matters' report
in the Annual Report for more information on how the Company
positions itself and for a report on engagement case studies
undertaken during the year.
Board developments
David Lamb, Senior Independent Director and marketing
representative, retired from the Board on 30 September 2022. I
would like to thank David for his many years of service and wise
counsel on the Company's affairs. Kevin Carter has taken on the
role of Senior Independent Director and Michael Warren is the
Board's new marketing representative.
I am delighted that Yen Mei Lim joined the Board in April 2023
as our newest non-executive director, in line with our long-term
succession planning. With over 20 years of experience in the
financial services industry, and as a qualified lawyer and
accountant, Mei brings deep insight and expertise across merger and
acquisition activity, corporate development and finance,
particularly in the field of growth potential for smaller
businesses committed to resiliency, accessibility and
sustainability.
We meet the national targets on gender and ethnic diversity,
including the targets set by the FCA's Listing Rules for all FTSE
350 members. According to these targets, at least 40% of board
members should be women, at least one woman should hold a senior
position, and at least one director should be from an ethnic
minority. As such we also meet the FTSE Women Leaders Review and
Parker Review recommendations. Please refer to the Annual Report
for a fuller disclosure about Board composition in the Governance
report.
Annual General Meeting ("AGM")
We are pleased to invite shareholders to attend the AGM in
person at our registered office on Thursday, 5 October 2023 at
11.30 am. We encourage shareholders to attend for the opportunity
to meet the Board, the Fund Manager Neil Hermon, and Deputy Fund
Manager Indriatti van Hien. Neil and Indriatti will give a
presentation on the year under review and will discuss their
outlook for the year ahead. There will be an opportunity to ask
questions and debate, and to meet the Fund Manager, Deputy Fund
Manager and directors after the formal proceedings. Shareholders
unable to join in person will be able to join the meeting by
Zoom.
We encourage all shareholders to submit their votes on the
resolutions, all of which come with the Board's endorsement, ahead
of the deadline of Tuesday, 3 October 2023 to ensure that their
vote counts at the AGM. Please see the AGM Notice in the Annual
Report for more information on joining and voting.
The Fund Manager discusses these results and performance during
the year in a video available from 9.00 am on the date of release
of this announcement at www.hendersonsmallercompanies.com . If you
have any questions for the Board or the Fund Manager in advance of
the AGM, please contact us at itsecretariat@janushenderson.com
.
Outlook
It has been a difficult year and we remain cautious about the
outlook, but are confident in the ability of our Fund Manager and
his team and in the investment philosophy applied to the portfolio.
The portfolio is weighted towards companies with well-capitalised
balance sheets and entrepreneurial management teams, and as such we
believe your Company is well positioned and prepared to take
advantage of the investment opportunities that lie ahead despite
the current uncertain market. In closing I would like to thank
shareholders for your continued support.
Penny Freer
Chair of the Board
FUND MANAGER'S REPORT
Fund performance
The Company had a disappointing year in performance terms,
falling in absolute terms and underperforming its benchmark. The
share price fell by 12.0% and the net asset value by 13.8% on a
total return basis. This compared with a decrease by 6.5% in the
Company's benchmark total return, the Numis Smaller Companies Index
(excluding investment companies). The underperformance came from a
combination of the negative contributions from stock selection,
gearing and expenses. Negative contributions from stock selection
were principally a function of the underperformance of growth
companies as they de-rated in valuation terms due to market
concerns about the impact of rising interest rates and higher bond
yields. In most cases, this was independent of the operational and
financial performance of these businesses, which remained, on the
whole, strong. Additionally, some of our cyclically exposed
positions suffered as the global economy weakened, leading to
selective earnings downgrades and consequent de-ratings. Despite it
being a poor year for performance, as growth stocks de-rated
following the increase in interest rates, the long-term record of
the Company remains strong, outperforming its benchmark in 16 of
the last 20 years.
Market - year under review
The year under review was a volatile and ultimately negative one
for UK equity markets. Markets faced a number of challenges
including a zero-tolerance policy to Covid in China which
suppressed economic growth and exacerbated supply chain challenges,
the ongoing conflict in Ukraine which kept energy prices high,
particularly in Western Europe, the persistent cost-of-living
crisis fuelled by high inflation and political instability in the
UK, primarily focused around the short-lived tenure of Liz Truss as
Prime Minister.
The principal driver of market returns, however, has remained
central bank policy. Inflation projections continued to worsen
throughout the initial part of the year and central banks, led by
the Federal Reserve, European Central Bank and Bank of England,
raised interest rates aggressively. Despite indications that
headline inflation has peaked, core inflation has remained sticky.
Whilst goods inflation has started to ease, services inflation,
driven by supply side pressures and a tight labour market, has
remained elevated. Consequently, the messaging from central banks
has remained hawkish regarding the future path of interest rates.
Rising interest rates and a move from quantitative easing to
quantitative tightening led to a weakening in global economic
growth in the period, putting pressure on corporate earnings.
The markets saw a continued flight to safety by investors who
have taken refuge from uncertain macroeconomic conditions by
investing in larger, more liquid and more international stocks.
This has led to another year of underperformance by smaller
companies versus larger companies.
Gearing
Gearing started the year at 11.2% and ended at 12.6%. Debt
facilities are a combination of GBP30 million 20-year unsecured
loan notes at an interest rate of 3.33% issued in 2016, GBP20
million 30-year unsecured loan notes at 2.77% issued in February
2022, and GBP85 million short-term bank borrowings.
As markets fell, the use of gearing was a negative contributor
to performance in the year. Gearing, however, has made a
significant positive contribution to investment performance over
the 20 years I have managed the investment portfolio.
Attribution analysis
The following tables show the top five contributors to, and the
top five detractors from, the Company's relative performance.
12-month return Relative contribution
Principal contributors % %
-------------------------- ---------------- ----------------------
Balfour Beatty +45.0 +0.9
National Express(1) -58.1 +0.6
Oxford Instruments +25.0 +0.6
RPS Group +114.5 +0.5
John Wood(1) -41.1 +0.4
1 Not owned by the Company
Balfour Beatty is an international contractor and infrastructure
investor. New management has transformed the business over the last
few years, driving margins higher across all operational activities
in the UK, US and Hong Kong whilst maintaining the significant
value of the infrastructure investment portfolio. Significantly
improved cashflow has allowed the business to accelerate returns to
shareholders through ongoing share buybacks and increased
dividends. Given likely increased infrastructure investment in its
key markets, the company looks well placed to continue to deliver
growth in earnings, cashflow and returns to investors.
National Express (now Mobico) is an international operator of
bus and rail services. The business has struggled to rebuild
profitability post-Covid as weaker demand and higher wage costs
have impacted the business. Additionally, the business suffers from
high levels of debt. The Company did not own a position in this
stock.
Oxford Instruments is a manufacturer of advanced instrumentation
equipment. The company benefits from servicing a number of
high-growth industries such as semiconductors, quantum computing,
life sciences and advanced materials. In addition, its 'Horizon'
programme of business improvement is driving sales, profit and
margin growth. The company has a very strong balance sheet and,
given a positive outlook for its end markets, the company is well
placed for the future.
RPS Group is an independent environmental, health, safety and
risk consulting group, which provides scientific, planning and
design advice to customers in the commercial and government
sectors. Formed by a series of acquisitions, the group has gone
through significant change, with self-help improvement, a refreshed
management team and tighter strategic focus. The group is
benefiting from buoyant infrastructure, renewables and energy
markets. The business was acquired by a US competitor, Tetra Tech,
during the year at a significant premium to the undisturbed share
price.
John Wood is an international engineering, procurement and
construction ("EPC") contractor for the oil and gas industry.
Despite selling its 'Built Environment' business, the company still
suffers from the perception of a weak balance sheet caused by
provisions relating to historic loss-making contracts. The company
was the subject of an abandoned takeover approach from Apollo. The
Company did not own a position in this stock.
12-month return Relative contribution
Principal detractors % %
------------------------ ---------------- ----------------------
Future -63.6 -1.3
Synthomer -70.7 -0.9
GB Group -46.2 -0.7
Bank of Georgia(1) +102.3 -0.6
RWS Holdings -40.5 -0.6
1 Not owned by the Company
Future is a tech-enabled global platform for specialised media
which targets consumers and business-to-business ("B2B") brands
across Europe, America and Asia Pacific. The company creates
specialised content to attract and grow high-value audiences. These
audiences are then monetised through memberships and subscriptions,
print and digital advertising, e-commerce sales and events. Future
has both an organic and inorganic growth strategy. Management is
focused on purchasing new brands and titles to leverage its
scalable technology and drive digital growth using its revenue
optimisation model. The shares have suffered from both earnings
downgrades and a material de-rating during the year. Downgrades
have been driven by greater-than-expected normalisation of spending
in consumer technology post-pandemic, while the de-rating has been
driven by concerns around advertising volumes and yields in an
uncertain macroeconomic environment. There have also been more
existential concerns around potential disruption to its business
model from artificial intelligence ("AI"). Poorly handled
communications around the retirement of the long-standing CEO in
the period only added to investor nervousness. Whilst we cannot be
certain the downgrade cycle has ended, we believe the rating has
discounted much of this. A new CEO is now in place and the company
has retained and, in some cases, improved on its leading market
positions which gives us confidence that earnings can recover in
improved macroeconomic conditions.
Synthomer is a diversified chemicals group. The group has
expanded through acquisition which has diversified the company's
end markets. The group enjoyed extremely buoyant market conditions
in its nitrile latex market as demand for gloves rapidly expanded
during the pandemic. A marked cooling in demand in this market in
the last year combined with a cyclical downturn in the coatings,
adhesives and general chemicals markets has led to a significant
fall in profitability. Additionally, previous acquisition activity
has left the company with elevated financial leverage. A new
management team is in the process of reducing debt by disposals and
other balance sheet measures. We believe the business is well
placed to benefit from a recovery in the nitrile latex market as
demand recovers.
GB Group is a data identity, fraud prevention and address
verification business. The company provides a combination of
software and data to clients to help onboard their customers in an
efficient and accurate manner whilst also reducing the risk of
fraud. The company's end markets are growing rapidly as services
move from offline to online channels, a trend which is expected to
continue as new business models are formed. GB Group has grown both
organically and through acquisition. The shares have fallen in the
year due to weaker trading conditions for some of the group's
financial service and internet economy customers as well as being
impacted by the general market de-rating of growth companies.
Bank of Georgia is a leading retail and commercial bank in
Georgia. Robust economic growth in the region has led to strong
growth in profitability and an improving capital position for the
business. The Company did not own a position in this stock.
RWS Holdings is a leading provider of translation software and
services. Although the company is extracting the expected synergies
from its acquisition of SDL plc, regulation change in its patent
translation services business, weakness in demand from its large
technology customers and a shift to SaaS from licence sales in its
software division has led to modest falls in profitability. This
has led to a de-rating in the valuation of the company. The
business retains a strong net cash balance sheet and has
significant potential for recovery once the negative drivers on
profitability abate.
Portfolio activity
Trading activity in the portfolio was consistent with an average
holding period of over five years. Our approach is to consider our
investments as long term in nature and to avoid unnecessary
turnover. The focus has been on adding stocks to the portfolio that
have good growth prospects, sound financial characteristics and
strong management, at a valuation level that does not reflect these
strengths. Likewise, we have been employing strong sell disciplines
to cut out stocks that fail to meet these criteria.
Acquisitions
During the year we have added a number of new positions to our
portfolio. These include the following:
Ergomed provides specialised services to the pharmaceuticals
industry in its operations as both a clinical research outsourcer
("CRO") and provider of pharmacovigilance services. It is a global
business which operates 24 offices and services 140 countries
although its main exposure comes from the US and Europe. The CRO
business specialises in drug development for oncology and rare
diseases, while its pharmacovigilance services benefit from the
high burden of drug regulation. It is a capital-light business
which generates high returns. The business has a net cash balance
sheet which it is looking to deploy on acquisitions to further
augment strong organic growth trends.
GlobalData is a leading business information and data provider.
The business was formed by Mike Danson, who had previously founded
and then sold Datamonitor, a comparative business. He remains a
majority shareholder of GlobalData. The company provides high-level
data intelligence, analytics and insights across a wide range of
industries principally to executive level customers at major
organisations. The key product differentiator is the focus on live
and real-time updated datasets and analysis rather than big
reference 'big book reports'. The business is set to deliver strong
growth through high retention rates, upselling to existing
customers, price increases and new customer adds. With a cost base
under control, margins are set to expand from current levels.
JTC is a global professional services firm operating in 20
jurisdictions covering fund, corporate and private client product
offerings. It operates two divisions: Institutional Client
Services, which focuses on the provision of fund, corporate, and
banking solutions to institutional clients, primarily fund
managers, listed companies and multinationals; and Private Client
Services, which provides trust, corporate and banking services for
global wealth management firms, family offices and
ultra-high-net-worth individuals. Our investment provides exposure
to the growth in fund regulation and the continued trend of
outsourcing fund administration. The business is still run by its
founder so an entrepreneurial spirit prevails and there is a strong
ethos of share ownership and alignment throughout the business.
Morgan Advanced Materials is a thermal and ceramic products
business. The DNA of the business is knowledge of material science
around ceramics and carbon. It services a wide range of end
markets, customers and applications. The company is operating at
the forefront of material science applications, making materials
that need extreme precision in highly challenging operating
environments such as extreme temperatures, high altitudes or high
winds. We think the company has materially improved its portfolio
over recent years and recent organic growth has exceeded
expectations. We felt that the low valuation the company was
trading on did not reflect these positives. In addition, the
company's balance sheet is strong which gives it the scope to
supplement growth with accretive acquisitions.
Trainline is a global ticketing platform operating in the rail
and coach industry. It has a leading position in the UK and Europe
as an e-commerce player that sells rail and coach tickets on behalf
of carriers to both consumers and businesses. The platform is
accessible through its highly rated mobile and desktop app. The
investment case provides exposure to growth trends in online
purchasing of e-tickets and the increased liberalisation of
European rail. Earnings are being depressed by continued investment
in Europe, while the valuation multiple is currently being impacted
by the uncertainty surrounding UK rail regulation. Both factors
provided a good entry point to buy the shares.
Wilmington is a training, events and education business. Based
in the UK, the group is split into two units: Intelligence which
provides a combination of risk and compliance data to insurance,
pension and healthcare customers globally, and Training &
Education which offers bespoke technical support for customers
across the financial services and healthcare sectors. The group has
attractive business fundamentals with high profit margins,
operating in defensive areas of corporate spend with growth
opportunities as businesses expand on training and development
activities. With a positive market backdrop and the potential for
future value-enhancing acquisitions, Wilmington has a strong
earnings outlook.
Disposals
To balance the additions to our portfolio, we have disposed of
positions in companies which we felt were set for poor price
performance. We sold our holding in De La Rue, a provider of
currency and security products. Overcapacity in the market is
leading to pressure on prices and capacity utilisation and earnings
expectations have been guided down significantly. We also disposed
of our holding in Alphawave, a semiconductor licensing and
manufacturing company. Since its initial public offering ("IPO")
the business has had a poor record of meeting market expectations
and the acquisition of Banias Labs, a loss-making Israeli
semiconductor company, further depressed profitability and pushed
the group into a net debt position. We sold our position in Gym
Group, a low-cost gym operator, as membership recovery from Covid
had been disappointing and may indicate a structural shift in the
market. We also sold our position, in line with our stated policy,
in Dechra Pharmaceuticals, a veterinary products supplier, as it
was elevated to the FTSE 100.
Takeover activity
There was a decent level of takeover activity in the portfolio.
This was consistent with the wider mid and small-cap equity markets
aided by continued levels of interest from private equity. A number
of takeover bids were received: for Euromoney, a B2B information
provider, from a private equity consortium; for RPS Group, an
international engineering consultancy, from Tetra Tech; for EMIS,
an IT healthcare company, from United Health Group; and for Hyve,
an exhibitions organiser, from Providence Equity Partners.
Top ten positions
The following table shows the Company's top ten stock positions
and their active positions versus the Numis Smaller Companies Index
(excluding investment companies):
Top ten positions Portfolio Index weight Active weight
at 31 May 2023 % % %
------------------------ ---------- ------------- --------------
Oxford Instruments 3.7 1.2 2.5
Impax Asset Management 3.0 - 3.0
Bellway 2.8 - 2.8
Balfour Beatty 2.8 - 2.8
OSB Group 2.5 - 2.5
Paragon Banking 2.3 0.9 1.4
Vesuvius 2.3 0.8 1.5
Mitchells and Butlers 2.2 0.9 1.3
Team17 1.9 - 1.9
Watches of Switzerland 1.8 - 1.8
A brief description of the largest positions (excluding Oxford
Instruments and Balfour Beatty which were covered earlier)
follows:
Impax Asset Management is an environmentally and socially
responsible focused asset manager based in the UK. The company was
formed in 1998 by the current CEO Ian Simm, and has several funds
spanning public equities, bonds and private equity assets. Demand
for these strategies is growing as sustainability agendas have
become top priorities for governments, consumers and investors
alike. As a result, the business has seen rapid growth in assets
under management which we expect to continue as the group's strong
performance track record and global distribution agreements should
lead to further inflows.
Bellway is a national UK housebuilder. The company has an
excellent long-term track record of controlled expansion whilst
maintaining a strong balance sheet. Although the company has
delivered strong operational and financial performance, the share
price has fallen due to the weakness in the housing market, caused
by the economic downturn and rising interest rates. Although future
short-term profitability is likely to fall as house prices soften
and volumes contract, the business remains well placed to benefit
from any recovery. Additionally, valuation support is provided by
the large discount to net asset value at which the shares currently
trade.
OSB Group is a speciality lender with a primary focus on
providing buy-to-let mortgages to professional landlords.
Regulations on complex underwriting and the sophistication of its
underwriting capability have allowed OSB to grow market share and,
with landlord demand remaining robust, the business is poised to
see further growth. The company has built a very strong capital
position, and this is allowing the company to return significant
cash to shareholders through share buy-backs and increased
dividends.
Paragon Banking is a speciality lender with a primary focus on
providing buy-to-let mortgages to professional landlords. The
company has changed its structure in the last few years by
obtaining a banking licence allowing the company to diversify its
funding sources into the retail market. The company enjoys a very
strong capital position, enabling it to pay higher dividends whilst
buying back some of its own stock. Regulations on complex
underwriting and the sophistication of its underwriting capability
have allowed Paragon to grow market share from non-bank lenders
which have suffered in this rising rate environment.
Vesuvius is a materials technology company. The company offers
steel flow control, foundry technologies, advanced refractories and
metal processing products and services to customers around the
world. The business has gone through significant rationalisation
over recent years removing excess capacity and improving returns on
capital and margins. The company has demonstrated excellent pricing
power during the recent inflationary period, validating its leading
market position and high value add of its products. Although the
steel industry is seeing the impact of global economic weakness,
the business is well positioned to enjoy strong growth once markets
recover.
Mitchells & Butlers is a national owner and operator of pubs
in the UK. Its major brands include All Bar One, Browns, Harvester,
Toby Carvery, O'Neill's, Miller & Carter, Nicholson and Ember
Inns. The vast majority of its pubs are owned freehold, meaning it
has substantial asset value backing. After a difficult trading
period impacted by lockdowns and restricted trading during Covid
and more recently pressures from significant inflation in energy,
food prices and labour costs, the outlook is looking brighter
especially as consumer demand remains strong and cost pressures are
starting to ease. The company is steadily repaying its securitised
debt, enabling a transfer of value from debt to equity.
Additionally, with its pension deficit now cleared, cashflow is
improving, allowing the possibility of a resumption in dividends to
shareholders.
Team17 is a developer and publisher of video games for PCs,
consoles and mobile devices. The company focuses on the independent
games market and selectively works with developers and third
parties to launch new content on multiple platforms. The business
listed in 2018 and has had a strong record of growth driven by
well-received new releases, the monetisation of new content and
improved profitability as the portfolio has expanded. With strong
internal intellectual property and the balance sheet in a net cash
position, the company is well set for future growth.
Watches of Switzerland is a leading retailer of luxury watches
and jewellery in the UK and US. The group trades under the banner
of four prestigious retail brands: Watches of Switzerland, Mappin
& Webb, Goldsmiths and Mayors. The group has a 40% share of the
UK luxury watch market and a 10%+ share of the US luxury watch
market. Over 50% of revenues are generated from the sale of Rolex
watches. In addition to driving sales densities across existing
stores through improved marketing and stock availability,
management's growth strategy is centred around expansion in the US
and Europe where there is significant potential for market share
gains.
Portfolio weightings
As at 31 May 2023, the portfolio was weighted by company size as
follows :
Weighting %
31 May 2023 31 May 2022
------------ ------------ ------------
FTSE 100 0.0 1.9
FTSE 250 70.2 63.5
FTSE Small
Cap 14.3 16.5
FTSE AIM 28.1 29.3
Gearing (12.6) (11.2)
Market outlook
With inflation staying elevated against official targets,
central banks, led by the US Federal Reserve, have remained
hawkish. We have seen significant rises in interest rates globally
and a move from quantitative easing to tightening. The market is
forecasting further modest rises in interest rates globally
although it is clear we are much closer to the end rather than the
start of the monetary policy tightening cycle. Oscillating
confidence levels in central bankers' willingness and ability to
strike the right balance between containing inflation and
supporting economic growth are driving heightened levels of
uncertainty and volatility in global bond and equity markets.
The rapid rise of inflation, driven by energy prices but also by
a wider number of other components, and rising interest rates are
putting pressure on consumers and businesses alike. Although the
labour market is strong and wages are rising, real net disposable
income is falling and consumer confidence is low. The delayed
transmission mechanism of rising interest rates and their impact on
the economy mean that economic conditions are likely to worsen in
the short term.
Geopolitics remain challenging with the ongoing conflict in
Ukraine and heightened tensions between China, the US and Europe.
The longer-term economic implications of these are material. There
is an urgent need to reduce European dependence on Russian oil and
gas supplies and a requirement to decrease China's influence on the
global supply chain through investment in nearshoring capability.
We expect capital spending to increase as a result and pockets of
inflation to remain as bottlenecks appear in the process of supply
chain reorganisation.
In the UK corporate sector we are encouraged by the fact that
conditions are intrinsically stronger than they were during the
Global Financial Crisis of 2008-2009. In particular, balance sheets
are more robust. Dividends have been recovering strongly and we are
seeing an increasing number of companies buying back their own
stock.
After an active 2021, the IPO market has become considerably
quieter as equity market confidence has diminished. There are no
signs this is likely to change in the short term. Merger and
acquisition activity ("M&A") has remained robust as acquirors,
particularly private equity, look to exploit opportunities thrown
up by the recent equity market falls. We expect this to continue in
the coming months as UK equity market valuations remain markedly
depressed versus other developed markets.
In terms of valuations, the equity market is now trading below
long-term averages. Corporate earnings rebounded sharply following
the pandemic-induced shock in 2020. Lead indicators suggest this
rebound is likely to continue to fade as economic activity weakens
further. Rising interest costs and increasing tax burdens are
putting further pressure on corporate earnings growth. The view
that the UK economy is entering a moderate recession is now
consensual and the debate is now focused on whether the trough will
be deeper than expected.
Although uncertainty remains around short-term economic
conditions, we think that the portfolio is well positioned to
withstand an economic downturn and exploit any opportunities it
presents. The movements in equity markets have thrown up some
fantastic buying opportunities. However, it is important to be
selective as the strength of franchise, market positioning and
balance sheets will likely determine the winners from the
losers.
In conclusion, the year under review has been a disappointing
one for the Company. Absolute performance was negative and the
Company underperformed its benchmark. The operating performance of
our portfolio companies, however, has been robust. The companies
are soundly financed and attractively valued. Additionally, the
smaller companies market continues to throw up exciting growth
opportunities in which the Company can invest. We remain confident
in our ability to generate significant value from a consistent and
disciplined investment approach.
Neil Hermon
Fund Manager
INVESTMENT PORTFOLIO at 31 May 2023
Company Principal activities Valuation Portfolio
GBP'000 %
-------------------------------- -------------------------------------- ---------- ----------
Oxford Instruments Advanced instrumentation equipment 27,826 3.66
Impax Asset Management(1) ESG-focused investment manager 22,801 3.00
Bellway Housebuilder 21,338 2.81
Balfour Beatty International contractor 21,274 2.80
OSB Group Buy-to-let mortgage provider 19,258 2.53
Paragon Banking Buy-to-let mortgage provider 17,232 2.27
Vesuvius Ceramic engineering 17,140 2.25
Mitchells & Butlers Hospitality operator 16,710 2.20
Team17(1) Games software developer 14,438 1.90
Watches of Switzerland Luxury watch retailer 13,897 1.83
-------------------------------- -------------------------------------- ----------
10 largest 191,914 25.25
Exhibition organiser and data
Ascential services 13,688 1.80
Alpha Financial Markets(1) Investment management consultancy 13,233 1.74
Learning Technologies(1) E-learning 12,806 1.68
Electronic control and process
Spectris instrumentation 12,693 1.67
Precision measuring and calibration
Renishaw equipment 12,638 1.66
Gamma Communications(1) Telecommunications 12,628 1.66
Computacenter IT reseller 12,528 1.65
Volution Producer of ventilation products 12,505 1.65
Softcat Software reseller 11,671 1.54
Specialist internet, website
Future and magazine company 11,552 1.52
-------------------------------------- ----------
20 largest 317,856 41.82
IntegraFin B2B financial platform 11,196 1.47
Just Group Enhanced annuity provider 11,043 1.45
Bytes Technology Software reseller 10,965 1.44
Victrex Speciality chemicals 10,062 1.32
Serco Outsourcing services 9,996 1.31
Rathbones Private client wealth manager 9,970 1.31
Bodycote Engineering group 9,889 1.30
Workspace Real estate investment and services 9,809 1.29
Moneysupermarket.Com Price comparison website 9,789 1.29
Foresight Specialist fund manager 9,680 1.27
----------
30 largest 420,255 55.27
Property transactional consulting
Savills services 9,555 1.26
Serica Energy(1) Oil & gas exploration and production 9,448 1.24
GB Group(1) Data intelligence services 9,379 1.23
Tyman Building products 9,095 1.20
Chemring Technology products and services 9,070 1.19
RWS Holdings(1) Patent translation services 8,809 1.16
Crest Nicholson Housebuilder 8,719 1.15
Redde Northgate Commercial vehicle hire 8,672 1.14
Hollywood Bowl Ten pin bowling operator 8,137 1.07
SigmaRoc(1) Aggregates supplier 8,098 1.07
40 largest 509,237 66.98
Midwich(1) Audio-visual equipment distributor 7,788 1.02
Qinetiq Defence services 7,543 0.99
Next Fifteen Communications(1) PR and media services 7,430 0.98
Burford Capital(1) Litigation finance 7,324 0.96
Liontrust Asset Management Specialist fund management 7,163 0.94
Auction Technology Online auction software provider 6,720 0.88
Morgan Advanced Materials Engineering group 6,670 0.88
Pagegroup Recruitment company 6,199 0.82
Genuit Building products 6,176 0.81
Bridgepoint Private equity fund manager 6,110 0.80
---------- ----------
50 largest 578,360 76.06
------------------------------------------------------------------------ ---------- ----------
CLS Real estate investment and services 5,952 0.78
Trainline Online ticket retailer 5,936 0.78
Luceco Electrical products 5,913 0.78
Wickes DIY retailer 5,856 0.77
Urban regeneration and property
Harworth investment 5,421 0.71
Videndum Broadcast and camera systems 5,239 0.69
SThree Recruitment company 5,081 0.67
XP Power Electrical power products 5,056 0.67
Smart Metering Systems(1) Energy smart meters 5,030 0.66
Automotive testing and measurement
AB Dynamics(1) products 4,925 0.65
----------
60 largest 632,769 83.22
Restore(1) Office service provider 4,778 0.63
DFS Furniture retailer 4,748 0.62
Oil and gas exploration and
Harbour Energy production 4,663 0.61
Synthomer Speciality chemicals 4,582 0.60
Howden Joinery Kitchen manufacturer and retailer 4,459 0.59
Moonpig Online card and gift retailer 4,387 0.58
Gresham House(1) Specialist fund manager 4,322 0.57
Stelrad Radiator manufacturer 4,271 0.56
Oil and gas exploration and
Capricon Energy production 3,961 0.52
Empiric Student accommodation 3,865 0.51
--------------------------------
70 largest 676,805 89.01
Wilmington B2B information provider 3,836 0.51
Hunting Oil equipment and services 3,832 0.50
Office property investor and
Helical developer 3,766 0.50
Avon Protection Defence products 3,690 0.49
Pebble(1) Promotional products and services 3,689 0.49
Alliance Pharma(1) Pharmaceutical products 3,438 0.45
GlobalData(1) B2B information provider 3,402 0.45
RM Education software and services 3,330 0.44
Spirent Communications Telecom testing services 3,276 0.43
JTC Fund administrator 3,121 0.41
----------
80 largest 712,185 93.68
------------------------------------------------------------------------
Young & Co's share class
A(1) Pub operator 3,009 0.40
Grainger Residential property investor 2,981 0.39
Advanced Medical Solutions(1) Medical supplies manufacturer 2,912 0.38
Aptitude Software Software retailer 2,880 0.38
Young & Co's share class
NV(1) Pub operator 2,851 0.38
Cycling and automative products
Halfords retailer 2,727 0.36
Headlam Floor coverings distributor 2,651 0.35
Benchmark Holdings(1) Aquaculture services 2,630 0.35
Restaurant Group Restaurant and pub operator 2,611 0.34
Blancco Technology(1) Data erasure software 2,600 0.34
----------
90 largest 740,037 97.35
------------------------------------------------------------------------
Severfield Structural steel products 2,488 0.33
Essentra Industrial distributor 2,374 0.31
Clarkson Shipping services 2,302 0.30
Marketing services software
Access Intelligence(1) provider 2,238 0.29
Educational support services
Tribal(1) and software 2,232 0.29
Eurocell Building products 2,072 0.27
Ergomed(1) Clinical trial services 2,028 0.27
Thruvision(1) Detection technology 1,800 0.24
Safestyle(1) Window and door retailer 1,710 0.23
Focusrite(1) Audio production equipment 875 0.12
----------
100 largest 760,156 100.00
----------
Total Equity Investments 760,156 100.00
(1) Quoted on the Alternative Investment Market
There were no convertible or fixed interest securities at 31 May
2023 (2022: None)
PRINCIPAL RISKS AND UNCERTAINTIES
The Board, with the assistance of the Manager, has carried out a
robust assessment of the principal and emerging risks facing the
Company which relate to the activity of investing in the shares of
smaller companies that are listed (or quoted) in the United
Kingdom.
The directors seek assurance that the risks are appropriately
evaluated, their possible outcomes considered, and that effective
mitigating controls are in place. To support this process, the
Audit and Risk Committee ("ARC") maintains a detailed risk matrix
which identifies the substantial risks to which the Company is
exposed and methods of mitigating against them as far as
practicable. The ARC considers the Company's principal and emerging
risks at each meeting, with a thorough review at least once per
year, using heat maps derived from the detailed risk matrix. Every
year each director undertakes an individual assessment of each
risk. The individual ratings are collated and reviewed at a
meeting, which triggers fresh critical debate. The Board regularly
considers these and does not consider the principal risks to have
changed during the course of the reporting period and up to the
date of this report.
Throughout the year the Board has considered the impact of
macroeconomic events with a global impact and heightened market
volatility, including the aftermath of Covid-19 and the ongoing
ramifications of the Russia/Ukraine conflict. The Board has
assessed the impact of mitigation measures on manufacturing supply
lines and on heightened uncertainty in the business environment.
The Board has also considered the wider consequences of the recent
specific problems in the US and Swiss banking sectors, and
continues to monitor economic uncertainty and the cost-of-living
crisis in the UK, and the UK banks' appetite for lending to the
corporate sector.
While uncertainty remains around short-term economic conditions,
the Board has concluded that the Company's portfolio and the
Manager's investment approach should prove resilient. The Fund
Manager's long-standing philosophy is that, over the long term,
smaller companies are able to deliver superior returns than the
broader market, driven by his fund management team's fundamental,
qualitative analysis, engagement with management teams and strong
valuation discipline.
The principal risks fall broadly under the following
categories:
Risk Controls and mitigation
Investment activity The Board reviews investment strategy at each
and strategy board meeting. An inappropriate investment strategy
Poor long-term investment (for example, in terms of asset allocation or
performance (significantly the level of gearing) may lead to underperformance
below agreed benchmark against the Company's benchmark and the companies
or market/industry in its peer group; it may also result in the
average) Company's shares trading at a wider discount
to net asset value
Loss of the Fund Manager ("NAV") per share. The Board manages these risks
or by ensuring a diversification of investments
management team and a regular review of the extent of borrowings.
The Manager operates in accordance with investment
Impact of political, limits and restrictions determined by the Board;
environmental, health these include limits on the extent to which borrowings
or other emergencies may be used. The Board reviews its investment
(e.g. Covid-19, war limits and restrictions regularly and the Manager
and a changing macroeconomic confirms its compliance with them each month.
environment) on the The Manager provides the directors with management
Company's investments information, including performance data and reports
and shareholder analysis. The Board monitors
Approach to ESG matters the implementation and results of the investment
process with the Fund Manager, and regularly
Material climate-related reviews data that monitor portfolio risk factors.
impacts (both physical
and transition risks) The Fund Manager reports to each board meeting
on his close oversight of the portfolio, and
Market appetite - more frequently in the event of a crisis. Performance
investment is monitored by JHI's internal teams, any of
objective and/or policy which would escalate directly to the Board in
not the event of matters of concern. At each meeting,
appropriate in the the Board reviews the Fund Manager's ESG engagement
current market or with portfolio companies and their governance
not sought by investors structures, ESG risks reports, and votes cast
resulting in a wide against management. The Board also reviews JHI's
discount ESG-related marketing activity specific to the
Company.
The performance of the Company relative to its
benchmark and its peers and the discount/premium
to NAV per share are key performance indicators
measured by the Board on a continual basis and
are reported on in the Annual Report.
The Board obtains assurances from the Manager
that the UK Smaller Companies team is suitably
resourced, and the Fund Manager is appropriately
remunerated and incentivised in this role. The
Board also considers the succession plan for
the fund management team on an annual basis.
See the Annual Report for a description of the
engagement with shareholders and potential investors
undertaken by the Board and Manager to keep the
market informed about Company developments.
--------------------------------------------------------
Legal and regulatory In order to qualify as an investment trust the
Loss of investment Company must comply with s1158 Corporation Tax
trust status Act 2010 ("s1158"). A breach of s1158 could result
in the Company losing investment trust status
Breach of company and, as a consequence, capital gains realised
law or Listing Rules within the Company's portfolio would be subject
resulting in suspension to corporation tax. The s1158 criteria are monitored
by the Manager and the results are reported to
the directors at each board meeting. The Company
must comply with the provisions of the Companies
Act 2006 (the "Act") and, as the Company has
a premium listing on the London Stock Exchange,
the Company must comply with the Listing, Prospectus
and Disclosure Guidance and Transparency Rules
of the FCA.
A breach of the Act could result in the Company
and/or the directors being fined or becoming
the subject of criminal proceedings. A breach
of the FCA Rules could result in the suspension
of the Company's shares which would in turn lead
to a breach of s1158. The Board relies on its
corporate secretary and its professional advisers
to ensure compliance with the Act and FCA Rules.
--------------------------------------------------------
Operational Disruption to, or failure of, the Manager's accounting,
Failure of, disruption dealing or payment systems or the custodian's
to or inadequate service records could prevent the accurate reporting
levels by key third-party and monitoring of the Company's financial position.
service provider The Manager has contracted some of its operational
functions, principally those relating to trade
Cyber-crime leading processing, investment administration and accounting,
to loss of confidential to BNP Paribas. Details of how the Board monitors
data the services provided by Janus Henderson and
its other suppliers, and the key elements designed
Breach of internal to provide effective internal control and risk
controls management, such as review of service providers'
assurance reports, are explained further in the
Impact of political, Annual Report.
environmental, health
or other emergencies Cybersecurity is closely monitored by the ARC
(e.g. Covid-19, war as part of quarterly internal controls reports,
and a changing macroeconomic and the ARC receives an annual presentation from
environment) on the Janus Henderson's Chief Information Security
Company's operations Officer.
and those of its service
providers The Board monitors effectiveness and efficiency
of service providers' processes through ongoing
compliance and operational reporting. There were
no disruptions to the services provided to the
Company in the year under review.
--------------------------------------------------------
Financial instruments By its nature as an investment trust, the Company
and the management is exposed in varying degrees to market risk
of risk (comprising market price risk, currency risk
and interest rate risk), liquidity risk and credit
and counterparty risk. An analysis of these financial
risks and the Company's policies for managing
them are set out in note 15 in the Annual Report.
--------------------------------------------------------
EMERGING RISKS
At each meeting, the Board considers emerging risks which it
defines as potential trends, sudden events or changing risks which
are characterised by a high degree of uncertainty in terms of
occurrence probability and possible effects on the Company. Once
emerging risks become sufficiently clear, they may be treated as
specific risks and enter the Company's matrix of significant risks.
During the year, the directors agreed that emerging risks would
include disruption to markets, the global economy and society
through artificial intelligence ("AI") such as ChatGPT, and UK
banks' appetite for lending to the UK corporate sector, including
investment trusts. The directors also considered the trend for
UK-listed companies to de-list from the London Stock Exchange and
seek an alternative listing in the US, and agreed that potentially
more relevant for smaller UK-focused companies would be a
de-listing and move to private equity.
The Board receives reporting on risks from the Manager and other
service providers in addition to any ad hoc reports on specialist
topics from professional advisors. The Board monitors effectively
the changing risk landscape and potential threats to the Company
with the support of regular reports and ad hoc reports as required,
the directors' own experience and external insights gained from
industry and shareholder events.
BORROWINGS
The Company has borrowed GBP30 million by its issue in 2016 of
3.33% unsecured loan notes 2036 and a further GBP20 million by its
issue in 2022 of 2.77% unsecured loan notes 2052. The Company is
able to draw short-term borrowings of up to GBP85 million from its
committed borrowing facility with BNP Paribas, London branch (2022:
GBP85 million with Industrial and Commercial Bank of China Limited,
London branch ("ICBC")). There were borrowings of GBP50.7 million
drawn down under the facility at 31 May 2023 (2022: GBP50.3
million).
Accordingly, the Company has access to borrowings of up to
GBP135 million: the GBP50 million of fixed debt represented by the
issue of unsecured loan notes and a committed bank facility of
GBP85 million.
VIABILITY STATEMENT AND CONTINUATION VOTE
The Company is a long-term investor. The Board believes it is
appropriate to assess the Company's viability over a five-year
period in recognition of the Company's long-term horizon and what
the Board believes to be investors' horizons, taking account of the
Company's current position and the potential impact of the
principal risks and uncertainties as documented in the Strategic
Report.
The assessment has considered the impact of the likelihood of
the principal risks and uncertainties facing the Company, in
particular investment strategy and performance against benchmark,
whether from asset allocation or the level of gearing, and market
risk, in severe but plausible scenarios, and the effectiveness of
any mitigating controls in place.
The Board took into account the liquidity of the portfolio and
the borrowings in place when considering the viability of the
Company over the next five years and the Company's ability to meet
liabilities as they fall due. This included consideration of the
duration of the Company's loan and borrowing facilities and how a
breach of any covenants could impact the Company's NAV and share
price, recognising the current strength of the covenants, liquidity
of the portfolio and capital reserves available. The Board used a
five-year cash-flow forecast and sensitivity analysis to support
its deliberations.
The Board considers revenue and expense forecasts at each
meeting, with additional focus at the time of reviewing half-year
and year-end results. At the same time the Board discusses the
impact on the Company of decreases in revenue and the impact that
would have on revenue and capital reserves available to pay
dividends.
The Board does not expect there to be any significant change in
the principal risks and adequacy of the mitigating controls in
place, nor does the Board envisage any change in strategy or
objective or any events that would prevent the Company from
continuing to operate over the next five years; the Company's
assets are liquid, its commitments are limited and the Company
intends to continue to operate as an investment trust. In coming to
this conclusion, the Board has considered rigorously the aftermath
of the Covid-19 pandemic, the continued macroeconomic and
geopolitical uncertainty following Russia's invasion of Ukraine and
impact on global supply chains, and the current cost-of-living
crisis. The Board considers that these events have highlighted the
advantages of holding an investment trust.
The Board does not believe that these factors will have a
long-term impact on the viability of the Company and its ability to
continue in operation, notwithstanding the short-term uncertainty
these events have caused in the markets and specific shorter-term
issues, such as supply chain disruption, inflation and labour
shortages.
The continuation vote at the 2022 AGM was passed with support of
99.2% of votes cast and the Board expects shareholders to support
continuation at the 2025 AGM which is within the viability
assessment period.
Based on their assessment, the directors have a reasonable
expectation that the Company will be able to continue in operation
and meet its liabilities as they fall due over the next five years
to 31 May 2028.
FUTURE DEVELOPMENTS
The future success of the Company is dependent primarily on the
performance of its investment portfolio, which will, to a
significant degree, reflect the performance of the stock market and
the skill of the Manager. While the Company invests in companies
that are listed (or quoted) in the United Kingdom, the underlying
businesses of those companies are affected by external factors,
many of an international nature. The Board's intention is that the
Company will continue to pursue its stated investment objective and
strategy as explained in the Annual Report. The Chair's Statement
and the Fund Manager's Report in the Annual Report give commentary
on the outlook for the Company. Other information on recommended
dividends and financial risks is detailed in the Strategic Report
and in notes 9 and 15 to the financial statements in the Annual
Report.
RELATED-PARTY TRANSACTIONS
The Company's transactions with related parties in the year were
with the directors and the Manager. There were no material
transactions between the Company and its directors, and the only
amounts paid to them were in respect of remuneration. Remuneration
is paid quarterly in arrears and amounts for April and May 2023
were therefore accrued as at the year end. There were no other
outstanding amounts payable at the year end. The directors did not
claim any expenses during the years to 31 May 2023 or 31 May 2022.
Directors' shareholdings are listed in the Annual Report.
In respect of the Manager's service provision during the year,
other than fees payable by the Company in the ordinary course of
business and the facilitation of marketing activities with third
parties, there were no material transactions with the Manager
affecting the financial position of the Company. More details on
transactions with the Manager, including amounts outstanding at the
year end, are in the Annual Report.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
Each director who is listed in the Annual Report confirms that,
to the best of his or her knowledge:
-- the financial statements, which have been prepared in accordance
with International Accounting Standards in conformity with the
requirements of the Companies Act 2006 on a going concern basis,
give a true and fair view of the assets, liabilities, financial
position and profit/loss of the Company; and
-- the Strategic Report and financial statements include a fair review
of the development and performance of the business and the position
of the Company, together with a description of the principal risks
and uncertainties that it faces.
On behalf of the Board
Penny Freer
Chair of the Board
STATEMENT OF COMPREHENSIVE INCOME
Year ended 31 May 2023 Year ended 31 May 2022
Revenue Capital Revenue Capital
return return Total return return Total
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
---------------------- --------- ---------- ---------- --------- ------------ ------------
2 Investment income 24,295 - 24,295 20,648 - 20,648
3 Other income 95 - 95 2 - 2
Losses on investments
held at fair value
through profit
or loss - (127,252) (127,252) - (187,266) (187,266)
Currency losses - - - - (1) (1)
---------------------- --------- ---------- ---------- --------- ------------ ------------
Total income/(loss) 24,390 (127,252) (102,862) 20,650 (187,267) (166,617)
Expenses
4 Management fees (710) (1,657) (2,367) (1,004) (2,343) (3,347)
Other expenses (731) - (731) (728) - (728)
---------------------- --------- ---------- ---------- ----------- ------------ ------------
Profit/(loss)
before finance
costs and taxation 22,949 (128,909) (105,960) 18,918 (189,610) (170,692)
Finance costs (997) (2,325) (3,322) (562) (1,310) (1,872)
---------------------- --------- ---------- ---------- --------- ------------ ------------
Profit/(loss)
before taxation 21,952 (131,234) (109,282) 18,356 (190,920) (172,564)
Taxation (5) - (5) (1) - (1)
---------------------- --------- ---------- ---------- --------- ------------ ------------
Profit/(loss)
for the year and
total comprehensive
income 21,947 (131,234) (109,287) 18,355 (190,920) (172,565)
---------------------- --------- ---------- ---------- --------- ------------ ------------
Earnings/(loss)
per ordinary share
5 - basic and diluted 29.38p (175.68p) (146.30p) 24.57p (255.58p) (231.01p)
---------------------- --------- ---------- ---------- --------- ------------ ------------
The total columns of this statement represent the Statement of
Comprehensive Income, prepared in accordance with UK-adopted
International Accounting Standards in conformity with the
requirements of the Companies Act 2006.
The revenue return and capital return columns are supplementary
to this and are prepared under guidance published by the
Association of Investment Companies.
STATEMENT OF CHANGES IN EQUITY
Retained earnings
Capital
Share redemption Capital Revenue Total
capital reserve reserves reserve equity
Notes Year ended 31 May GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
2023
-------------------------- ---------- ------------ ----------- ---------- ----------
Total equity at 1 June
2022 18,676 26,745 744,044 13,134 802,599
Total comprehensive
income:
(Loss)/profit for the
year - - (131,234) 21,947 (109,287)
Transactions with owners,
recorded directly to
equity:
Ordinary dividends
6 paid - - - (17,925) (17,925)
Total equity at 31
May 2023 18,676 26,745 612,810 17,156 675,387
---------- ------------ ----------- ---------- ----------
Retained earnings
Capital
Share redemption Capital Revenue Total
capital reserve reserves reserve equity
Notes Year ended 31 May 2022 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------- -------------------------- ---------- ------------ ----------- ---------- ----------
Total equity at 1 June
2021 18,676 26,745 935,307 12,170 992,898
Total comprehensive
income:
(Loss)/profit for the
year - - (190,920) 18,355 (172,565)
Transactions with owners,
recorded directly to
equity:
Ordinary dividends
6 paid - - (343) (17,391) (17,734)
Total equity at 31
May 2022 18,676 26,745 744,044 13,134 802,599
---------- ------------ ----------- ---------- ----------
BALANCE SHEET
At 31 May At 31 May
2023 2022
Notes GBP'000 GBP'000
------------------------------------------------------ ------------- --------------
Non-current assets
Investments held at fair value through profit or loss 760,156 892,397
------------- --------------
Current assets
Receivables 3,187 4,229
Cash and cash equivalents 13,338 8,991
------------- --------------
16,525 13,220
------------- --------------
Total assets 776,681 905,617
------------- --------------
Current liabilities
Payables (851) (2,990)
Bank loans (50,672) (50,268)
------------- --------------
(51,523) (53,258)
------------- --------------
Total assets less current liabilities 725,158 852,359
Non-current liabilities
Financial liabilities (49,771) (49,760)
------------- --------------
Net assets 675,387 802,599
------------- --------------
Equity attributable to equity shareholders
7 Share capital 18,676 18,676
Capital redemption reserve 26,745 26,745
Retained earnings:
Capital reserves 612,810 744,044
Revenue reserve 17,156 13,134
------------- --------------
Total equity 675,387 802,599
------------- --------------
8 Net asset value per ordinary share 904.1p 1,074.4p
------------- --------------
STATEMENT OF CASH FLOWS
Year ended
31 May 31 May
2023 2022
GBP'000 GBP'000
-------------------------------------------------- ---------- ----------
Operating activities
Loss before taxation (109,282) (172,564)
Add back interest payable 3,322 1,872
Losses on investments held at fair value through
profit or loss 127,252 187,266
Purchases of investments (109,395) (165,877)
Sales of investments 114,384 166,572
Increase in receivables (38) (1)
Decrease in amounts due from brokers 1,394 1,179
Increase in accrued income (316) (412)
Decrease in payables (66) (4,545)
(Decrease)/increase in amounts due to brokers (2,081) 1,607
Net cash inflow from operating activities
before interest and taxation 25,174 15,097
Interest paid (3,303) (1,659)
Net cash inflow from operating activities(1) 21,871 13,438
---------- ----------
Financing activities
Equity dividends paid (17,928) (17,734)
(Repayment)/drawdown of bank loans 404 (9,592)
Issue of unsecured private placement notes - 20,000
Direct expenses on issue of unsecured private
placement notes - (82)
---------- ----------
Net cash outflow from financing activities (17,524) (7,408)
---------- ----------
Increase in cash and cash equivalents 4,347 6,030
Currency losses - (1)
Cash and cash equivalents at the start of the
year 8,991 2,962
---------- ----------
Cash and cash equivalents at the end of the
year 13,338 8,991
---------- ----------
(1) In accordance with IAS 7.31, cash inflow from dividends was
GBP24,000,000 (2022: GBP20,243,000) and cash
inflow from interest was GBP74,000 (2022: GBP2,000)
NOTES TO THE FINANCIAL STATEMENTS
Accounting policies: Basis of preparation
1 The Henderson Smaller Companies Investment Trust plc (the "Company")
is a company incorporated and domiciled in the United Kingdom under
the Companies Act 2006 (the "Act"). The financial statements of
the Company for the year ended 31 May 2023 have been prepared in
accordance with UK-adopted International Accounting Standards in
conformity with the requirements of the Act. These comprise standards
and interpretations approved by the International Accounting Standards
Board ("IASB"), together with interpretations of the International
Accounting Standards and Standing Interpretations Committee approved
by the IFRS Interpretations Committee ("IFRS IC") that remain in
effect, to the extent that IFRS have been adopted by the United
Kingdom.
The financial statements have been prepared on a going concern
basis and on the historical cost basis, except for the revaluation
of certain financial instruments held at fair value through profit
or loss. The principal accounting policies adopted are set out
in the Annual Report. These policies have been applied consistently
throughout the year. Where presentational guidance set out in the
Statement of Recommended Practice (the "SORP") for investment trusts
issued by the Association of Investment Companies (the "AIC") is
consistent with the requirements of IFRS, the directors have sought
to prepare the financial statements on a basis consistent with
the recommendations of the SORP.
There have been no amendments to International Accounting Standards
issued and effective for the year under review which are applicable
to the Company's financial statements. There are no new standards
or amendments to International Accounting Standards issued but
not effective for the year under review or early adopted by the
Company that are expected to have any impact on the Company's financial
statements.
Going concern
The assets of the Company consist of securities that are readily
realisable and, accordingly, the directors believe that the Company
has adequate resources to continue in operational existence for
at least twelve months from the date of approval of the financial
statements. In coming to this conclusion, the directors have also
considered the aftermath of the Covid-19 pandemic and its residual
impact on the Company, the continued macroeconomic and geopolitical
uncertainty following Russia's invasion of Ukraine and impact on
supply chains, the nature of the Company's covenants, the strength
of the Company's distributable reserves and the liquidity of the
portfolio. They have concluded that the Company is able to meet
its financial obligations, including the repayment of the bank
loan, as they fall due for a period of at least twelve months from
the date of issuance.
Having assessed these factors, the principal risks and other matters
discussed in connection with the Viability Statement in the Annual
Report, the Board has therefore determined that it is appropriate
for the financial statements to be prepared on a going concern
basis. The Company's shareholders are asked every three years to
vote for the continuation of the Company. An ordinary resolution
to this effect was put to the Annual General Meeting ("AGM") held
on 30 September 2022 and passed by a substantial majority of the
shareholders. The next continuation vote will take place at the
AGM in 2025.
Investment income
2
2023 2022
GBP'000 GBP'000
--------------------------------------------------------- --------- ---------
Income from companies listed or quoted in the United
Kingdom:
Dividends 22,553 18,939
Special dividends 1,177 1,577
Property income distributions 565 132
--------- ---------
Total investment income 24,295 20,648
--------- ---------
Other income
3
2023 2022
GBP'000 GBP'000
--------------------------------------------------------- --------- ---------
Bank and other interest 95 2
95 2
--------- ---------
Management fees
4
2023 2022
Revenue Capital Total Revenue Capital Total
return return return return return return
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------ ---------- --------- --------- ------------- ----------- ----------
Management fee 710 1,657 2,367 1,004 2,343 3,347
710 1,657 2,367 1,004 2,343 3,347
---------- --------- --------- ------------- ----------- ----------
A summary of the management agreement is given in the Annual Report.
(Loss)/earnings per ordinary share
5 The earnings per ordinary share figure is based on the net loss
for the year of GBP109,287,000 (2022: net loss of GBP172,565,000)
and on 74,701,796 (2022: 74,701,796) ordinary shares, being the
weighted average number of ordinary shares in issue during the
year.
The earnings per ordinary share figure detailed above is analysed
between revenue and capital as below:
2023 2022
GBP'000 GBP'000
-------------------------------------------------------------- ---------------- ----------------
Net revenue profit 21,947 18,355
Net capital loss (131,234) (190,920)
---------------- ----------------
Net total loss (109,287) (172,565)
---------------- ----------------
Weighted average number of ordinary shares
in issue during the year 74,701,796 74,701,796
---------------- ----------------
2023 2022
-------------------------------------------------------------- ---------------- ----------------
Revenue earnings per ordinary share 29.38p 24.57p
Capital loss per ordinary share (175.68p) (255.58p)
---------------- ----------------
Total loss per ordinary share (146.30p) (231.01p)
---------------- ----------------
The Company has no securities in issue that could dilute the return
per ordinary share. Therefore the basic and diluted earnings per
ordinary share are the same.
6 Ordinary dividends
2023 2022
Record Date Pay date GBP'000 GBP'000
------------------------- --------------- ----------------- --------- ---------
Final dividend: 17.0p
(2022: 16.75p) for the 26 August
year ended 31 May 2022 2022 10 October 2022 12,699 12,513
Interim dividend: 7.0
p (2022: 7.00p)
for the year ended 31 9 February
May 2023 2023 6 March 2023 5,229 5,229
Unclaimed dividends over 12 years
old (3) (8)
17,925 17,734
--------- ---------
Subject to approval at the AGM, the proposed final dividend of
19.00p per ordinary share will be paid on 9 October 2023 to shareholders
on the register of members at the close of business on 25 August
2023. The shares will be quoted ex-dividend on 24 August 2023.
The proposed final dividend for the year ended 31 May 2023 has
not been included as a liability in these financial statements.
Under IFRS, the final dividend is not recognised until approved
by the shareholders.
The total dividends payable in respect of the financial year which
form the basis of the test under section 1158 Corporation Tax Act
2010 are set out below:
2023 2022
GBP'000 GBP'000
----------------------------------------------------------- --------- ----------
Revenue available for distribution by way of dividends
for the year 21,947 18,355
Interim dividend for the year ended 31 May 2023:
7.00p (2022: 7.00p) (5,229) (5,229)
Final dividend for the year ended 31 May 2022: 17.00p
(based on 74,701,796 shares in issue at 2 August
2022) - (12,699)
Proposed final dividend for the year ended 31 May (14,193) -
2023: 19.00p (based on 74,701,796 shares in issue
at 1 August 2023)
--------- ----------
Transfer to reserves 2,525 427
--------- ----------
7 Share capital
2023 2022
GBP'000 GBP'000
----------------------------------------------------------- --------- ----------
Allotted, issued, authorised and fully paid:
74,701,796 ordinary shares of 25p each (2022: 74,701,796) 18,676 18,676
--------- ----------
During the year the Company made no purchases of its own issued
ordinary shares (2022: nil). Up to the date of this report, the
Company has not purchased any ordinary shares.
8 Net asset value ("NAV") per ordinary share
The NAV per ordinary share is based on the net assets attributable
to the ordinary shares of GBP675,387,000 (2022: GBP802,599,000)
and on the 74,701,796 ordinary shares in issue at 31 May 2023 (2022:
74,701,796).
The Company has no securities in issue that could dilute the NAV
per ordinary share.
The movement during the year of the net assets attributable to
the ordinary shares was as follows:
2023 2022
GBP'000 GBP'000
---------------------------------------------------------- ---------- ----------
Net assets attributable to the ordinary shares
at 1 June 802,599 992,898
Net losses for the year (109,287) (172,565)
Ordinary dividends paid in the year (17,925) (17,734)
----------
Net assets attributable to the ordinary shares
at 31 May 675,387 802,599
---------- ----------
9 2023 Financial information
The figures and financial information for the year ended 31 May
2023 are extracted from the Company's annual financial statements
for that period and do not constitute statutory accounts. The Company's
annual financial statements for the year to 31 May 2023 have been
audited but have not yet been delivered to the Registrar of Companies.
The Independent Auditor's Report on the 2023 annual financial statements
is unqualified, does not include a reference to any matter to which
the auditor drew attention without qualifying the report, and does
not contain any statements under s498(2) or s498(3) Companies Act
2006.
10 2022 Financial information
The figures and financial information for the year ended 31 May
2022 are compiled from an extract of the published financial statements
for that year and do not constitute statutory accounts. Those financial
statements have been delivered to the Registrar of Companies, include
the unqualified Independent Auditor's Report on the 2021 annual
financial statements, do not include a reference to any matter
to which the auditors drew attention without qualifying the report,
and do not contain any statements under s498(2) or s498(3) Companies
Act 2006.
11 Annual Report
The Annual Report for the year ended 31 May 2023 will be sent to
shareholders in August 2023 and will be available on www.hendersonsmallercompanies.com.
Thereafter copies will be available from the corporate secretary
at the Company's registered office: 201 Bishopsgate, London EC2M
3AE.
12 Annual general meeting ("AGM")
The Company's AGM will be held at 11.30 am on Thursday, 5 October
2023. The Board invites shareholders to attend the meeting at the
registered office at 201 Bishopsgate, London EC2M 3AE, or via Zoom
webinar connection if preferable. The Fund Manager will present
his review of the year and thoughts on the future and will be pleased
to answer your questions, as will the Board.
Instructions on attending the meeting in person or virtually, and
details of resolutions to be put to the AGM, are included in the
Notice of AGM in the Annual Report and will be available at www.hendersonsmallercompanies.com.
If shareholders would like to submit any questions in advance of
the AGM, they are welcome to send these to the corporate secretary
at itsecretariat@janushenderson.com.
13. General Information
Company Status
The Henderson Smaller Companies Investment Trust plc is a UK
domiciled investment trust company.
ISIN number/SEDOL Ordinary Shares: GB0009065060/0906506
London Stock Exchange (TIDM) Code: HSL
Global Intermediary Identification Number (GIIN):
WZD8S7.99999.SL.826
Legal Entity Identifier (LEI): 213800NE2NCQ67M2M998
Registered Office
201 Bishopsgate, London EC2M 3AE
Directors and Secretary
The directors of the Company are Penny Freer (Chair of the
Board), Alexandra Mackesy (Audit and Risk Committee Chair), Kevin
Carter (Senior Independent Director), Victoria Sant, Michael Warren
and Yen Mei Lim.
The Corporate Secretary is Janus Henderson Secretarial Services
UK Limited.
For further information please contact:
Neil Hermon Dan Howe
Fund Manager Head of Investment Trusts
Janus Henderson Investors Janus Henderson Investors
Telephone: 020 7818 4351 Telephone: 020 7818 4458
Harriet Hall
Investment Trust PR Manager
Janus Henderson Investors
Telephone: 020 7818 2919
Neither the contents of the Company's website nor the contents
of any website accessible from hyperlinks on the Company's website
(or any other website) are incorporated into, or form part of, this
announcement.
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END
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