Final Results
Aberforth Split Level Income Trust plc
Audited Annual Results for the period to 30 June 2018
The following is an extract from the Company's Annual Report and Financial Statements for the period from incorporation on 19 April 2017 to 30 June 2018. The Annual Report is expected to be posted to shareholders on or before 31 July 2018. Members of the public may obtain copies from Aberforth Partners LLP, 14 Melville Street, Edinburgh EH3 7NS or from its website: www.aberforth.co.uk. A copy will also shortly be available for inspection at the National Storage Mechanism at: www.morningstar.co.uk/uk/NSM.
FINANCIAL HIGHLIGHTS
| Performance (total return) since inception | ||
| Total Assets | +5.6% | |
| Ordinary Share NAV | +6.2% | |
| Ordinary Share Price | +0.7% | |
| ZDP Share NAV | +2.9% | |
| ZDP Share Price | +6.5% | |
| Dividends Declared | ||
| Second Interim Dividend | 2.6p | |
| Special Dividend | 0.6p | |
| The second interim dividend and special dividend have an ex dividend date of 9 August 2018, record date of 10 August 2018 and pay date of 31 August 2018. | ||
| Key Dates | ||
| Inception | 30 June 2017 | |
| Launch | 3 July 2017 | |
The investment objective of Aberforth Split Level Income Trust plc (ASLIT) is to provide Ordinary Shareholders with a high level of income, with the potential for income and capital growth, and to provide Zero Dividend Preference (ZDP) Shareholders with a pre-determined final capital entitlement of 127.25p on the planned winding up date of 1 July 2024. ASLIT is managed by Aberforth Partners LLP.
CHAIRMAN’S STATEMENT TO SHAREHOLDERS
Introduction
I am pleased to present my report for Aberforth Split Level Income Trust plc (ASLIT or the Company) covering the period from the Company’s inception on 30 June 2017 to 30 June 2018.
ASLIT’s launch was successful despite the uncertain political and economic backdrop at that time. Gross proceeds, before launch costs, were £237.8 million. The Company started its life almost fully invested, with approximately £205.4 million having been subscribed by Shareholders in Aberforth Geared Income Trust plc (AGIT) who elected to “roll over†their investment, and the balance coming from the Company’s placing and offer for subscription. On behalf of the Board, I should once again like to thank all Shareholders for their support.
ASLIT is a split capital investment trust, comprising Ordinary Shares and Zero Dividend Preference (ZDP) Shares issued in a ratio of 4:1. The Company’s investment objective is to provide Ordinary Shareholders with a high level of income, with the potential for income and capital growth, and to provide ZDP Shareholders with a pre-determined final capital entitlement of 127.25p per ZDP Share on the planned winding up date of 1 July 2024. This entitlement equates to a 3.5% gross redemption yield based on the issue price of 100p per ZDP Share.
Capital returns to the Ordinary Shareholders are effectively geared by the capital entitlement due to the ZDP Shareholders. In periods of rising equity prices, this can benefit the net asset value performance attributable to the Ordinary Shares, but the converse also holds true. Ordinary Shareholders are entitled to all net income generated by the portfolio of investments. On a winding up, Ordinary Shareholders are entitled to receive undistributed revenue reserves in priority to the capital entitlements of the ZDP Shareholders. Ordinary Shareholders are also entitled to the net assets of the Company, if any, after all liabilities have been settled and the entitlements of the ZDP Shares have been met.
Performance
ASLIT’s total assets total return, essentially its ungeared portfolio return, for the period since inception on 30 June 2017 to 30 June 2018 was 5.6%. This return is calculated after one-off costs of approximately £6.8 million. These comprise a fall in value of £4.0 million relating to the investment portfolio acquired from AGIT between the date agreed for valuing those assets (23 June 2017) and inception (30 June 2017), together with launch costs of £2.8 million. Thereafter, ASLIT’s total assets return to 30 June 2018, since its launch on the London Stock Exchange on 3 July 2017, has been 8.7%. The period between inception on 30 June 2017 and launch on 3 July 2017 comprised a weekend, when the London Stock Exchange was closed.
When reporting performance, “since inception†returns will reflect the impact of these one-off costs whilst “since launch†will reflect subsequent performance only, i.e. periods after 30 June 2017, excluding the one-off costs.
As noted above, the Ordinary Shares are geared by the entitlements of the ZDP Shares. The Ordinary Share NAV total return from inception to 30 June 2018 was 6.2% which reflects the return attributable to equity Shareholders of 6.80p together with the effect of the reinvestment of the dividend received by them and the impact of one-off costs. Excluding the impact of one off costs (i.e. since launch), the Ordinary Share NAV total return was 10.0%.
The Numis Smaller Companies Index (excluding investment companies) (NSCI (XIC)), which represents the Company’s opportunity base of small UK quoted companies, achieved a total return of 7.6% for the year ended 30 June 2018.
It is important to emphasise that ASLIT’s investment objective reduces the relevance of assessing its performance relative to an equity index. For ASLIT to succeed over its seven-year life, the Company needs to produce capital returns at the total assets level greater than the hurdle rate imposed by the 127.25p final capital entitlement to ZDP Shareholders on 1 July 2024.
The major influences on portfolio performance are analysed in detail in the Managers’ Report.
Earnings and Dividends
The Company invests in a diversified portfolio of small UK quoted companies, which comprised 69 holdings at 30 June 2018. The small company universe has delivered a strong and growing stream of dividend income since the global financial crisis. As explained in the Managers’ Report, this trend has been maintained in the first year of ASLIT’s life and has generated a Revenue Return per Ordinary Share of 5.43p for the period from inception to 30 June 2018.
The Company’s policy is to distribute a significant proportion of its net revenue in the form of dividends to Ordinary Shareholders.
The Board has declared a second interim dividend of 2.6p per Ordinary Share for the period ended 30 June 2018. Together with the first interim dividend of 1.4p paid on 6 March 2018, the total underlying dividend with respect to the period is 4.0p per Ordinary Share. This level of underlying dividend is in line with the Board’s intention at launch, which was to pay total dividends of not less than 4.0p per Ordinary Share in respect of the period from inception to 30 June 2018.
In addition, the Company has declared a special dividend of 0.6p per Ordinary Share. This reflects strong income performance, not all of which may be expected to recur, and the requirement to retain no more than 15% of total income (for tax purposes) in order to retain the benefits of investment trust status.
After accounting for the second interim dividend and the special dividend, retained revenue reserves were approximately 0.8p per Ordinary Share at 30 June 2018. At this stage in the Company’s planned life, the Board believes that this is a prudent level of retention given the continuing volatility and uncertainties surrounding the UK economy generally. The ability to retain revenue reserves is one of the main structural advantages of investment trusts when compared with open ended funds (e.g. unit trusts).
The second interim dividend of 2.6p per Ordinary Share and the special dividend of 0.6p per Ordinary Share will be paid on 31 August 2018 to Ordinary Shareholders on the register on 10 August 2018. The ex dividend date for the second interim dividend and the special dividend is 9 August 2018.
Your Company operates a Dividend Reinvestment Plan. Details of the plan, including the Form of Election, are available from Aberforth Partners LLP or on their website, www.aberforth.co.uk.
Annual General Meeting
The first AGM of the Company will be held on 23 October 2018 at 11.00 a.m. at 14 Melville Street, Edinburgh EH3 7NS. Details of the resolutions to be considered by Shareholders are set out in the Notice of the Meeting. Among the resolutions are those for the election of all Directors in accordance with the terms of the Articles and the AIC Corporate Governance Code.
Outlook
The Company has enjoyed an encouraging start to its life. However, I would caution investors against extrapolating the level of absolute returns from what has been a relatively short period since launch.
At a global level, the spectre of trade tariffs and the continued unwinding of the exceptional monetary stimulus in place since the global financial crisis will surely challenge companies of all sizes and nationalities. Closer to home, the uncertain political and economic consequences of the UK’s exit from the EU is an even more obvious reason to expect choppy waters for UK companies in the short and medium term. Furthermore, the portfolio’s fortunes will be influenced by the Managers’ commitment to the value investment style. There can be periods when the value investment style is out of favour although the value approach within small UK quoted companies has resulted in superior returns to those of the NSCI (XIC) over the long term.
As the Managers’ Report describes, the portfolio seeks to be invested in good businesses where the cost of each investment is considered to already discount some or all of the risks described above, leaving significant scope for an uplift in value. Therefore, your Board considers that the Company is well positioned to meet its investment objectives despite the inevitable market challenges it is likely to encounter along the way.
Jonathan Cartwright
Chairman
26 July 2018
jonathan.cartwright@aberforth.co.uk
MANAGERS’ REPORT
Introduction
Equity returns in ASLIT’s first year were supportive of the company’s investment objective and capital structure. Large companies, as gauged by the FTSE All-Share, generated a total return of 9.0%. The return from small companies, defined by the NSCI (XIC), was 7.6%. From launch on 3 July 2017, ASLIT’s total assets total return, which captures its ungeared portfolio performance, was 8.7%.
These twelve month returns mask a favourable stockmarket environment in the first six months of the financial year, as reflationary conditions gave rise to a period of synchronised growth around the world, but a more challenging period in the second half. The lacklustre share price performance of UK companies, both large and small, in the opening months of 2018 was influenced by heightened concerns about macro economic and geopolitical risks. In this Donald Trump has played a central role, with his transactional approach to foreign relations in which confusion and unpredictability may indeed be by design. His threatened withdrawal from the Iranian nuclear deal has contributed to a higher oil price, which in itself acts as a drag on economic activity around the globe. Moreover, his trade initiatives threaten to exacerbate the protectionist instincts of politicians in other countries to the detriment of economic activity around the world.
Donald Trump’s domestic strategy, based on fiscal stimulus, has succeeded in supporting economic growth but brings further inflationary pressure and concern about the pace at which interest rates need to rise. The ten year US government bond has responded, with the yield rising to 3% for the first time since 2013. This is a significant move for arguably the world’s most important financial instrument, which is the basis for the valuation of other assets around the world. Among these are equities and the specific implications for the value investment style are described later in this report.
To the extent that the higher ten year US yield reflects higher nominal economic growth, it is to be welcomed. However, the message is complicated by an accompanying increase in shorter term government bond yields with the effect that the yield curve has flattened. Historically, an inverted yield curve – when shorter term yields exceed longer term yields – has been a useful indicator of recession. While inversion has not come to pass, the risk inevitably tempers the enthusiasm that might otherwise accompany a return to 3% yields and a tentative normalisation of monetary conditions.
Meanwhile, in Europe, there are indications that 2017’s robust recovery in economic activity has lost momentum, with various indicators suggesting that while activity continues to improve it is doing so at a more modest rate. This comes against the backdrop of renewed concern about the politics of the euro zone. Angela Merkel is confronted by domestic concerns about immigration and by Emmanuel Macron’s integrationist agenda, while Italy’s general election in March was followed by the eventual assumption of power by populist parties who retain a sceptical stance on the European Union.
Turning to the UK, progress with the exit negotiations remains frustratingly slow: fundamental details about relations with the EU after March 2019 are yet to be settled. Consequently, the economy remains beset by uncertainty and gloom about UK equities is pervasive, typified by a recent survey by Bank of America Merrill Lynch suggesting that the asset class is the least popular among fund managers around the globe. Within the UK market, the closer one gets to companies exposed to the domestic economy, and thus further away from businesses whose overseas profits have been boosted by sterling weakness, the worse sentiment becomes. To an extent this is understandable: consumer behaviour continues to be hampered by wages that are struggling to grow in real terms. However, such is the negativity that many companies are being written off as “Brexit victimsâ€, when deeper scrutiny reveals a more nuanced picture. For those with a contrarian inclination, value among businesses reliant on the domestic economy continues to emerge. The Managers, while cognisant of the risk of a badly handled exit from the EU, have taken advantage of this situation by redirecting capital from overseas facing businesses to domestics as bottom-up opportunities emerge, a process described in the following section.
Investment Performance
To recap, ASLIT’s total assets total return in the period since launch to 30 June 2018 was 8.7%. The opportunity base of the NSCI (XIC) generated a total return of 7.6%. The following paragraphs describe and explain the important influences on ASLIT’s performance.
Style
The Managers have consistently followed a value investment philosophy. The performance of the portfolios that they manage is therefore influenced by the stockmarket’s style cycles. Most of the period since the financial crisis has been characterised by headwinds for the value style. This was the case in 2017, despite a good year of economic progress, to the extent that it was the style’s ninth worst year since 1955. The first two months of 2018 followed a similar pattern, but, as ten year US government bond yields rose, the value style picked up and was a gentle following wind for ASLIT’s portfolio over the second half of its financial year. It is tempting to compare this recent episode with the events of 2013, when ten year bond yields in the US last reached 3% and the value style performed strongly. Experience would thus appear to back up the theory of a relationship between the cost of money and investment style.
There are two aspects to the theory. First, today’s population of value stocks is biased to companies sensitive to the economic cycle: a pick-up in economic activity, signalled by higher bond yields, thus ought to favour the value style. Second, higher bond yields imply the use of higher discount rates in valuing financial assets. Longer duration assets – i.e. those whose cash flows are weighted to more distant periods – are more affected to changes in discount rates. In stockmarket terms, growth stocks may be thought of as long duration equities, while value stocks are relative beneficiaries of a return to a normal cost of money.
Size
The portfolio is biased towards the NSCI (XIC)’s “smaller small†constituents: companies with market capitalisations of more than £750m account for 58% of the NSCI (XIC) but for just 28% of the portfolio. This is due to the lower ratings that persist for such companies and the premium that investors at large are still willing to pay for greater size and liquidity: at 30 June 2018, NSCI (XIC) companies with market capitalisations above £750m are on average 47% more expensive, using 2018 EV/EBITA ratios, than those of £100m or less. In the twelve months to 30 June 2018, the larger stocks within the NSCI (XIC) – specifically, those also in the FTSE 250 – under-performed the smaller stocks, which implies that the size effect had a beneficial effect on portfolio returns.
Sector
At the sector level, the main issue since the EU referendum and the subsequent devaluation of sterling has been the contrast in fortunes between those sectors exposed to the domestic economy and those earning their profits outside the UK. From the end of May 2016 to the end of June 2017, the latter out-performed the former by 19% in total return terms, and the gap widened by a further 18% in ASLIT’s financial year to 30 June 2018. All else being equal, this would have represented a drag on the performance of the portfolio, which has a relatively high exposure to domestic companies: at 30 June 2018, 65% of the aggregate sales of the portfolio’s holdings were in the UK’s domestic economy, compared with 62% for the NSCI (XIC). While acknowledging Brexit’s uncertainties and the more challenging trading conditions presently confronting domestically oriented companies, the Managers are attracted by the overly negative sentiment presently afflicting the stockmarket valuations of many such businesses. Contrarianism and opportunism of this sort are part of the Managers’ value investment philosophy, though it is important to emphasise that the positioning is not driven by a top-down view; rather it is the result of decisions about the prospects and valuations of individual companies.
Results
Of the companies that the Managers follow closely within the NSCI (XIC), many have December year ends and report results in the first calendar quarter. This year, with those involved in the mining and oil industries excluded, there were 124 such businesses. The aggregated sales and profits of the 124 rose by 9% and 2%. It was therefore a year of progress, albeit one with a squeeze on margins, particularly for those companies paying more in sterling terms for goods and services sourced from outside the UK. While domestic facing businesses experienced greater pressure on profits, it is noteworthy that most of the domestics within the analysis were still able to grow their profits.
Investment by the 124 companies was encouraging: the ratio of aggregated capital expenditure to depreciation was 1.4x. For several years now, the ratio has been well above 1x, which suggests that small and medium sized companies have been investing for future growth. This bodes well and paints a different picture from that of the overall UK economy, which is inevitably influenced by the actions of large companies. The healthy rate of investment by small companies comes alongside evidence that boards of directors are willing to deploy the balance sheet strength that was built up in the years following the financial crisis. This is consistent with a broader recovery in confidence, which is also manifest in growing dividends and gives reason for optimism about an economy that seldom seems short of bad news.
Corporate activity
The last calendar year was relatively quiet in terms of M&A activity within the NSCI (XIC). This was surprising since valuations for small UK quoted companies were low and sterling’s decline following the EU referendum rendered UK assets in general more affordable to overseas buyers. That reasoning has seen some vindication so far in 2018, with six deals announced up to the end of June, of which ASLIT owned two. The renewed enthusiasm for British businesses on the part of other corporates and private equity contrasts sharply with the Bank of America Merrill Lynch survey noted previously. Additionally, the incidence of shareholder activism within the NSCI (XIC) is notably higher so far in 2018. While the Managers choose to engage with company boards directly and discreetly, the proclamations of the public activists draw attention to opportunities within the small cap universe.
Income
The table below categorises the portfolio’s holdings depending on each company’s most recent dividend action. With numerous dividend increases and few cuts, the first twelve months of ASLIT’s life have been supportive of its income account. This is a continuation of the strong growth trend that has been a feature the small company universe since the end of the financial crisis. The “Other†category contains companies that have returned to the dividend register or that have paid dividends for the first time and that therefore do not have a meaningful comparative payment in the previous year.
| Down | No change | Increase | Other |
| 3 | 21 | 42 | 3 |
Perhaps the most worrisome aspect about small company dividends at present is that the growth has been so strong for so long. At some point, it is probable that something will happen to bring the rate of progress back closer to the long term average of 2.7% per annum in inflation adjusted terms. However, such a setback would not appear imminent: dividend cover for the portfolio as a whole of 2.0x gives comfort and, while trading is difficult for some, a year of profit growth for the majority of companies in the NSCI (XIC) looks likely.
Turnover
Portfolio turnover over the twelve months to 30 June 2018 was 19%. The rate of turnover can be influenced by situations in which ASLIT is required to sell, notably when one of its holdings is subject to a takeover approach. Turnover for other portfolios overseen by the Managers has averaged over 30% over the long term. ASLIT’s relatively subdued rate highlights a correlation between investment style and portfolio activity. If the broader stockmarket shows little appetite for the value stocks held by the portfolio, there is no incentive for the Managers to sell these stocks and seek to redeploy the proceeds in fresher opportunities with greater upside. The stockmarket’s enthusiasm for growth stocks for much of the past twelve months thus contributes to the relatively low rate of turnover.
Active share
Active share is a measure of how different a portfolio is from an index. It is calculated as half of the sum of the absolute differences between each stock’s weighting in an index and its weighting in the portfolio. The upper limit to the ratio is 100% and the higher the ratio, the greater the chance that the portfolio will perform differently from the index, for better or worse. The Managers consider active share a useful discipline to ensure that portfolios do not come to resemble too closely the NSCI (XIC). They target a ratio of at least 70%. At 30 June 2018, ASLIT’s active share was 78%.
Valuations
The table below contains historical PE and yield data for the portfolio and the NSCI (XIC) at 30 June 2018 and, for comparison, at 31 December 2017. On both measures, the portfolio is cheaper than the opportunity base, consistent with the Managers’ value investment style. The major development in PE terms within the UK stockmarket has come from large companies, with the FTSE All-Share’s historical PE, according to the London Business School, dropping from 21.6x at 31 December 2017 to 13.0x at 30 June 2018. A fall was to be expected as large companies reported their 2017 results, which benefited from higher commodity prices and the boost to overseas profits from sterling weakness. However, there was an additional factor at work: through its purchase of Reynolds, British American Tobacco earned a one-off profit that brought its historical PE down to 2x reported earnings. Given the size of the company, this distorts the PE of the FTSE All-Share, which will persist for a year. With British American Tobacco excluded, the large cap PE would be just under 17x, which is a more representative gauge of large company valuation. This would represent a premium of 14% over the small cap PE, higher than the average since 1990 of 10%.
| Portfolio Characteristics | 30 June 2018 | 31 December 2017 | ||
| ASLIT | NSCI (XIC) | ASLIT | NSCI (XIC) | |
| Number of companies | 69 | 344 | 72 | 350 |
| Weighted average market capitalisation | £655m | £889m | £703m | £878m |
| Price earnings ratio or PE (historic) | 11.3x | 13.9x | 12.2x | 14.3x |
| Dividend yield (historic) | 4.4% | 2.9% | 4.0% | 2.8% |
| Dividend cover | 2.0x | 2.5x | 2.0x | 2.5x |
The table below focuses on the Managers’ favoured valuation metric: the ratio of enterprise value to earnings before interest, tax and amortisation. EV/EBITA is shown for the portfolio, for the Tracked Universe – a set of 280 stocks that are followed closely by the Managers – and for certain subsets of the Tracked Universe. The analysis confirms the valuation advantage enjoyed by the portfolio in relation to the Tracked Universe and to the constituency of growth stocks in particular. The table also compares the valuations of all the Tracked Universe’s domestic and overseas companies, an approach that excludes the resources sectors and those businesses with no particular geographical skew. This highlights the valuation gap between domestic and overseas companies, with the latter on a 17% premium to the former for 2018, measured as a multiple of profits that have themselves, in many cases, never been higher. In contrast, the domestics are valued on lower multiples of profits that, in several instances, have already declined meaningfully.
| EV/EBITA | 2017 | 2018 | 2019 |
| ASLIT | 11.0x | 10.6x | 9.5x |
| Tracked universe (280 stocks) | 13.9x | 13.0x | 11.6x |
| - 43 growth stocks | 22.4x | 18.7x | 16.3x |
| - 237 other stocks | 12.7x | 12.2x | 11.0x |
| - 55 overseas stocks | 15.4x | 14.9x | 13.1x |
| - 141 domestic stocks | 13.3x | 12.7x | 11.5x |
Conclusion & outlook
It is now nine years since the last recession, a period in which total returns from the FTSE All-Share and the NSCI (XIC) have been 166% and 274% respectively. Given that length of time and the strength of those returns, a degree of nervousness about a less rewarding period is understandable. Early in 2018, the markets appeared to have found good reason for concern as monetary tightening in the US combined with rising political risk around the world to cloud the outlook. And, of course, the situation in the UK is complicated by the possibility of a Brexit settlement that proves hostile to business.
In the event, the elevated volatility of the quarter to 31 March 2018 proved transient and many indices ended ASLIT’s financial year at or close to historical highs. However, there is a different story in the bond markets, with the US ten year yield still around 3%. This would imply better prospects for economic activity in nominal terms but it remains to be seen whether the world economy can endure such a repricing of money. The experience of 2013 does not bode well, but today’s growth is more balanced among the major economies and inflationary pressures are more difficult to ignore, with employment markets tightening and populism encouraging looser fiscal policies. At the very least, 3% bond yields give financial markets pause for thought. Will the investment strategies and styles that have prospered in a decade of easy money prove so successful as circumstances change?
As these big picture issues play out and have their inevitable influence on ASLIT’s performance, it is important not to lose sight of the progress being made by the substantial majority of businesses within the portfolio and the NSCI (XIC). Notwithstanding the continuing negotiations with the EU, another year of higher sales and profits looks likely. A healthy level of investment and above average dividend growth suggest confidence on the part of company boards. However, in the context of broader equity markets, valuations of small UK quoted companies remain low, especially among the “smaller small†companies and domestic businesses to which the Managers are attracted through their value investment philosophy. This combination of factors should be supportive of future returns from ASLIT’s portfolio.
Aberforth Partners LLP
Managers
26 July 2018
HURDLE RATES1
| Ordinary Shares Hurdle Rates to return |
ZDP Shares Hurdle rates to return |
||||
| 100p | Share Price | Zero Value | 127.25p | Zero Value | |
| At 30 June 2018 | 1.2% | 1.1% | (20.0%) | (20.0%) | (64.0%) |
| Inception | 1.5% | n/a | (17.0%) | (17.0%) | (57.2%) |
REDEMPTION YIELDS2 AS AT 30 JUNE 2018 (ORDINARY SHARES)
| Ordinary Share Redemption Yields Dividend Growth (per annum) |
|||||
| Capital Growth (per annum) | 0.0% | +2.5% | +5.0% | +7.5% | Terminal NAV3 |
| 0% | 3.2% | 3.6% | 4.0% | 4.4% | 90.5p |
| +2.5% | 6.1% | 6.5% | 6.8% | 7.2% | 110.1p |
| +5.0% | 9.0% | 9.4% | 9.7% | 10.0% | 132.3p |
| +7.5% | 11.9% | 12.2% | 12.5% | 12.8% | 157.3p |
1 The rate of capital growth per annum in the Company’s investment portfolio to return a stated amount per Share at the planned winding up rate.
2 The annualised rate at which projected future income and capital cash flows (based on assumed future capital/dividend growth rates) is discounted to produce an amount equal to the share price at the date of calculation.
3 The projected NAV per Ordinary Share at the planned winding up date at a stated rate of capital growth in the Company’s investment portfolio after taking into account the final capital entitlement of the ZDP Shares, future estimated costs charged to capital and estimated winding up costs.
The valuation statistics in the tables above are projected, illustrative and do not represent profit forecasts. There is no guarantee these returns will be achieved.
DIRECTORS’ RESPONSIBILITY STATEMENT
The Directors who were in office at the date of approving these financial statements confirm to the best of their knowledge that:
(a) the financial statements, which have been prepared in accordance with applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit of the Company;
(b) the Strategic Report includes a fair review of the development and performance of the business and the financial position of the Company, together with a description of the principal risks and uncertainties that it faces; and
(c) the Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for Shareholders to assess the Company’s performance, business model and strategy.
On behalf of the Board
Jonathan Cartwright
Chairman
26 July 2018
PRINCIPAL RISKS AND RISK MANAGEMENT
The Board has established an on-going process for identifying, evaluating and managing the principal risks faced by the Company. This process was in operation during the period and continues in place up to the date of this report.
Investment in small companies is generally perceived to carry more risk than investment in large companies. While this is reasonable when comparing individual companies, it is much less so when comparing the risks inherent in diversified portfolios of small and large companies. In addition, the Company has a simple capital structure and outsources all the main operational activities to recognised, well-established firms.
The principal risks faced by the Company, together with the approach taken by the Board towards them, have been summarised below.
(i) Investment policy/performance risk – The investment portfolio is exposed to share price movements owing to the nature of the Company’s investment policy and strategy. The performance of the investment portfolio will be influenced by market related risks including market price and liquidity. The Board’s aim is to achieve the investment objective by ensuring the investment portfolio is managed in accordance with the policy and strategy. The Board has outsourced portfolio management to experienced Managers with a clearly defined investment philosophy and investment process. The Board receives regular and detailed reports on investment performance. Senior representatives of Aberforth Partners attend each Board meeting. Peer group performance is also regularly monitored by the Board.
(ii) Structural conflicts of interest – The different rights and expectations of the holders of Ordinary Shares and the holders of ZDP Shares may give rise to conflicts of interest between them. While the Company’s investment objective and policy seeks to strike a balance between the interest of both classes of Shareholder, there can be no guarantee that such a balance will be achieved and maintained during the life of the Company.
(iii) Significant fall in investment income – A significant fall in investment income could lead to the inability to provide a high level of income and income growth. The Board receives regular and detailed reports from the Managers on income performance together with income forecasts.
(iv) Loss of key investment personnel – The Board believes that a risk exists in the loss of key investment personnel at the Managers. The Board recognises the collegiate approach employed by the Managers mitigates this risk. Board members are in regular contact with the partners and staff of the Managers and monitor personal changes.
(v) Regulatory risk – Breach of regulatory rules could lead to suspension of the Company’s share price listings, financial penalties or a qualified audit report. Breach of Section 1158 of the Corporation Tax Act 2010 could lead to the Company losing investment trust status and, as a consequence, any capital gains would then be subject to capital gains tax. The Board reviews regular reports from the Secretaries to monitor compliance with regulations.
The Income Statement, Reconciliation of Movements in Shareholders’ Funds, Balance Sheet and Cash Flow Statement are set out below:-
INCOME STATEMENT
Period from 19 April 2017 to 30 June 2018
(audited)
| Period to | ||||||||
| 30 June 2018 | ||||||||
| Revenue | Capital | Total | ||||||
| £000 | £000 | £000 | ||||||
| Net gains on investments | - | 6,430 | 6,430 | |||||
| Investment income | 11,238 | 751 | 11,989 | |||||
| Other income | - | - | - | |||||
| Investment management fee | (539) | (1,258) | (1,797) | |||||
| Portfolio transaction costs1 | - | (1,594) | (1,594) | |||||
| Other expenses | (356) | - | (356) | |||||
| -------- | -------- | -------- | ||||||
| Net return before finance costs and tax | 10,343 | 4,329 | 14,672 | |||||
| Finance costs: | ||||||||
| Appropriation to ZDP Shares | - | (1,704) | (1,704) | |||||
| Interest expense and overdraft fee | (6) | (15) | (21) | |||||
| -------- | -------- | -------- | ||||||
| Return on ordinary activities before tax | 10,337 | 2,610 | 12,947 | |||||
| Tax on ordinary activities | - | - | - | |||||
| -------- | -------- | -------- | ||||||
| Return attributable to Equity Shareholders | 10,337 | 2,610 | 12,947 | |||||
| ====== | ======= | ======= | ||||||
| Returns per Ordinary Share | 5.43p | 1.37p | 6.80p | |||||
1 Includes £1,133,000 in respect of stamp duty incurred on the transfer of securities from Aberforth Geared Income Trust plc to ASLIT.
The Board declared on 26 July 2018 a second interim dividend of 2.6p per Ordinary Share and a special dividend of 0.6p per Ordinary Share. The Board also declared on 24 January 2018 an interim dividend of 1.4p per Ordinary Share.
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 in the year. A Statement of Comprehensive Income is not required as all gains and losses of the Company have been reflected in the above statement.
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS’ FUNDS
Period from 19 April 2017 to 30 June 2018
(audited)
| Share | Share | Special | Capital | Revenue | ||
| capital | premium | reserve | reserve | reserve | Total | |
| £000 | £000 | £000 | £000 | £000 | £000 | |
| Balance as at 19 April 2017 | - | - | - | - | - | - |
| Return on ordinary activities after tax | - | - | - | 2,610 | 10,337 | 12,947 |
| Equity dividends paid | - | - | - | - | (2,664) | (2,664) |
| Issue of Ordinary Shares | 1,902 | 188,348 | - | - | - | 190,250 |
| Ordinary Share issue costs | - | (1,275) | - | - | - | (1,275) |
| Share premium cancellation | - | (187,035) | 187,035 | - | - | - |
| Cost of share premium cancellation | - | (38) | - | - | - | (38) |
| Issue of redeemable shares | 50 | - | - | - | - | 50 |
| Redemption of redeemable shares | (50) | - | - | - | - | (50) |
| -------- | -------- | -------- | -------- | -------- | -------- | |
| Balance as at 30 June 2018 | 1,902 | - | 187,035 | 2,610 | 7,673 | 199,220 |
| ====== | ====== | ====== | ====== | ====== | ====== |
BALANCE SHEET
As at 30 June 2018
(audited)
| 30 June 2018 | ||
| £000 | ||
| Fixed assets | ||
| Investments at fair value through profit or loss | 242,967 | |
| ---------- | ||
| Current assets | ||
| Debtors | 1,387 | |
| Cash at bank | 3,876 | |
| ---------- | ||
| 5,263 | ||
| Creditors (amounts falling due within one year) | (56) | |
| ---------- | ||
| Net current assets | 5,207 | |
| ---------- | ||
| Total Assets less Current Liabilities | 248,174 | |
| Creditors (amounts falling due after more than one year) | ||
| ZDP Shares | (48,954) | |
| ---------- | ||
| TOTAL NET ASSETS | 199,220 | |
| ======= | ||
| Capital and Reserves: Equity Interests | ||
| Share Capital: | ||
| Ordinary Shares | 1,902 | |
| Reserves: | ||
| Special reserve | 187,035 | |
| Capital reserve | 2,610 | |
| Revenue reserve | 7,673 | |
| ---------- | ||
| TOTAL SHAREHOLDERS’ FUNDS | 199,220 | |
| ======= | ||
| Net Asset Value per Ordinary Share | 104.71p | |
| Net Asset Value per ZDP Share | 102.93p |
CASH FLOW STATEMENT
For the period ended 30 June 2018
(audited)
| Period ended 30 June 2018 |
|||||
| £000 | |||||
| Operating activities | |||||
| Net revenue before finance costs and tax | 10,343 | ||||
| Tax withheld from income | (112) | ||||
| Receipt of special dividends taken to capital | 751 | ||||
| Investment management fee charged to capital | (1,258) | ||||
| Increase in debtors | (1,275) | ||||
| Increase in creditors | 56 | ||||
| -------- | |||||
| Cash inflow from operating activities | 8,505 | ||||
| ===== | |||||
| Investing activities | |||||
| Purchases of investments | (87,766) | ||||
| Sales of investments | 50,027 | ||||
| -------- | |||||
| Cash outflow from investing activities | (37,739) | ||||
| ===== | |||||
| Financing activities | |||||
| Proceeds from issue of Ordinary Shares | 22,904 | ||||
| Issue costs of Ordinary Shares | (1,275) | ||||
| Proceeds from issue of ZDP Shares | 14,516 | ||||
| Issue costs of ZDP Shares | (312) | ||||
| Share premium cancellation costs paid | (38) | ||||
| Equity dividends paid | (2,664) | ||||
| Interest and fees paid | (21) | ||||
| -------- | |||||
| Cash inflow from financing activities | 33,110 | ||||
| ===== | |||||
| Change in cash during the period | 3,876 | ||||
| ===== | |||||
| Cash at the start of the period | - | ||||
| Cash at the end of the period | 3,876 | ||||
| ====== | |||||
SUMMARY NOTES TO THE FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Company has presented its financial statements under Financial Reporting Standard 102 (FRS 102) and the AIC’s Statement of Recommended Practice “Financial Statements of Investment Trust Companies and Venture Capital Trusts†(SORP) issued in 2014, updated in February 2018. The principal accounting policies have been consistently applied throughout the period. The financial statements have been prepared on a going concern basis under the historical cost convention, modified to include the revaluation of the Company’s investments as permitted by FRS 102. The functional and presentation currency is pounds sterling, which is the currency of the environment in which the Company operates.
2. DIVIDENDS PAID
| Amounts recognised as distributions to equity holders in the period. | Period ended 30 June 2018 £000 |
|
| In respect of the period ended 30 June 2018: | ||
| First interim dividend of 1.4p (paid on 6 March 2018) | 2,664 | |
| ------------ | ||
| 2,664 | ||
| ------------ |
The second interim dividend of 2.6p and the special dividend of 0.6p, both in respect of the period ended 30 June 2018, are payable on 31 August 2018 and have not been recognised in the financial statements as at 30 June 2018.
3. PORTFOLIO TRANSACTION COSTS
| Period ended 30 June 2018 £000 |
||
| Analysis of total purchases | ||
| Purchase consideration before expenses | 286,392 | |
| ------------ | ||
| Commissions | 122 | |
| Taxes1 | 1,388 | |
| ------------ | ||
| Total purchase expenses | 1,510 | |
| ------------ | ||
| Total purchase consideration | 287,902 | |
| ------------ | ||
| Analysis of total sales | ||
| Sales consideration before expenses | 50,111 | |
| Commissions | (84) | |
| ------------ | ||
| Total sale proceeds net of expenses | 50,027 | |
| ------------ | ||
| Total transaction costs | 1,594 | |
| ------------ |
1 Includes £1,133,000 in respect of stamp duty incurred on the transfer of securities from Aberforth Geared Income Trust plc.
4. INVESTMENTS HELD AT FAIR VALUE THROUGH PROFIT OR LOSS
| Period ended 30 June 2018 £000 |
||
| Investments at fair value through profit or loss | ||
| Opening fair value | - | |
| Opening fair value adjustment | - | |
| ------------ | ||
| Opening book cost | - | |
| Purchases at cost1 | 286,392 | |
| Sale proceeds | (50,111) | |
| Realised gains on sales | 9,265 | |
| ------------ | ||
| Closing book cost | 245,546 | |
| Closing fair value adjustment | (2,579) | |
| ------------ | ||
| Closing fair value | 242,967 | |
| ------------ |
1 Includes £200.1m in respect of an “in specie†transfer of securities from Aberforth Geared Income Trust plc.
| Period ended 30 June 2018 £000 |
||
| Gains on Investments: | ||
| Net realised gains on sales | 9,265 | |
| Loss on sales in period from 23 June 2017 to 29 June 2017 | (256) | |
| Movement in fair value adjustment | (2,579) | |
| ------------ | ||
| Net gains on investments | 6,430 | |
| ------------ |
In accordance with FRS 102 fair value measurements have been classified using the fair value hierarchy:
Level 1 - using unadjusted quoted prices for identical instruments in an active market;
Level 2 - using inputs, other than quoted prices included within Level 1, that are directly or indirectly observable (based on market data); and
Level 3 - using inputs that are unobservable (for which market data is unavailable).
All investments are held at fair value through profit or loss, have been classified as Level 1 and are traded on a recognised stock exchange.
5. RETURNS PER SHARE
| Period ended 30 June 2018 |
||
| Net return for the period | £12,947,000 | |
| Weighted average Ordinary Shares in issue during the period | 190,250,000 | |
| Return per Ordinary Share | 6.80p | |
| Appropriation to ZDP Shares for the period | £1,704,000 | |
| Weighted average number of shares in issue during the period | 47,562,500 | |
| Return per ZDP Share | 3.58p |
There are no dilutive or potentially dilutive shares in issue.
6. SHARE CAPITAL
Upon incorporation on 19 April 2017, the Company issued and allotted 100 Ordinary Shares at £1 each. On 26 April 2017, 50,000 Redeemable Preference Shares were issued and allotted to enable the Company to obtain a trading certificate.
On 30 June 2017, the Company entered into a Transfer Agreement in connection with the scheme of reconstruction and winding up of Aberforth Geared Income Trust plc (AGIT). Under this Transfer Agreement, a proportion of the assets of AGIT were transferred to ASLIT as consideration for the issue of Ordinary and ZDP Shares to shareholders of AGIT who elected to roll over their investment in AGIT to ASLIT. Another portion of the AGIT assets were transferred to ASLIT for a cash payment funded from the proceeds of the Placing and Offer for Subscription underwritten by the Company.
On 30 June 2017, 172,126,759 Ordinary Shares and 33,268,212 ZDP Shares were allotted to the shareholders of AGIT who elected to roll over their investment in AGIT to ASLIT at the issue price of 100p each. Assets amounting to £205.4 million were transferred from AGIT in consideration for this allotment, including securities valued at £200.1 million.
In addition, 18,123,141 Ordinary Shares and 14,294,288 ZDP Shares were allotted to satisfy the demand of the Placing and Offer for Subscription at the issue price of 100p each. In accordance with the Transfer Agreement, the proceeds of these issues were used to acquire the remaining AGIT portfolio including securities valued at £29.5 million.
These allotments resulted in the Company having a total of 190,250,000 Ordinary Shares and 47,562,500 ZDP Shares, which were admitted to listing on the Official list and to trading on the London Stock Exchange on 3 July 2017. In addition, the 50,000 Redeemable Preference Shares were redeemed in full on 3 July 2017.
In November 2017, the Court of Session confirmed the cancellation of the entire amount standing to the credit of the Share Premium account and the creation of a Special Reserve, the balance of which may be treated as distributable profits for all purposes as permitted by the Articles of the Company. The Special Reserve will be available to be used for any buy-back of Ordinary Shares and ZDP Shares as permitted by the Companies Act 2006 and in accordance with the Company’s Articles of Association.
Costs of £1,275,000 associated with the issue of the Ordinary Shares have been charged to the Share Premium account. Costs of £312,000 associated with the issue of the ZDP Shares will be amortised to capital as a finance cost to the Income Statement over the planned life of the ZDP Shares. Stamp duty amounting to £1,133,000 was also paid in relation to the transfer of securities from AGIT to ASLIT under the Transfer Agreement, as detailed above. This cost is included in portfolio transaction costs as disclosed in the Income Statement.
7. NET ASSET VALUES
The Net Assets and the Net Asset Value per share attributable to the Ordinary Shares and ZDP Shares at the period end are as follows:
| Ordinary Shares |
ZDP Shares |
Total |
|
| Net assets attributable | £199,220,000 | £48,954,000 | £248,174,000 |
| Number of Shares at the reporting date | 190,250,000 | 47,562,500 | 237,812,500 |
| ------------ | ------------ | ------------ | |
| Net Asset Value per Share | 104.71p | 102.93p | 104.36 |
| Effect of reinvestment of first interim dividend of 1.4p | 1.53p | - | 1.20p |
| ------------ | ------------ | ------------ | |
| Net Asset Value per Share on a total return basis | 106.24p | 102.93p | 105.56p |
| ------------ | ------------ | ------------ | |
| Net Asset Value per Share at inception | 100.00p | 100.00p | 100.00p |
| ------------ | ------------ | ------------ | |
| Total Return performance in the period | 6.2% | 2.9% | 5.6% |
| ------------ | ------------ | ------------ |
8. RELATED PARTY TRANSACTIONS
Under UK GAAP, the Directors have been identified as related parties and their fees and interests have been disclosed in the Directors’ Remuneration Report contained in the Annual Report. During the period no Director or entity controlled by a Director was interested in any contract or other matter requiring disclosure under s412 of the Companies Act 2006.
9. FURTHER INFORMATION
The foregoing do not constitute statutory accounts (as defined in section 434(3) of the Companies Act 2006) of the Company.
Certain statements in this announcement are forward looking statements. By their nature, forward looking statements involve a number of risks, uncertainties or assumptions that could cause actual results or events to differ materially from those expressed or implied by those statements. Forward looking statements regarding past trends or activities should not be taken as representation that such trends or activities will continue in the future. Accordingly, undue reliance should not be placed on forward looking statements.
The Annual Report is expected to be posted to shareholders by 31 July 2018. Members of the public may obtain copies from Aberforth Partners LLP, 14 Melville Street, Edinburgh EH3 7NS or from its website: www.aberforth.co.uk.
CONTACT: Euan Macdonald/Christopher Watt, Aberforth Partners LLP, 0131 220 0733
Aberforth Partners LLP, Secretaries – 26 July 2018
ANNOUNCEMENT ENDS
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