Half-year Report
BLACKROCK SMALLER COMPANIES TRUST plc
Half yearly financial announcement of results in respect of the six months ended 31 August 2016
FINANCIAL HIGHLIGHTS
| Six months ended 31 August 2016 |
Six months ended 31 August 2015 |
Year ended 29 February 2016 |
|
| Performance | |||
| Net asset value per share1,2 | 1,079.28p | 1,039.98p | 992.18p |
| Movement in net asset value per share1,2 | +8.8% | +9.0% | +4.0% |
| Net asset value per share (capital only)1 | 1,064.57p | 1,026.41p | 978.61p |
| Movement in net asset value per share (capital only)1 | +8.8% | +8.9% | +3.8% |
| Movement in Numis Smaller Companies plus AIM (excluding Investment Companies) Index2 | +9.5% | +2.4% | -4.4% |
| Share price | 895.50p | 925.50p | 863.00p |
| Movement in share price | +3.8% | +14.0% | +6.3% |
| Discount3 | 16.3% | 10.1% | 12.2% |
| -------- | -------- | -------- | |
| Revenue return per share | 14.71p | 13.57p | 20.57p |
| Interim dividend per share | 8.00p | 7.00p | 7.00p |
| Final dividend per share | 10.50p | ||
| Change in interim dividend | +14.3% | +27.3% | +27.3 |
| Change in total dividends | +20.7 | ||
| -------- | -------- | -------- | |
| Ongoing charges ratio4 | 0.7% | 0.7% | 0.7% |
| Ongoing charges ratio (including performance fees) | 0.9% | 1.0% | 0.9% |
| Dividend yield | 2.1% | 1.6% | 2.0% |
| Gearing | 6.9% | 5.6% | 6.6% |
| ===== | ===== | ===== | |
| 1. Based on NAV with debenture at par value. 2. Excludes income reinvested. 3. Based on NAV with debt at fair value (see note 5 for details). 4. Annualised ongoing charges ratio calculated as a percentage of average shareholders’ funds and using expenses, excluding finance costs, performance fees and taxation, in accordance with AIC guidelines. Sources: BlackRock and Datastream. |
|||
CHAIRMAN'S STATEMENT
FOR THE SIX MONTHS TO 31 AUGUST 2016
PERFORMANCE
During the six months ended 31 August 2016 the Company’s net asset value (NAV) increased by 8.8%1 to 1079.28p per share, underperforming the benchmark by 0.7%. The Company’s share price increased by 3.8%1 to 895.50p per share over the same period. Performance relative to the benchmark was driven by a mix of stock selection and sector allocation, details of which are given in the Investment Manager’s report.
The Company’s performance was against a backdrop of significant volatility during this period as UK stock and currency markets immediately reacted negatively to the decision by UK voters in June to leave the EU. Various factors subsequently helped restore a level of confidence and bring about a reasonable recovery in the markets for UK smaller company stocks: the Bank of England’s decisions to cut interest rates and provide market liquidity; consumer confidence and GDP growth continuing to be relatively good; and the continued weakness of sterling against the dollar and the euro which has provided support for overseas earners.
The FTSE 100 Index rose by 11.2%1 over the period, the FTSE 250 Index (excluding Investment Companies) rose by 5.6%1 and the FTSE AIM All Share Index by 14.2%1. The Company’s benchmark (the Numis Smaller Companies plus AIM (excluding Investment Companies) Index) rose by 9.5%1. Since the period end, and up until the close of business on 24 October 2016, the Company’s NAV per share increased by 2.3% and the share price increased by 0.1%.
The robust performance of both the NAV and share price over the longer term is illustrated in the table below.
Performance to 31 August 2016 |
3 years change % |
5 years change % |
10 years change % |
| Net asset value per share | 33.7 | 95.1 | 196.4 |
| Share price | 21.3 | 88.1 | 195.5 |
| Benchmark* | 11.4 | 44.7 | 35.6 |
| Net asset value per share (with income reinvested) | 39.9 | 110.2 | 243.3 |
| Share price (with income reinvested) | 27.6 | 104.7 | 251.1 |
| Benchmark* (with income reinvested) | 20.7 | 64.8 | 74.9 |
| * Benchmark – Numis Smaller Companies plus AIM (excluding Investment Companies) Index from 1 September 2007; FTSE Small Cap Index (excluding Investment Companies) prior to that date. | |||
EARNINGS AND DIVIDENDS
The Company’s revenue return per share for the six months ended 31 August 2016 amounted to 14.71p per share compared with 13.57p for the corresponding period in the previous year, an increase of 8.4%. After adjusting for the impact of special dividends received, which amounted to 1.33p per share (2015: 2.10p per share), regular dividend income from portfolio companies increased by 14.6% over the same period.
The Board is pleased to declare an interim dividend of 8.00p per share (2015: 7.00p per share) representing an increase of 14.3% over the previous interim dividend. The interim dividend will be paid on 30 November 2016 to shareholders on the Company’s register on 4 November 2016.
GEARING
The Company has in place a range of borrowing options in order to maximise flexibility and to reduce dependency on short term borrowings. In addition to the £15 million debenture, the Company has a £35 million three year revolving loan facility with Scotia Bank (Ireland) Limited and an uncommitted overdraft facility of £10 million with Bank of New York Mellon.
It is the Board’s intention that gearing will not exceed 15% of the net assets of the Company at the time of the drawdown of the relevant borrowings. Under normal operating conditions it is envisaged that gearing will be within a range of 0%-15% of net assets. Gearing levels and sources of funding are reviewed regularly and the Board continues to believe that moderate gearing is in the long term interests of shareholders; for the period under review, gearing contributed to performance by approximately 0.2%. At the period end, the Company’s gearing was 6.9% of net assets.
DISCOUNT
During the period, the Company’s shares traded at an average discount to NAV (with debt at fair value) of 14.3% and this stood at 16.3% at 31 August 2016. The Company’s shares traded at a discount of 18.1% as at close of business on 24 October 2016.
OUTLOOK
Following the initial reaction to the decision of the UK to leave the EU, markets now face a period of uncertainty around the political and economic policy landscape over the next couple of years as exit negotiations begin. Despite this, we believe that the Company’s portfolio is soundly positioned with a heavy emphasis on holdings in well managed companies with strong balance sheets, and with a significant proportion of portfolio holdings benefitting from global exposure; your Investment Manager estimates that approximately half of the profits of our portfolio companies currently arise outside the UK.
Nicholas Fry
Chairman
25 October 2016
1 All performance figures are in sterling terms without income reinvested.
INVESTMENT MANAGER'S REPORT
FOR THE SIX MONTHS ENDED 31 AUGUST 2016
MARKET REVIEW
The six months to 31 August 2016 has been a very volatile period, heavily influenced by the impact of the UK electorate’s decision to leave the European Union (EU). This was a shock result and markets reacted very negatively once the result was known. However markets have subsequently recovered helped by support from the Bank of England, (which cut interest rates by 0.25% and provided further liquidity), a realisation that the UK will take at least two years to leave the EU, consumer confidence holding up relatively well and GDP growth continuing to be good. News from overseas was less important for UK markets; although the weakness of Sterling against the US Dollar and the Euro benefitted companies with overseas revenues.
PERFORMANCE REVIEW
Against this background, the Company’s net asset value (NAV) per share increased by 8.8% to 1079.28p. This compares to an increase in the benchmark, the Numis Smaller Companies plus AIM (excluding Investment Companies) Index of 9.5% and the FTSE 100 Index of 11.2% (all in sterling terms without income reinvested).
Underperformance relative to the benchmark was driven by a mix of stock selection and sector allocation. We did not own certain large benchmark stocks which have performed well. For example, not owning Mediclinic detracted 0.5% from relative performance (Mediclinic combined with Al Noor Hospitals forming a hospital group which is now a constituent of the FTSE 100 Index). The portfolio was also significantly underweight the mining sector which performed well during the period and detracted 1.4% from relative performance.
Turning to stocks held in the portfolio, the largest negative contributor was Topps Tiles, the UK’s largest specialist tile retailer. The company’s shares were hit hard immediately following the UK referendum vote. The company’s latest trading statement showed that like-for-like sales growth did slow over the summer months.
Many of the Company’s portfolio companies performed well during the period, with Fevertree Drinks, 4imprint Group, Accesso Technology and Hill & Smith contributing positively to relative performance. Fevertree Drinks’ interim results to 30 June 2016 showed revenue growth of 69% (all organic), earnings per share growth of 83% and net cash up to £18 million. We had another good meeting with management who continues to impress. 4imprint Group announced half year results which showed revenues up by 17% (all organic), a 19% increase in earnings per share and net cash of US$20 million. 96% of 4imprint Group’s revenue is generated in the USA. Trading patterns in the first half of 2016 are expected to continue into the second half of the year. Accesso Technology announced in May that it had a strong start to its financial year, winning 18 new contracts and installing their solutions in 51 applications globally. Hill & Smith earnings per share grew by 27% in the first half of 2016. The company is benefitting from a pick-up in infrastructure spending in both the UK and the US. The share price of these four companies rose between 41% and 77% in the half year, all backed up by very strong trading. It should be noted that these companies are very international in their operations and profit generation.
ACTIVITY
The largest investments in new holdings during the period were Joules Group, McCarthy & Stone, 888 Holdings and Ultra Electronics. Joules Group is a UK retailer focussed on supplying good value, colourful country wear. The company completed an IPO during the period and its recently published maiden results were good, as expected. McCarthy & Stone is the UK market leader in the development of owner-occupied retirement accommodation. The company continues to grow well although, it depends on a reasonable second hand homes market to allow its customers to sell in order to buy a McCarthy & Stone home. 888 Holdings provides online gaming solutions including casino, poker and sport. It combines good technology and marketing capability to generate strong revenue and profit growth, and excellent cash generation. Ultra Electronics is increasingly confident of seeing a return to organic sales growth and cash generation, and defence budgets are generally looking better underpinned.
The largest additions to existing holdings were Morgan Sindall, Quartix, St Modwen Properties, Eco Animal Health Group, and Trifast. We have grown more confident that Morgan Sindall can generate higher profits from construction and regeneration activities in future. Quartix continues to increase customer numbers for its telematics solutions in the UK, US and France. St Modwen Properties shares were sold off aggressively and we thought the shares offered excellent medium term value. Eco Animal Health Group continues to see excellent global growth in demand for its Aivlosin product. Trifast designs and manufactures fasteners on a global basis. The company’s attention to customer satisfaction is paramount and this has enabled it to grow despite mixed end markets.
The largest holdings sold during the period were Victrex, Virgin Money and Unite Group. We grew concerned that competitive pressures were building for Victrex. Our conviction in banking shares generally waned, so we decided to sell the holding in Virgin Money. Unite Group is a well-run student property business but we felt the shares were fully valued and the company’s highly regarded CEO is moving to St Modwen Properties. We also reduced our holdings in a number of other companies where our confidence had reduced or where we were looking to reduce exposure to UK earnings.
Our approach to purchases and sales is largely stock specific. However, during the period we also slightly reduced portfolio exposure to the UK and increased our exposure to the US and emerging markets.
PORTFOLIO POSITIONING
Relative to the benchmark index, the portfolio remains most overweight in consumer discretionary stocks, including companies such as JD Sports, Cineworld Group, Headlam Group and Topps Tiles. These are companies which have strong market positions and very capable managements. Should these companies be affected by the impact from the UK leaving the EU at some stage in the future, we would expect them to fare much better than their competitors. The portfolio is also significantly overweight in health care with holdings such as CVS Group, Dechra Pharmaceuticals and Advanced Medical Solutions. Dechra Pharmaceuticals and Advanced Medical Solutions are very international; we have recently held another encouraging meeting with Dechra Pharmaceuticals management following good results. CVS Group is very defensive in that pet owners are unlikely to cut back spending on their pets materially in tougher times. We expect the strong market participants, such as CVS Group, to continue gaining market share. We are increasingly exposed to UK infrastructure spending through holdings such as Marshalls, Morgan Sindall and Costain, a small new addition. We are overweight in technology through companies such as GB Group, Accesso Technology, Gooch & Housego, Quartix and e2v Technologies.
The portfolio is neutrally weighted in industrials; larger holdings include Restore, Avon Rubber, and Ocean Wilsons. Ocean Wilsons manages ports in Brazil, and is part of our emerging markets exposure which also includes City of London Investment Group and a number of mining companies.
The portfolio is underweight in financials, real estate, consumer staples and energy.
The approach has continued to be to run winners but to trim holdings if they exceed 3% of net assets. We start with small positions, typically 0.5% of net assets over the last few years.
OUTLOOK
We estimate that approximately half of the portfolio’s revenues and profits derive from outside the UK. We believe that this global exposure provides important diversification, and that with a focus on well run, high calibre companies, the portfolio is well positioned to face the market uncertainties that lie ahead.
Mike Prentis
BlackRock Investment Management (UK) Limited
25 October 2016
INVESTMENT EXPOSURE
INVESTMENT SIZE AS AT 31 AUGUST 2016
| Number of investments | Market value of investment as a % of portfolio | |
| £0m to £1m | 22 | 2.6 |
| £1m to £2m | 29 | 7.9 |
| £2m to £3m | 42 | 19.3 |
| £3m to £4m | 30 | 19.0 |
| £4m to £5m | 11 | 9.1 |
| £5m to £6m | 10 | 9.7 |
| £6m to £7m | 6 | 6.9 |
| £7m to £8m | 6 | 8.2 |
| £8m to £9m | 2 | 3.1 |
| £9m to £10m | 2 | 3.4 |
| £10m to £11m | 2 | 3.7 |
| £11m to £12m | 1 | 2.0 |
| £13m to £14m | 1 | 2.4 |
| £14m to £15m | 1 | 2.7 |
Source: BlackRock.
MARKET CAPITALISATION OF PORTFOLIO COMPANIES AS AT 31 AUGUST 2016
| Market capitalisation of investment as a % of portfolio |
|
| £0m to £100m | 6 |
| £100m to £400m | 47 |
| £400m to £1bn | 31 |
| £1bn+ | 16 |
Source: BlackRock.
TWENTY LARGEST INVESTMENTS
AS AT 31 AUGUST 2016
Company |
Market value £’000 |
% of total portfolio |
Business activity |
| 4imprint Group | 14,791 | 2.7 | Supply of promotional merchandise in the US |
| CVS Group | 13,400 | 2.4 | Operation of veterinary surgeries |
| Fevertree Drinks | 11,089 | 2.0 | Development and sale of soft drinks and mixers |
| Dechra Pharmaceuticals | 10,291 | 1.9 | Development and supply of pharmaceutical and other products focused on the veterinary market |
| Hill & Smith | 10,103 | 1.8 | Production of infrastructure products and supply of galvanizing services |
| Advanced Medical Solutions | 9,638 | 1.7 | Development and provision of products for global wound care and wound closure markets |
| Restore | 9,593 | 1.7 | Management of business information in both paper and digital form |
| GB Group | 8,893 | 1.6 | Development and supply of identity verification solutions |
| Savills | 8,172 | 1.5 | Provision of property services |
| Accesso Technology | 7,933 | 1.4 | Development and supply of ticketing and virtual queuing solutions for leisure attractions |
| JD Sports | 7,836 | 1.4 | Retail of sports and leisure footwear and clothing |
| Avon Rubber | 7,813 | 1.4 | Production of safety masks and dairy related products |
| Workspace Group | 7,695 | 1.4 | Supply of flexible workspace to businesses in London |
| Marshalls | 7,347 | 1.3 | Manufacture and sale of concrete and stone paving and related products |
| Next Fifteen Communications | 7,051 | 1.3 | Provision of digital communications services |
| Headlam Group | 6,699 | 1.2 | Distribution of carpets and other floor coverings |
| Gooch & Housego | 6,437 | 1.2 | Design and manufacture of precision optical components, subsystems and instruments used to transmit and measure light |
| Hansteen Holdings | 6,420 | 1.2 | Ownership of industrial property |
| Topps Tiles | 6,209 | 1.1 | Sourcing and retail of ceramic tiles |
| Polar Capital Holdings | 6,073 | 1.1 | Investment management |
| ------------ | -------- | ||
| Twenty largest investments | 173,483 | 31.3 | |
| ------------ | -------- | ||
| Remaining investments | 379,003 | 68.7 | |
| ------------ | -------- | ||
| Total | 552,486 | 100.0 | |
| ======= | ===== |
Details of the full portfolio are available on the Company’s website at blackrock.co.uk/brsc
DISTRIBUTION OF INVESTMENTS
AS AT 31 AUGUST 2016
ANALYSIS OF PORTFOLIO VALUE BY SECTOR
| % of portfolio | |
| Aerospace & Defence | 3.6 |
| Banks | 0.3 |
| Beverages | 2.0 |
| Chemicals | 2.4 |
| Construction & Materials | 6.0 |
| Electronic & Electrical Equipment | 2.3 |
| Financial Services | 5.6 |
| Food & Drug Retailers | 0.2 |
| Food Producers | 0.5 |
| Gas, Water & Multiutilities | 0.2 |
| General Retailers | 7.6 |
| General Industrials | 0.5 |
| Health Care Equipment & Services | 3.4 |
| Household Goods & Home Construction | 5.1 |
| Industrial Engineering | 4.3 |
| Industrial Transportation | 2.8 |
| Leisure Goods | 0.7 |
| Media | 7.3 |
| Mining | 5.7 |
| Nonlife Insurance | 0.5 |
| Oil & Gas Producers | 1.8 |
| Personal Goods | 0.7 |
| Pharmaceuticals & Biotechnology | 4.3 |
| Real Estate Investment & Services | 3.1 |
| Real Estate Investment Trusts | 4.3 |
| Software & Computer Services | 9.8 |
| Support Services | 9.7 |
| Technology Hardware & Equipment | 0.1 |
| Travel & Leisure | 5.2 |
Source: BlackRock.
INTERIM MANAGEMENT REPORT AND RESPONSIBILITY STATEMENT
The Chairman’s Statement and the Investment Manager’s Report give details of the important events which have occurred during the period and their impact on the financial statements.
PRINCIPAL RISKS AND UNCERTAINTIES
The principal risks faced by the Company can be divided into various areas as follows:
- Investment performance risk;
- Market risk;
- Income/dividend risk;
- Legal and compliance risk;
- Operational risk; and
- Financial risk.
The Board reported on the principal risks and uncertainties faced by the Company in the Annual Report and Financial Statements for the year ended 29 February 2016. A detailed explanation can be found in the Strategic Report on pages 14 to 16, and in note 17 on pages 56 to 62 of the Annual Report and Financial Statements which is available on the website maintained by BlackRock, at blackrock.co.uk/brsc.
In the Board’s opinion, an additional uncertainty to those outlined in the Annual Report now exists. In a referendum held on 23 June 2016, the United Kingdom electorate voted to leave the European Union. The referendum result may affect the Company’s risk profile through introducing new uncertainties and instability in financial markets. The process of a major country leaving the EU has no precedent, so we expect an ongoing period of market uncertainty as implications are digested.
GOING CONCERN
The Directors, having considered the nature and liquidity of the portfolio, the Company’s investment objectives and the Company’s projected income and expenditure, are satisfied that the Company has adequate resources to continue in operational existence for the foreseeable future, and is financially sound. For this reason, they continue to adopt the going concern basis in preparing the financial statements. The Company is able to meet all of its liabilities from its assets and income generated from these assets and the ongoing charges (excluding performance fees, finance costs and taxation) are approximately 0.7% of net assets. Ongoing charges with performance fees included were 0.9% of net assets for the year ended 29 February 2016, and as the performance fee is capped at 0.25% of total assets less current liabilities, ongoing charges calculated on this basis are not likely to significantly exceed this going forward.
RELATED PARTY DISCLOSURE AND TRANSACTIONS WITH THE AIFM AND INVESTMENT MANAGER
BlackRock Fund Managers Limited (BFM) was appointed as the Company’s AIFM with effect from 2 July 2014. BFM has (with the Company’s consent) delegated certain portfolio and risk management services, and other ancillary services, to BlackRock Investment Management (UK) Limited (BIM (UK)). Both BFM and BIM (UK) are regarded as related parties under the Listing Rules. Details of the management and performance fees payable are set out in note 3 and note 10. The related party transactions with the Directors are set out in note 11.
DIRECTORS’ RESPONSIBILITY STATEMENT
The Disclosure and Transparency Rules (DTR) of the UK Listing Authority require the Directors to confirm their responsibilities in relation to the preparation and publication of the Interim Management Report and Financial Statements.
The Directors confirm to the best of their knowledge that:
- the condensed set of financial statements contained within the half yearly financial report has been prepared in accordance with applicable UK Accounting Standard, FRS 104 ‘Interim Financial Reporting’; and
- the Interim Management Report together with the Chairman’s Statement and Investment Manager’s Report, include a fair review of the information required by 4.2.7R and 4.2.8R of the FCA’s Disclosure and Transparency Rules.
The half yearly financial report has not been audited or reviewed by the Company’s Auditors.
The half yearly financial report was approved by the Board on 25 October 2016 and the above responsibility statement was signed on its behalf by the Chairman.
Nicholas Fry
For and on behalf of the Board
25 October 2016
INCOME STATEMENT
FOR THE SIX MONTHS ENDED 31 AUGUST 2016
Notes |
Revenue £’000 six months ended 31.08.16 (unaudited) |
Capital £’000 six months ended 31.08.16 (unaudited) |
Total £’000 six months ended 31.08.16 (unaudited) |
Revenue £’000 six months ended 31.08.15 (unaudited) |
Capital £’000 six months ended 31.08.15 (unaudited) |
Total £’000 six months ended 31.08.15 (unaudited) |
Revenue £’000 year ended 29.02.16 (audited) |
Capital £’000 year ended 29.02.16 (audited) |
Total £’000 year ended 29.02.16 (audited) |
|
| Gains/(losses) on investments held at fair value through profit or loss | – | 42,666 | 42,666 | – | 41,765 | 41,765 | – | 20,409 | 20,409 | |
| Losses on foreign exchange | – | (2) | (2) | – | (2) | (2) | – | (4) | (4) | |
| Income from investments held at fair value through profit or loss | 2 | 7,909 | – | 7,909 | 7,350 | – | 7,350 | 11,550 | 53 | 11,603 |
| Other income | 2 | 1 | – | 1 | 22 | – | 22 | 24 | – | 24 |
| ---------- | --------- | --------- | --------- | --------- | --------- | ---------- | --------- | --------- | ||
| Total income | 7,910 | 42,664 | 50,574 | 7,372 | 41,763 | 49,135 | 11,574 | 20,458 | 32,032 | |
| ---------- | --------- | --------- | --------- | --------- | --------- | ---------- | --------- | --------- | ||
| Expenses | ||||||||||
| Investment management and performance fees | 3 | (351) | (2,375) | (2,726) | (345) | (2,321) | (2,666) | (681) | (3,299) | (3,980) |
| Operating expenses | 4 | (306) | (11) | (317) | (313) | (11) | (324) | (630) | (20) | (650) |
| ---------- | --------- | --------- | --------- | --------- | --------- | ---------- | --------- | --------- | ||
| Total operating expenses | (657) | (2,386) | (3,043) | (658) | (2,332) | (2,990) | (1,311) | (3,319) | (4,630) | |
| ---------- | --------- | --------- | --------- | --------- | --------- | ---------- | --------- | --------- | ||
| Net profit on ordinary activities before finance costs and taxation | 7,253 | 40,278 | 47,531 | 6,714 | 39,431 | 46,145 | 10,263 | 17,139 | 27,402 | |
| Finance costs | (197) | (592) | (789) | (205) | (613) | (818) | (402) | (1,206) | (1,608) | |
| ---------- | --------- | --------- | --------- | --------- | --------- | ---------- | --------- | --------- | ||
| Net profit on ordinary activities before taxation | 7,056 | 39,686 | 46,742 | 6,509 | 38,818 | 45,327 | 9,861 | 15,933 | 25,794 | |
| Taxation | (11) | – | (11) | (12) | – | (12) | (14) | – | (14) | |
| Net profit on ordinary activities after taxation | 7,045 | 39,686 | 46,731 | 6,497 | 38,818 | 45,315 | 9,847 | 15,933 | 25,780 | |
| ---------- | --------- | --------- | --------- | --------- | --------- | ---------- | --------- | --------- | ||
| Earnings per ordinary share | 5 | 14.71p | 82.89p | 97.60p | 13.57p | 81.07p | 94.64p | 20.57p | 33.27p | 53.84p |
| ---------- | --------- | --------- | --------- | --------- | --------- | ---------- | --------- | --------- |
The total column of this statement represents the Company’s Profit and Loss Account.
The supplementary revenue and capital columns are both prepared under guidance published by the Association of Investment Companies (AIC). All items in the above statement derive from continuing operations and no operations were acquired or discontinued during the period. All income is attributable to the equity holders of the Company.
The Company does not have any other recognised gains or losses. The net profit for the period disclosed above represents the Company’s total comprehensive income.
STATEMENT OF CHANGES IN EQUITY
FOR THE SIX MONTHS ENDED 31 AUGUST 2016
| Called up share capital £’000 |
Share premium account £’000 |
Capital redemption reserve £’000 |
Capital reserves £’000 |
Revenue reserve £’000 |
Total £’000 |
|
| For the six months ended 31 August 2016 (unaudited) |
||||||
| At 29 February 2016 | 12,498 | 38,952 | 1,982 | 405,323 | 16,300 | 475,055 |
| Total comprehensive income: | ||||||
| Profit for the period | – | – | – | 39,686 | 7,045 | 46,731 |
| Transactions with owners, recorded directly to equity: | ||||||
| Dividends paid(a) | – | – | – | – | (5,027) | (5,027) |
| -------- | -------- | -------- | -------- | -------- | -------- | |
| At 31 August 2016 | 12,498 | 38,952 | 1,982 | 445,009 | 18,318 | 516,759 |
| -------- | -------- | -------- | -------- | -------- | -------- | |
| For the six months ended 31 August 2015 (unaudited) |
||||||
| At 28 February 2015 | 12,498 | 38,952 | 1,982 | 389,390 | 14,114 | 456,936 |
| Total comprehensive income: | ||||||
| Profit for the period | – | – | – | 38,818 | 6,497 | 45,315 |
| Transactions with owners, recorded directly to equity: | ||||||
| Dividends paid(b) | – | – | – | – | (4,309) | (4,309) |
| -------- | -------- | -------- | -------- | -------- | -------- | |
| At 31 August 2015 | 12,498 | 38,952 | 1,982 | 428,208 | 16,302 | 497,942 |
| -------- | -------- | -------- | -------- | -------- | -------- | |
| For the year ended 29 February 2016 (audited) | ||||||
| At 28 February 2015 | 12,498 | 38,952 | 1,982 | 389,390 | 14,114 | 456,936 |
| Total comprehensive income: | ||||||
| Profit for the year | – | – | – | 15,933 | 9,847 | 25,780 |
| Transactions with owners, recorded directly to equity: | ||||||
| Dividends paid(c) | – | – | – | – | (7,661) | (7,661) |
| -------- | -------- | -------- | -------- | -------- | -------- | |
| At 29 February 2016 | 12,498 | 38,952 | 1,982 | 405,323 | 16,300 | 475,055 |
| ===== | ===== | ==== | ====== | ===== | ====== | |
(a) Final dividend of 10.50p per share for the year ended 29 February 2016, declared on 25 April 2016 and paid on 20 June 2016. (b) Final dividend of 9.00p per share for the year ended 28 February 2015, declared on 27 April 2015 and paid on 25 June 2015. (c) Final dividend of 9.00p per share for the year ended 28 February 2015, declared on 27 April 2015 and paid on 25 June 2015, and interim dividend of 7.00p per share for the six months ended 31 August 2015, declared on 26 October 2015 and paid on 30 November 2015. |
||||||
BALANCE SHEET
AS AT 31 AUGUST 2016
Notes |
31 August 2016 £’000 (unaudited) |
31 August 2015 £’000 (unaudited) |
29 February 2016 £’000 (audited) |
|
| Fixed assets | ||||
| Investments held at fair value through profit or loss | 9 | 552,486 | 525,824 | 506,588 |
| ----------- | ----------- | ----------- | ||
| Current assets | ||||
| Cash and cash equivalents | 1,154 | 16,410 | 11,988 | |
| Debtors | 2,504 | 629 | 1,254 | |
| ----------- | ----------- | ----------- | ||
| 3,658 | 17,039 | 13,242 | ||
| ----------- | ----------- | ----------- | ||
| Creditors – amounts falling due within one year | ||||
| Other creditors | (4,471) | (5,022) | (4,868) | |
| ----------- | ----------- | ----------- | ||
| Net current (liabilities)/assets | (813) | 12,017 | 8,374 | |
| ----------- | ----------- | ----------- | ||
| Total assets less current (liabilities)/assets | 551,673 | 537,841 | 514,962 | |
| Creditors – amounts falling due after more than one year | 7 | (34,914) | (39,899) | (39,907) |
| ----------- | ----------- | ----------- | ||
| Net assets | 516,759 | 497,942 | 475,055 | |
| ====== | ====== | ====== | ||
| Capital and reserves | ||||
| Called up share capital | 8 | 12,498 | 12,498 | 12,498 |
| Share premium account | 38,952 | 38,952 | 38,952 | |
| Capital redemption reserve | 1,982 | 1,982 | 1,982 | |
| Capital reserves | 445,009 | 428,208 | 405,323 | |
| Revenue reserve | 18,318 | 16,302 | 16,300 | |
| ----------- | ----------- | ----------- | ||
| Total shareholders’ funds | 5 | 516,759 | 497,942 | 475,055 |
| ======== | ======== | ======== | ||
| Net asset value per ordinary share (debenture at par value) | 5 | 1,079.28p | 1,039.98p | 992.18p |
| ======== | ======== | ======== | ||
| Net asset value per ordinary share (debenture at fair value) | 5 | 1,069.71p | 1,029.43p | 982.59p |
| ======== | ======== | ======== |
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED 31 AUGUST 2016
| Six months ended 31 August 2016 £’000 (unaudited) |
Six months ended 31 August 2015 £’000 (unaudited) |
Year ended 29 February 2016 £’000 (audited) |
|
| Operating activities | |||
| Net profit before taxation | 46,742 | 45,327 | 25,794 |
| Add back finance costs | 789 | 818 | 1,608 |
| Gains on investments held at fair value through profit or loss | (42,666) | (41,765) | (20,409) |
| Net movement on foreign exchange | 2 | 2 | 4 |
| Sales of investments held at fair value through profit or loss | 91,649 | 104,458 | 205,660 |
| Purchases of investments held at fair value through profit or loss | (97,427) | (89,652) | (193,747) |
| Increase in debtors | (438) | (328) | (70) |
| Increase in other creditors | 1,339 | 271 | 6 |
| Taxation on investment income | (11) | (12) | (14) |
| -------- | -------- | -------- | |
| Net cash (used)/generated from operating activities | (21) | 19,119 | 18,832 |
| -------- | -------- | -------- | |
| Financing activities | |||
| Interest paid | (784) | (812) | (1,593) |
| Drawdown of Scotia Bank revolving credit facility | 5,000 | – | – |
| Repayment Scotia Bank revolving credit facility | (10,000) | – | – |
| Dividends paid | (5,027) | (4,309) | (7,661) |
| -------- | -------- | -------- | |
| Net cash used in financing activities | (10,811) | (5,121) | (9,254) |
| -------- | -------- | -------- | |
| (Decrease)/increase in cash and cash equivalents | (10,832) | 13,998 | 9,578 |
| -------- | -------- | -------- | |
| Cash and cash equivalents at start of period | 11,988 | 2,414 | 2,414 |
| Effect of foreign exchange rate changes | (2) | (2) | (4) |
| -------- | -------- | -------- | |
| Cash and cash equivalents at end of period | 1,154 | 16,410 | 11,988 |
| -------- | -------- | -------- | |
| Comprised of: | |||
| Cash at bank | 1,154 | 16,410 | 2,241 |
| BlackRock's Institutional Sterling Liquidity Fund | – | – | 9,747 |
| -------- | -------- | -------- | |
| 1,154 | 16,410 | 11,988 | |
| ==== | ===== | ===== |
NOTES TO THE FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED 31 AUGUST 2016
1. PRINCIPAL ACTIVITY AND BASIS OF PREPARATION
The principal activity of the Company is that of an investment trust company within the meaning of section 1158 of the Corporation Tax Act 2010.
The Company presents its results and financial positions under FRS 102, ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’, which forms part of revised Generally Accepted Accounting Practice (New UK GAAP) issued by the Financial Reporting Council (FRC) in 2013.
The condensed set of financial statements has been prepared on a going concern basis in accordance with FRS 102 and FRS 104 ‘Interim Financial Reporting’ issued by the FRC in March 2015 and the revised Statement of Recommended Practice – ‘Financial Statements of Investment Trust Companies and Venture Capital Trusts’ (SORP) issued by the Association of Investment Companies (AIC) in November 2014.
The accounting policies applied for the condensed set of financial statements with regard to measurement and classification are as set out in the Company’s Annual Report and Financial Statements for the year ended 29 February 2016. This reflects the Company’s application of Sections 11 and 12 of FRS 102, in relation to financial instruments, in full.
2. INCOME
| Six months ended 31 August 2016 £’000 (unaudited) |
Six months ended 31 August 2015 £’000 (unaudited) |
Year ended 29 February 2016 £’000 (audited) |
|
| Investment income: | |||
| UK listed dividends | 6,135 | 5,666 | 9,370 |
| UK listed dividends – scrip | 19 | – | 25 |
| UK listed dividends – special | 559 | 1,006 | 1,035 |
| Property income dividends | 437 | 167 | 384 |
| Overseas listed dividends | 677 | 511 | 736 |
| Overseas listed dividends- special | 82 | - | - |
| -------- | -------- | -------- | |
| 7,909 | 7,350 | 11,550 | |
| -------- | -------- | -------- | |
| Other income: | |||
| Deposit interest | 1 | 5 | 7 |
| Underwriting commission | – | 17 | 17 |
| -------- | -------- | -------- | |
| 1 | 22 | 24 | |
| -------- | -------- | -------- | |
| Total | 7,910 | 7,372 | 11,574 |
| ===== | ===== | ===== |
Special dividends of £162,000 have been recognised in capital (31 August 2015: nil; 29 February 2016: £53,000).
3. INVESTMENT MANAGEMENT AND PERFORMANCE FEES
| Six months ended 31 August 2016 £’000 (unaudited) |
Six months ended 31 August 2015 £’000 (unaudited) |
Year ended 29 February 2016 £’000 (audited) |
|
| Revenue: | |||
| Investment management fee | 351 | 345 | 681 |
| -------- | -------- | -------- | |
| Capital: | |||
| Investment management fee | 1,052 | 1,036 | 2,041 |
| Performance fee | 1,323 | 1,285 | 1,258 |
| -------- | -------- | -------- | |
| 2,375 | 2,321 | 3,299 | |
| -------- | -------- | -------- | |
| Total | 2,726 | 2,666 | 3,980 |
| ===== | ===== | ===== |
The investment management fee is calculated based on 0.65% in respect of the first £50 million of the Company’s total assets less current liabilities, reducing to 0.50% thereafter. A performance fee is payable at the average rate of 10% of the annualised excess performance over the benchmark in the two previous financial years, applied to the average of the total assets less current liabilities of the Company. The fee is payable annually in April and is capped at 0.25% of the average of the total assets less current liabilities of the Company.
Performance fees have been wholly allocated to capital reserves as the performance has been predominantly generated through capital returns of the investment portfolio. A performance fee of £1,323,000 has been accrued for the six month period ended 31 August 2016 (six months ended 31 August 2015: £1,285,000 and year ended 29 February 2016: £1,258,000). This is based on outperformance of 3.8% against the benchmark resulting from a NAV return of 6.1% against the benchmark return of 2.3%. These percentage returns are the annualised performance from 28 February 2015 to 28 February 2017 using actual performance for the period 28 February 2015 to 31 August 2016 and assuming the performance is in line with the benchmark for the six months ended 28 February 2017.
4. OPERATING EXPENSES
| Six months ended 31 August 2016 £’000 (unaudited) |
Six months ended 31 August 2015 £’000 (unaudited) |
Year ended 29 February 2016 £’000 (audited) |
|
| Auditors’ remuneration | 17 | 13 | 34 |
| Registrar's fees | 19 | 17 | 33 |
| Marketing fees | 52 | 94 | 164 |
| Depositary fees | 34 | 33 | 67 |
| Directors’ emoluments – fees for services to the Company (excluding expenses) | 76 | 71 | 141 |
| Other administrative costs | 108 | 85 | 191 |
| -------- | -------- | -------- | |
| 306 | 313 | 630 | |
| ===== | ===== | ===== | |
| Transaction charges – capital | 11 | 11 | 20 |
| -------- | -------- | -------- | |
| 317 | 324 | 650 | |
| ===== | ===== | ===== |
5. EARNINGS AND NET ASSET VALUE PER SHARE
Revenue and capital returns per share are shown below and have been calculated using the following:
| Six months ended 31 August 2016 (unaudited) |
Six months ended 31 August 2015 (unaudited) |
Year ended 29 February 2016 (audited) |
|
| Net revenue profit attributable to ordinary shareholders (£’000) | 7,045 | 6,497 | 9,847 |
| ----------- | ----------- | ----------- | |
| Net capital profit attributable to ordinary shareholders (£’000) | 39,686 | 38,818 | 15,933 |
| ----------- | ----------- | ----------- | |
| Total profit attributable to ordinary shareholders (£’000) | 46,731 | 45,315 | 25,780 |
| ----------- | ----------- | ----------- | |
| Equity shareholders’ funds (£’000) | 516,759 | 497,942 | 475,055 |
| -------------- | --------------- | -------------- | |
| The actual and weighted average number of ordinary shares in issue at the end of each period, on which the return and net asset value per ordinary share was calculated was: | 47,879,792 | 47,879,792 | 47,879,792 |
| -------------- | --------------- | -------------- | |
| Revenue earnings per ordinary share | 14.71p | 13.57p | 20.57p |
| ----------- | ----------- | ----------- | |
| Capital earnings per ordinary share | 82.89p | 81.07p | 33.27p |
| ----------- | ----------- | ----------- | |
| Total earnings per ordinary share | 97.60p | 94.64p | 53.84p |
| ====== | ====== | ====== |
| As at 31 August 2016 (unaudited) |
As at 31 August 2015 (unaudited) |
As at 29 February 2016 (audited) |
|
| Net asset value per ordinary share (debt at par value) | 1,079.28p | 1,039.98p | 992.18p |
| ------------- | ------------- | ----------- | |
| Net asset value per ordinary share (debt at fair value) | 1,069.71p | 1,029.43p | 982.59p |
| ======== | ======== | ======== | |
| Share price (mid-market) | 895.50p | 925.50p | 863.00p |
| ======== | ======== | ======== |
6. DIVIDEND
In accordance with FRS 102 Section 32 ‘Events After the End of the Reporting Period’, the final dividend payable on ordinary shares is recognised as a liability when approved by shareholders. Interim dividends are recognised only when paid.
The Board has declared an interim dividend of 8.00p per share (2015: 7.00p per share), payable on 30 November 2016 to shareholders on the Company’s register as at 4 November 2016; the ex dividend date is 3 November 2016. The total cost of this dividend, based on 47,879,792 shares in issue at 25 October 2016, is £3,830,000 (2015: £3,352,000).
7. CREDITORS - AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
| Six months ended 31 August 2016 £’000 (unaudited) |
Six months ended 31 August 2015 £’000 (unaudited) |
Year ended 29 February 2016 £’000 (audited) |
|
| Revolving loan facility | 20,000 | 25,000 | 25,000 |
| 7.75% debenture stock 2022 | 14,914 | 14,899 | 14,907 |
| --------- | --------- | --------- | |
| Total | 34,914 | 39,899 | 39,907 |
| ====== | ===== | ===== |
The fair value of the 7.75% debenture stock using the last available quoted offer price from the London Stock Exchange as at 31 August 2016 was 130.00p per debenture, a total of £19,500,000.
The £15 million debenture stock was issued on 8 July 1997. Interest on the stock is payable in equal half yearly instalments on 31 July and 31 January in each year. The stock is secured by a first floating charge over the whole of the assets of the Company and is redeemable at par on 31 July 2022.
The Company has in place a £35 million three year multi-currency revolving loan facility with Scotia Bank (Ireland) Limited. At the period end, £20 million of the facility had been utilised. Under the amended agreement the termination date of this facility is the third anniversary of the effective date being June 2018. Interest on this facility is reset every three months and is currently charged at the rate of 1.44388% (31 August 2015: 1.53156%, 29 February 2016: 1.53938%).
8. CALLED UP SHARE CAPITAL
| Ordinary shares (number) |
Treasury shares (number) |
Total shares in issue (number) |
Nominal value £’000 |
|
| Allotted, called up and fully paid share capital comprised: | ||||
| Ordinary shares of 25 pence each: | ||||
| At 1 March 2016 | 47,879,792 | 2,113,731 | 49,993,523 | 12,498 |
| --------------- | ------------- | --------------- | -------- | |
| At 31 August 2016 | 47,879,792 | 2,113,731 | 49,993,523 | 12,498 |
| ========= | ======== | ========= | ===== |
9. VALUATION OF FINANCIAL INSTRUMENTS
The Company has early adopted the amendments to FRS 102 ‘Fair value hierarchy disclosure’ effective for annual periods beginning on or after 1 January 2017. These amendments improve the consistency of fair value disclosure for financial instruments compared with those required by EU adopted IFRS.
The Company classifies financial instruments measured at fair value using a fair value hierarchy. The fair value hierarchy has the following categories:
Level 1 – Quoted prices for identical instruments in active markets
A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The Company does not adjust the quoted price for these instruments.
Level 2 – Valuation techniques using observable inputs
This category includes instruments valued using: quoted prices in active markets for similar instruments; quoted prices for similar instruments in markets that are considered less than active; or other valuation techniques where all significant inputs are directly or indirectly observable from market data.
Level 3 – Valuation techniques using significant unobservable inputs
This category includes all instruments where the valuation techniques used include inputs not based on market data and these inputs could have a significant impact on the instrument’s valuation. This category also includes instruments that are valued based on quoted prices for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences between the instruments and instruments for which there is no active market.
The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. For this purpose, the significance of an input is assessed against the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a Level 3 measurement.
Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability. The determination of what constitutes ‘observable’ inputs requires significant judgment by the Investment Manager. The Investment Manager considers observable inputs to be that market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.
The table below is an analysis of the Company’s financial instruments measured at fair value at the balance sheet date.
| Financial assets at fair value through profit or loss at 31 August 2016 | Level 1 £’000 (unaudited) |
Level 2 £’000 (unaudited) |
Level 3 £’000 (unaudited) |
Total £’000 (unaudited) |
| Equity investments | 552,486 | – | – | 552,486 |
| ---------- | -------- | -------- | ---------- | |
| Total | 552,486 | – | – | 552,486 |
| ====== | ===== | ===== | ====== |
| Financial assets at fair value through profit or loss at 31 August 2015 | Level 1 £’000 (unaudited) |
Level 2 £’000 (unaudited) |
Level 3 £’000 (unaudited) |
Total £’000 (unaudited) |
| Equity investments | 525,824 | – | – | 525,824 |
| ---------- | -------- | -------- | ---------- | |
| Total | 525,824 | – | – | 525,824 |
| ====== | ===== | ===== | ====== |
| Financial assets at fair value through profit or loss at 29 February 2016 | Level 1 £’000 (audited) |
Level 2 £’000 (audited) |
Level 3 £’000 (audited) |
Total £’000 (audited) |
| Equity investments | 506,588 | – | – | 506,588 |
| ---------- | -------- | -------- | ---------- | |
| Total | 506,588 | – | – | 506,588 |
| ====== | ===== | ===== | ====== |
For exchange listed equity investments the quoted price is the bid price.
There were no transfers between levels for financial assets and financial liabilities during the six month period to 31 August 2016 or recorded at fair value as at 31 August 2016, 31 August 2015 and 29 February 2016. The Company did not hold any level 3 securities throughout the six month period or as at 31 August 2016 (31 August 2015: nil; 29 February 2016: nil).
10. TRANSACTIONS WITH THE AIFM AND THE INVESTMENT MANAGER
BlackRock Investment Management (UK) Limited continues to act as the Company’s Investment Manager under a delegation agreement with BFM. Further details of the investment management contract are disclosed in note 3.
The investment management fee due to the Manager for the six months ended 31 August 2016 amounted to £1,403,000 (six months ended 31 August 2015: £1,381,000; year ended 29 February 2016: £2,722,000). A performance fee accrued for the six months ended 31 August 2016 amounted to £1,323,000 (six months ended 31 August 2015: £1,285,000; year ended 29 February 2016: £1,258,000). At 31 August 2016, £1,403,000 was outstanding in respect of the management fee (31 August 2015: £1,381,000; 29 February 2016: £1,341,000) and £2,581,000 (31 August 2015: £1,285,000; 29 February 2016: £1,258,000) in respect of the performance fee. The management fee and any performance fee are payable to BFM.
In addition to the above services, BlackRock provided the Company with marketing services. The total fees paid or payable for these services for the period ended 31 August 2016 amounted to £52,000, including VAT (six months ended 31 August 2015: £94,000, year ended 29 February 2016: £164,000) and £124,000 (31 August 2015: £330,000; 29 February 2016: £229,000) was outstanding at 31 August 2016.
11. RELATED PARTY DISCLOSURE
The Board consists of five non-executive Directors, all of whom are considered to be independent by the Board. None of the Directors has a service contract with the Company. The Chairman receives an annual fee of £38,500, the Chairman of the Audit Committee receives an annual fee of £28,750 and each of the other Directors receives an annual fee of £25,750.
At the period end members of the Board held ordinary shares in the Company as set out below:
| Ordinary shares 25 October 2016 |
Ordinary shares 31 August 2016 |
|
| Nicholas Fry (Chairman) | 40,000 | 40,000 |
| Caroline Burton | 5,500 | 5,500 |
| Michael Peacock | 1,000 | 1,000 |
| Robert Robertson | 86,062 | 86,062 |
| Susan Platts-Martin – appointed 21 April 2016 | 2,000 | 2,000 |
12. PUBLICATION OF NON STATUTORY ACCOUNTS
The financial information contained in this half yearly report does not constitute statutory accounts as defined in section 435 of the Companies Act 2006. The financial information for the six months ended 31 August 2016 and 31 August 2015 has not been audited.
The information for the year ended 29 February 2016 has been extracted from the latest published audited financial statements, which have been filed with the Registrar of Companies. The report of the Auditors on those financial statements contained no qualification or statement under sections 498(2) or (3) of the Companies Act 2006.
13. CONTINGENT ASSETS/LIABILITIES
There were no contingent liabilities or assets at 31 August 2016, 31 August 2015 or 29 February 2016.
14. ANNUAL RESULTS
The Board expects to announce the annual results for the year ending 28 February 2017 in late April 2017. Copies of the annual results announcement can be obtained from the Secretary on 020 7743 3000 and a copy of the Annual Report is available from the Company’s website at blackrock.co.uk/brsc. The Annual Report should be available by beginning of May 2017 with the Annual General Meeting being held in June 2017.
For further information, please contact:
Simon White, Managing Director, Investment Trusts, BlackRock Investment Management (UK) Limited
Tel: 020 7743 5284
Mike Prentis, Fund Manager, BlackRock Investment Management (UK) Limited
Tel: 0207 743 2312
Press enquiries:
Lucy Horne, Lansons Communications – Tel: 020 7294 3689
E-mail: lucyh@lansons.com
25 October 2016
12 Throgmorton Avenue
London EC2N 2DL
END
The Half Yearly Financial Report will also be available on the BlackRock Investment Management website at http://www.blackrock.co.uk/brsc. Neither the contents of the Manager’s website nor the contents of any website accessible from hyperlinks on the Manager’s website (or any other website) is incorporated into, or forms part of, this announcement.
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