Portfolio Update

The information contained in this release was correct as at 31 July 2023.  Information on the Company’s up to date net asset values can be found on the London Stock Exchange Website at

https://www.londonstockexchange.com/exchange/news/market-news/market-news-home.html.

BLACKROCK SMALLER COMPANIES TRUST PLC (LEI:549300MS535KC2WH4082)
 

All information is at 31 July 2023 and unaudited.
Performance at month end is calculated on a Total Return basis based on NAV per share with debt at fair value
 

	One month %	Three months %	One year %	Three years %	Five years %
Net asset value	1.8	-1.7	-8.9	18.3	1.0
Share price	1.7	-1.3	-8.2	13.8	-4.1
Numis ex Inv Companies + AIM Index	2.9	-1.6	-4.6	20.5	1.9

Sources:  BlackRock and Datastream

At month end

Net asset value Capital only (debt at par value):	1,416.38p
Net asset value Capital only (debt at fair value):	1,468.36p
Net asset value incl. Income (debt at par value)1:	1,438.04p
Net asset value incl. Income (debt at fair value)1:	1,490.03p
Share price:	1,292.00p
Discount to Cum Income NAV (debt at par value):	10.2%
Discount to Cum Income NAV (debt at fair value):	13.3%
Net yield2:	3.1%
Gross assets3:	£768.2m
Gearing range as a % of net assets:	0-15%
Net gearing including income (debt at par):	11.2%
Ongoing charges ratio (actual)4:	0.70%
Ordinary shares in issue5:	48,582,292

1. Includes net revenue of 21.66p
2. Yield calculations are based on dividends announced in the last 12 months as at the date of release of this announcement and comprise the interim dividend of 14.50 pence per share (announced on 3 November 2022, ex-dividend on 10 November 2022, and paid 9 December 2022) and the final dividend of 25.50 pence per share (announced on 05 May 2023, ex-date on 18 May 2023, and paid 27 June 2023).
3. Includes current year revenue.
4. The Company’s ongoing charges are calculated as a percentage of average daily net assets and using the management fee and all other operating expenses excluding finance costs, direct transaction costs, custody transaction charges, VAT recovered, taxation and certain non-recurring items for year ended 28 February 2023.
5. Excludes 1,411,231 ordinary shares held in treasury.

Sector Weightings % of portfolio Industrials 32.3 Consumer Discretionary 20.4 Financials 13.7 Technology 8.4 Basic Materials 8.2 Consumer Staples 5.7 Health Care 3.7 Energy 2.6 Telecommunications 2.6 Communication Services 1.6 Real Estate 0.8 ----- Total 100.0 ===== Country Weightings % of portfolio United Kingdom 98.2 United States 1.0 Ireland 0.8 ----- Total 100.0 =====

Ten Largest Equity Investments Company	% of portfolio
CVS Group	2.6
Gamma Communications	2.6
4imprint Group	2.5
Watches of Switzerland	2.3
Hill & Smith	1.9
Workspace Group	1.9
Breedon	1.9
Oxford Instruments	1.8
YouGov	1.8
Chemring Group	1.8

Commenting on the markets, Roland Arnold, representing the Investment Manager noted:
 

During July the Company’s NAV per share rose by 1.8% to 1,490.03p on a total return basis (with debt at fair value), while our benchmark index rose 2.9%. For comparison the large cap FTSE 100 index rose by 2.3%.1

Equity markets globally were mostly positive during July as falling inflation and encouraging GDP data around developed markets led to improving market sentiment. Both the Federal Reserve (Fed) and European Central Bank (ECB) raised interest rates by the expected 25bps and hopes continued to mount that the peak in interest rates is fast approaching. In the UK, wage data remained high, but headline inflation fell more than expected to 7.9% and core inflation also fell bringing the number to 6.9%. UK equities underperformed most global developed markets, given the more challenging growth outlook. However, within the UK market, small and mid-caps outperformed, benefiting from the better-than-expected inflation numbers and strengthening sterling.

July was a disappointing month for the Company, where performance lagged our benchmark despite no negative developments or downgrades from any of our holdings. Two of the largest detractors to performance included 4imprint and Oxford Instruments which both simply drifted lower during the course of the month. After the month end, 4imprint actually reported continued solid trading, with upgrades to guidance and as a result the shares hit a record high. The largest single detractor during the month was Alfa Financial Software. Following the strong performance in June, off the back of the announced bid from private equity business EQT, the shares plummeted after EQT subsequently withdrew their offer.

The largest positive contributor was Watches of Switzerland which rose in response to results during the month which once again highlighted that trading remains strong. The shares have de-rated over the past 18 months as the market has remained concerned around the demand outlook for the business which has yet to materialise. Despite the markets concerns, demand remains robust,  the waitlist continues to grow, and the industry backdrop remains favourable with demand for luxury watches continuing to outstrip supply. The shares in our view remain attractively valued at around 13x earnings and the company has a net cash balance sheet, which provides further opportunity for M&A (Mergers & Acquisitions) in the future. The second largest relative contributor during the month came from not owning software business Wandisco. The shares were suspended earlier this year upon detection of fraudulent bookings and revenues. After coming within days of running out of cash, the company completed a restructuring and rescue fund raising in July, at a share price more than 90% below the suspension price. Shares in Hunting rose in response to a positive H1 trading update which flagged strength across almost all international markets and as a result management raised full year guidance.

2023 has seen a continuation of the themes of uncertainty around the Russia/Ukraine war, China, supply chains and inflation. However, we are closer to the end of monetary tightening, and we think inflation is peaking, albeit this is happening more slowly than we would have expected. As the year-on-year impact on inflation starts to roll over, we could see the environment turn to disinflation quite quickly. Generally speaking, financial conditions are not too stretched; corporates and consumers are reasonably well capitalised, and banks have plenty of capital. As such the path of employment will dictate the consumer outlook but we continue to expect the trough to be shallower than in previous recessions.

Industrial activity is likely to decline as excess inventory works through the system but given major markets such as automotive and aerospace were already seeing choked demand through supply chain issues, again we expect a shallower trough. Housebuilding and RMI (Renovation, Maintenance, Investment) will have a tough H1, but we still believe the outlook isn’t as bad as it was in September. Valuations have corrected quickly and looking back it appears all consumer orientated stocks overshot to the downside during the chaotic period around the Truss budget.

Whilst there is much that can be discussed with regards to the economic outlook, one thing is irrefutable; the valuation of UK small and mid-sized companies is more attractive than it has been for some time, and if that valuation is not recognized by the stock market, it will be recognized by others. As stated in recent updates, we expected to see M&A picking up through the course of the year and this certainly spiked in the last month, with approaches for several companies in the UK as Private Equity firms have decided to start deploying their substantial cash piles.

We are not out of the woods yet, but the recent round of trading updates from our investments have generally been in line or better than expectations. However, with oil and gas prices lower year-on-year, China re-opening, US$ weakening, shipping / logistics / factory gate prices dropping, much of the inflation pressure of last year could become deflationary during the course of this year, and we have tentatively started to utilise more of our gearing facilities.

Against this difficult backdrop, we remind ourselves that many equity markets (Europe, UK) are structurally under owned and could benefit as sentiment turns and investors begin to reduce these underweights. We remain focused on bottom-up company specific analysis to identify high quality, nimble businesses, operated by entrepreneurial management teams, with strong market positions and resilient cash-flows. These are the types of businesses that we believe will be best placed to manage and thrive in the current environment. Historically these periods have been followed by strong returns for the strategy and presented excellent investment opportunities.

We thank shareholders for their ongoing support.
 

1Source: BlackRock as at 31 July 2023

24 August 2023

ENDS
 

Latest information is available by typing www.blackrock.com/uk/brsc on the internet, "BLRKINDEX" on Reuters, "BLRK" on Bloomberg or "8800" on Topic 3 (ICV terminal).  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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