Interim Results

Aberforth Smaller Companies Tst PLC 17 July 2001 ABERFORTH SMALLER COMPANIES TRUST plc STOCK EXCHANGE ANNOUNCEMENT INTERIM RESULTS For the Six Months to 30 June 2001 FEATURES Fully Diluted Net Asset Value Total Return +10.9% Benchmark Index Total Return -6.1% Interim Dividend Increase +6.7% Two new Non-Executive Directors appointed to Board Aberforth Smaller Companies Trust plc (ASCoT) invests only in small UK quoted companies and is managed by Aberforth Partners. CHAIRMAN'S STATEMENT RESULTS REVIEW For the six months to 30 June 2001 ASCoT achieved a total return of plus 10.9% which compares favourably with the total return of minus 6.1% from the Hoare Govett Smaller Companies Index (excluding investment trusts). The comparative performance of large companies, represented by the FTSE All-Share Index was a total return of minus 7.3%. Your Board is pleased to announce an increase in this year's interim dividend to 3.20p per Ordinary Share. This represents an increase of 6.7% on the 3.0p interim dividend paid last year. The interim dividend will be paid on 7 September 2001 to Shareholders on the register on 10 August 2001. During the six month period, your Company bought in 728,988 Warrants for cancellation at prices which enhanced ASCoT's fully diluted asset value. Also, on 2 April 2001, a total of 370,616 Warrants were exercised. There now remain 1,779,293 Warrants outstanding and your Company is prepared to buy these in at prices which enhance the fully diluted net asset value. In addition, at the Annual General Meeting held in February, Shareholders unanimously passed the resolution renewing ASCoT's authority to buy-in up to 14.99% of its Ordinary Shares. As yet, no Ordinary Shares have been bought-in, however your Board will not hesitate to do so should we believe it to be in Shareholders' best interests. ASCoT has not made use of its debt facilities during the period under review. This position reflects your Managers' cautious view of the level of absolute returns from stockmarkets which has prevailed throughout the period. The gearing facility remains available and it is the intention to utilise it in the future as and when your Managers and Board consider the circumstances appropriate. Shareholders may be assured to know that there is no cost incurred by ASCoT in having its facilities available but not utilised. At the period end, ASCoT had net liquidity representing 5.7% of Shareholders' Funds. This position reflects the short term timing of purchases and sales within the portfolio. As Shareholders may be aware, it is ASCoT's policy to operate close to a fully invested position and that gearing is used on a tactical rather than permanent basis. BOARD COMPOSITION I mentioned in my last statement to Shareholders that the composition of the Board was kept under constant review. I am pleased that ASCoT has been able to appoint two new non-executive Directors to its Board with effect from 17 July 2001. Both Directors have been intimately involved in managing and growing public limited companies and I am sure that their experience will be of great value to ASCoT. Eddie Cran recently retired as the Chief Executive of Cattles plc, a consumer credit business, and Marco Chiappelli was the Finance Director of Johnston Press plc for 21 years until his retirement in July 2001. Dr. Finlay MacKenzie, who has been a Director of ASCoT since its inception, will not stand for re-election as a Director at the Annual General Meeting in February 2002. INVESTMENT REVIEW The year to date has been a relatively challenging one for global financial markets given the continued unwinding of the TMT (Technology, Media and Telecommunications) excesses combined with slowing levels of economic activity. The latter has been particularly apparent in the USA where the economy has slowed sharply and the previous concerns of the Federal Reserve regarding inflation have given way to concerns of a recession and, as a consequence, short term interest rates have been reduced significantly. Elsewhere, monetary authorities have followed suit but with rather less vigour consistent with greater economic resilience in some areas and more persistent inflationary pressures in others. A process of monetary easing is normally received positively by equity markets representing the normal precursor to economic recovery and hence growing corporate profits. Thus far equity markets, although enjoying brief bursts of optimism, have subsequently faltered in the face of a continuing flow of poor corporate news. INVESTMENT PERFORMANCE Clearly the recent background has been relatively favourable for ASCoT and the following paragraphs summarise the key elements. * The global stockmarket trends established at the end of the first quarter of calendar 2000 have been maintained in the year to date. At that time the liquidity driven bubble in the TMT sectors collapsed in the face of rising interest rates and the failure of these highly popular companies to achieve prevailing market expectations. Indeed, these expectations became increasingly unrealistic, based as they were on the New Paradigm under which the absence of a traditional business cycle justified levels of valuations unmatched in recent history. This environment was most closely associated with the US stock market but given the global nature of technology and financial markets these unfavourable trends have naturally washed on to UK shores. Your Managers, as value investors, have been underexposed to these previously popular sectors, believing that investor expectations implied in valuations were inconsistent with sustainable long term rates of profits growth. Moreover, these valuations were subject to the forces of creative destruction. The excessive popularity of the TMT sectors drove down their cost of equity capital. However, the extra capital attracted by such cheap financing simply intensified competitive pressure and ultimately threatened the viability of the original business models. With this cathartic process ongoing, the underexposure to TMT has been maintained over the past six months and has been beneficial to relative investment returns. Shareholders should not expect that the application of your Managers' value discipline will always result in ASCoT's assets being under-represented in technology and other areas perceived to possess higher levels of long term growth. Indeed, your Managers do not believe that the longer term potential of all sectors of the economy is the same and, in a low inflation environment, endorse the logic of paying higher prices for businesses with superior growth potential. Appreciation of this issue led to a significantly higher weighting in technology shares in the mid 1990's, an exposure which subsequently declined as valuations rose. Your Managers look at all sectors of the small company universe in seeking to find businesses selling below their intrinsic value, believing that financial markets are characterised by major cycles of sentiment. Good trading performance leads to rising optimism, which pushes share prices higher, which attracts more capital at a lower cost, which ultimately places pressure on future returns and disappointment ultimately follows. Working from this thesis, your Managers seek to gain exposure to areas of the market where the potential is not recognised and reduce, or remove completely, exposure to areas where expectations are high and hence future share price returns may be low. Further, this fundamentally based approach, with its regard for real world valuations, provides a margin of safety that should assist in capital preservation in more demanding market environments. * As the global environment has deteriorated, and with it visibility as to the future, investors have logically changed their appetite for risk. Previously, when liquidity was abundant and the business cycle banished to the annals of history, it was a modest leap to buy shares in companies with little or no current profit but with great hopes for the future. However, in an environment where economies are slowing and visibility is poor, buying shares in companies with a high level of cash flow in relation to Enterprise Value and with a stream of profit less sensitive to economic activity becomes rather more appealing and brings with it a substantially lower level of risk. Companies exposed to the defence and parts of the transport industries are illustrative of this general trend and recently ASCoT has been well represented in companies of this type. * Although the UK economy has slowed over recent months, the deceleration has been rather more gentle than that experienced across the Atlantic. Within this overall slowdown, UK based manufacturing has faced a continued appreciation of Sterling against the Euro and a reduction in demand for products from the electronics industry which, until recently, has been a significant contributor to growth in manufacturing output. Further, the direct impact of Foot and Mouth, although harrowing for those affected, has been modest in economic terms although the knock-on effects in areas such as tourism have been rather more substantial. These contractionary forces have been partially mitigated by an acceleration in government spending consistent with a commitment to strengthen public services as a General Election loomed. Moreover, consumption has been robust reflecting a growing employed population, real wage growth and rising house prices. Consumer prosperity has been supported by falling interest rates reflecting increased concern as to the state of the global economy. This environment has naturally been supportive for companies exposed to the consumer and they have been well represented in ASCoT's portfolio. The share prices of such companies offered attractive value given the fact that they were previously shunned by investors when interest in TMT was at its highest. * In contrast, there has been one influence which has been of little significance in the six months. Historically, Shareholders have benefited from a high level of corporate activity in ASCoT's holdings reflecting the implementation of your Managers' investment style which seeks to isolate businesses with attractive financial characteristics and strong market positions selling below their intrinsic value. These characteristics are similar to those which would attract a corporate or financial buyer. However, in the six months to June 2001 only 3 investments have been the subject of a takeover offer as corporate buyers have been concerned by deteriorating visibility as to profits, an issue which has also concerned the banking industry, and been reflected in the pricing and structure of their lending terms to possible acquirors. INVESTMENT OUTLOOK The macro economic outlook is less favourable with the major regions of the globe continuing to slow despite the significant number of interest rate reductions. Whilst your Managers believe in the efficacy of monetary easing, the level of inventory and debt, particularly in the USA, may lend some support to the well known analogy of 'pushing on a string' and therefore extend the period of anaemic economic performance. With regard to the UK, the current position is somewhat less benign than has been the case in the recent past. The strong growth in both private and government spending is demonstrating its counterpart in a deteriorating external account and recent evidence that inflation may not be as quiescent as previously anticipated removes some of the policy flexibility which the Monetary Policy Committee has hitherto enjoyed. The data available to your Managers detailed below demonstrates that small companies appear to still offer relatively good value. Further, they give exposure to a recovery in the global economy and to corporate consolidation which is likely to move hand in hand with the economic cycle. 30 June 2001 30 June 2000 Characteristics ASCoT Benchmark ASCoT Benchmark Number of Companies 95 980 95 1,018 Weighted Average £358.8m £353.4m £289.7m £347.9m Market Capitalisation Price Earnings Ratio 13.0x 14.1x 12.2x 13.1x (Historic) Net Dividend Yield 3.1% 2.6% 3.5% 2.9% (Historic) Dividend Cover 2.5x 2.8x 2.4x 2.7x (Historic) Your Managers believe that future equity returns will be somewhat more modest than those of the last decade as the adjustment to lower real yields has taken place. Hence future gains will be harder won but your Managers' investment style, which concentrates on fundamental value measures, should ensure that ASCoT's portfolio will be relatively well placed in the anticipated environment and should add value to more modest benchmark returns. However, the margin of future outperformance is unlikely to match the exceptional level of relative returns which Shareholders have enjoyed over the last six months. William Y Hughes Chairman 17 July 2001 The Statement of Total Return, summary Balance Sheet and summary Cash Flow Statement are set out below:- STATEMENT OF TOTAL RETURN (Incorporating the Revenue Account*) For the Six Months ended 30 June 2001 (unaudited) 6 months to 6 months to 30 June 2001 30 June 2000 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Realised - 20,850 20,850 - 18,423 18,423 gains/(losses) on sales Unrealised - 7,966 7,966 - (14,946) (14,946) gains/(losses) Gains/(losses) - 28,816 28,816 - 3,477 3,477 on investments Deemed cost of Warrants purchased for - (1,275) (1,275) - (41) (41) cancellation Dividend 5,383 - 5,383 4,980 - 4,980 income Interest 509 - 509 234 - 234 income Other income - - - 4 - 4 Investment (534) (890) (1,424) (462) (771) (1,233) management fee Other expenses (103) - (103) (98) - (98) Net return before finance costs and 5,255 26,651 31,906 4,658 2,665 7,323 taxation Interest - - - (41) (69) (110) payable and similar charges Return on 5,255 26,651 31,906 4,617 2,596 7,213 ordinary activities before tax Tax on - - - - - - ordinary activities Return attributable to equity 5,255 26,651 31,906 4,617 2,596 7,213 shareholders Dividends in (2,676) - (2,676) (2,498) - (2,498) respect of equity shares Transfer to 2,579 26,651 29,230 2,119 2,596 4,715 reserves Returns per Ordinary Share: Basic 6.30p 31.94p 38.24p 5.56p 3.13p 8.69p Diluted 6.17p 31.28p 37.45p 5.44p 3.06p 8.50p Dividends per 3.20p - 3.20p 3.00p - 3.00p Ordinary Share NOTES The calculations of revenue return per Ordinary Share are based on net revenue of £5,255,000 (30 June 2000 - £4,617,000) and on Ordinary Shares of 83,442,561 (30 June 2000 - 83,008,843) in the case of basic returns and 85,195,768 (30 June 2000 - 84,920,175) in the case of diluted returns. The calculations of capital return per Ordinary Share are based on net capital gains of £26,651,000 (30 June 2000 - £2,596,000) and on Ordinary Shares of 83,442,561 (30 June 2000 - 83,008,843) in the case of basic returns and 85,195,768 (30 June 2000 - 84,920,175) in the case of diluted returns. * The revenue 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 period. SUMMARY BALANCE SHEET As at 30 June 2001 (unaudited) 30-Jun 30-Jun 31-Dec 2001 2000 2000 £'000 £'000 £'000 Securities officially listed on the London 311,157 254,809 286,067 Stock Exchange Cash at bank 20,148 14,725 15,074 Debtors 2,399 6,214 5,430 Other creditors (3,690) (4,195) (5,651) Net current assets 18,857 16,744 14,853 Total assets less liabilities 330,014 271,553 300,920 Capital and reserves: equity interests Called up share capital (Ordinary Shares) 836 833 833 Reserves: Share premium account 868 500 500 Special reserve 133,525 133,525 133,525 Capital reserve - realised 139,850 118,665 121,672 Capital reserve - unrealised 43,943 9,012 35,977 Revenue reserve 10,992 9,018 8,413 330,014 271,553 300,920 Net Asset Values: Ordinary Share (basic) 394.6p 326.1p 361.4p Ordinary Share (fully diluted) 388.5p 318.6p 352.7p Ordinary Share (diluted - FRS 14) 388.8p 319.3p 353.5p NOTES As at 30 June 2001, the Company had 83,630,941 Ordinary Shares (30 June 2000 and 31 December 2000 - 83,260,325) and 1,779,293 Warrants (30 June 2000 and 31 December 2000 - 2,878,897) in issue. On 2 April 2001, as a result of certain holders exercising the subscription rights of their Warrants, 370,616 Ordinary Shares of 1p were issued at 100p per share. Also, during the six months to 30 June 2001, the Company bought in 728,988 Warrants for cancellation at a total cost of £1,782,000. SUMMARY CASH FLOW STATEMENT For the Six Months ended 30 June 2001 (unaudited) 6 months to 6 months to 30 June 2001 30 June 2000 £'000 £'000 £'000 £'000 Net cash inflow from operating activities 3,470 3,309 Returns on investment and servicing of finance Interest paid - (182) Net cash outflow from returns on investment and servicing of finance - (182) Capital expenditure and financial investment Payments to acquire (68,296) (51,947) investments Receipts from sales of 76,015 81,254 investments Net cash inflow from capital expenditure and financial investment 7,719 29,307 11,189 32,434 Equity dividends paid (4,704) (3,931) 6,485 28,503 Financing Issue of Ordinary Shares 371 503 Warrants purchased for (1,782) (76) cancellation Net cash (outflow)/inflow (1,411) 427 from financing Increase in cash 5,074 28,930 NOTES The foregoing do not comprise statutory accounts (as defined in section 240(5) of the Companies Act 1985) of the Company. The statutory accounts for the year to 31 December 2000, which contained an unqualified Report of the Auditors, have been lodged with the Registrar of Companies and did not contain a statement required under section 237(2) or (3) of the Companies Act 1985. The Interim Report is expected to be posted to shareholders on 23 July 2001. Members of the public may obtain copies from Aberforth Partners, 14 Melville Street, Edinburgh EH3 7NS. CONTACT: John Evans * Aberforth Partners * 0131 220 0733

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