Half Yearly Report

RNS Number : 7084R

Shires Smaller Companies PLC

26 August 2010

 



26 August 2010

Shires Smaller Companies plc

Interim Results for the

Six months to 30 June 2010

Shires Smaller Companies plc aims to provide a high and growing dividend and capital growth from a portfolio invested principally in the ordinary shares of smaller UK companies and UK fixed income securities.

	30 June 2010	31 December 2009	% change
Equity shareholders' funds (£'000)	27,254	25,327	+7.6
Net asset value per share	123.27p	114.55p	+7.6
Share price (mid-market)	103.00p	95.00p	+8.4
Discount to net asset value{A}	15.4%	15.8%
Dividend yield	5.8%	7.4%
{A} Based on IFRS net asset value excluding dividend adjustment of 1.50p (31 December 2009 - 1.75p).

For further information, please contact:-

Kenneth Harper

Manager, Investment Trust Investor Relations

Aberdeen Asset Management Limited

Telephone [phone]

INTERIM BOARD REPORT

Investment Returns

It has been a challenging couple of years for smaller company specialists, especially for a trust such as Shires Smaller with its geared structure. I am therefore pleased to report that the measures taken to reduce gearing to manageable levels while still retaining the Company's income attractions and recovery prospects are delivering much improved results. 

In the six months to 30 June 2010, the total return on Shires Smaller's net assets was 10.5%. This positive outcome was achieved during a period of weak equity returns when the FTSE Small Cap index (ex Investment Trusts) declined by 3.6% on a total return basis. Over the same period, the Company's share price total return was also positive at 12.1% and the discount narrowed to 15.4% at 30 June 2010, compared to 15.8% at our last year end. By comparison, the FTSE All-Share Index fell 6.1% in the same period on the back of a collapse in the share price of BP and weakness across the heavyweight resources sector. The FTSE All-Share Index is dominated by a small number of very large companies and the negative impact of the BP dividend cut highlights the attractions of investing in a portfolio of smaller companies which can offer greater diversity of revenue both by company and sector.

The Company's corporate bond portfolio returned 7.8% for the six months to 30 June 2010 compared to the iBoxx Sterling Non-Gilts 1-15 Years Index return of 5.7%. The portfolio outperformed its benchmark and is well positioned to deliver the expected contribution to the Company's dividend yield without the volatility in capital performance we experienced in prior periods.

Gearing

As announced with the Company's final results in February 2010, the Board has redeemed the final £5.3m tranche of the Zero Coupon Financing that matured at the end of July. Concurrent with this we have also concluded negotiations on a new borrowing facility at what we believe are very attractive terms. The previous 5.49% bank loan which was invested in corporate bonds to drive the enhanced yield has been replaced by a new £10m three year revolving credit facility priced at LIBOR + 200bps, now fully drawn at an all in cost of 2.5725%. The new facility provides the Company with a simple, cost effective and stable funding platform. The Board will keep under review, with the Manager, the likely course of interest rates but for the present believes that a floating rate rather than a fixed rate is the most attractive way to maximise the spread on the portfolio returns and to continue to generate the enhanced yield that the Company delivers

Earnings and Dividends

In line with the statement made in the Annual Report to shareholders, we have declared and paid the first two interim dividends of 1.5p each. The Board anticipates paying the third and fourth interim dividends of 1.5p each share, giving a total of 6.0p for the year to 31 December 2010 (subject to any unforeseen circumstances). The dividend yield on the current share price of 113.25p is 5.3% which remains attractive versus the smaller companies peer group.

As mentioned in more detail below companies are beginning to restore and deliver dividend growth, in some cases into the double digits. The Board believes that 2010 should be the low point in terms of revenue according to the work done by the Manager on internal forecasts. The Board is also comforted by the dividend cover from our equity portfolio which at the recent results was greater than two times. Finally, the Company has the benefit of revenue reserves, should they be required, which net of anticipated payments for the remainder of 2010 will be in excess 7p per share.

Background

Markets entered 2010 with greater optimism despite facing a number of headwinds. The fear and uncertainty of the economic crisis has subsided but the reality of dealing with the aftermath and the record levels of public debt were always going to be a tougher challenge.    

Equity markets were volatile throughout the period but recovered from their lows as successive governments announced measures to deal with their burgeoning budget deficits. There is, as always, a balancing act to a reduction in public spending and knock on effect of rising unemployment which would only exacerbate the already anaemic levels of growth. In the UK the coalition Government announced a swathe of spending cuts and tax rises with the aim of reducing debt from 11% of GDP to 1% by 2015-16. The rhetoric has been tough but these packages are in their infancy so only time will tell if this level of deleveraging can be delivered.

Portfolio Activity

The Company benefited from the resurgence in takeover activity during the period. Chloride was bid for by Emerson Electric of the U.S., the second time in the last few years they've tried to acquire the group. Swiss electrical group ABB joined the bidding culminating in Emerson paying a price which fully valued the group. Private client fund manager Rensburg Sheppards was acquired by Investec who already held 47% of the group and Care UK fell to private equity buyers. There are also two bids which have yet to be concluded. Travis Perkins has made a cash and shares offer for BSS Group which has been recommended by the Board, and finally private equity group Apollo is currently looking at the books of Brit Insurance. Other notable performers over the first half were XP Power, Oxford Instruments and Victrex while the main detractor was McBride. McBride, the household and personal care provider had a profit warning on the back of rising raw material prices and tough competition from the branded food producers. Rising raw material, and commodity prices, is a theme that we have seen across a number of our holdings with some able to mitigate the pressures of passing these costs through quicker than others.

In terms of activity we have seen a strong bounce in some of the more cyclical plays. This was an opportunity to trim the following holdings; Robert Walters, XP Power, Fenner and John Menzies. Greggs was added to given the defensive qualities of the business, and net cash balance sheet. We also added to Dechra Pharmaceuticals, Intermediate Capital and Helical Bar. There were four exits from the portfolio where there were concerns over the business model. Marshalls had repaired their balance sheet through a rights issue the previous year but with half of their business being exposed to public sector spending and the other half high ticket consumer spending we felt the cash could be better deployed elsewhere. We also exited Low and Bonar, and completed the sale of Hotel Corporation a legacy holding which had minimal liquidity. We introduced Forth Ports who are the last listed ports operator in the U.K., and pub operator Fuller Smith & Turner.

Post the period end it was noticeable that a number of the Company's holdings delivered strong interim results. The benefits of cost cutting are starting to come through at the operating line and in some cases there has been a return to top line growth. The caveat to this is the fact that sales remain depressed in a number of markets and they're up against easy comparative figures. In terms of dividends there has been some strong dividend growth despite the uncertainty about the outlook for the second half. 

Outlook

There is a considerable amount of uncertainty surrounding the second half of the year. Economic data has continued to be mixed with a number of negative surprises. Investors have yet to witness the full effects of the austerity measures which may choke consumption and cause unemployment to rise further. The earnings outlook remains unclear with talk of a double dip recession leading companies to rein in expectations for the second half. Despite the fragile economic outlook, the Manager's focus on strong balance sheets, and regular contact with the companies we invest in, and a now simplified structure means the Company is well placed to continue to deliver on its objective.

H S Cathcart

Chairman

26 August 2010

Principal Risks and Uncertainties

The principal risks and uncertainties faced by the Company and its subsidiaries fall into three broad categories: (i) market risk, comprising interest rate risk and other price risk, (ii) liquidity risk and (iii) credit risk. Information on each of these areas is given within the Annual Report and Accounts for the year ended 31 December 2009.

Directors' Responsibility Statement

The Directors are responsible for preparing this Half-Yearly Financial Report in accordance with applicable law and regulations. The Directors confirm that to the best of their knowledge:

-     the condensed set of interim financial statements contained within the Half Yearly Financial Report has been prepared in accordance with IAS34; and

-     the Chairman's Statement (constituting the interim management statement) includes a fair review of the information required by rules 4.2.7R of the Disclosure and Transparency Rules (being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements and a description of the principal risks for the remaining six months of the financial year) and 4.2.8R (being related party transactions that have taken place during the first six months of the financial year and that have materially affected the financial position of the Company and its subsidiary during that period; and any changes in the related party transactions described in the last annual report that could so do).

The half yearly report for the six months to 30 June 2010 comprises the Interim Board Report, the Directors' Responsibility Statement and a condensed set of financial statements.

For and on behalf of the Board

of Shires Smaller Companies plc

H S Cathcart

Chairman

Consolidated Statement of Comprehensive Income  

for the half year ended 30 June 2010

	Six months ended
	30 June 2010
	(unaudited)
	Revenue	Capital	Total
	£'000	£'000	£'000
Dividend income	802	-	802
Interest income from investments	241	(12)	229
Deposit interest	7	-	7
Other income	-	-	-
Gains on investments held at fair value	-	2,116	2,116
Fair value movement in zero coupon finance derivatives	-	(50)	(50)
	_________	_________	_________
Total income	1,050	2,054	3,104
	_________	_________	_________
Expenses
Investment management fees	(73)	(73)	(146)
VAT recoverable on investment management fees	-	-	-
Other administrative expenses	(121)	-	(121)
Finance costs of borrowing	(96)	(96)	(192)
	_________	_________	_________
Profit/(loss) before taxation	760	1,885	2,645
	_________	_________	_________
Taxation	-	-	-
	_________	_________	_________
Profit/(loss) attributable to equity holders of the Group	760	1,885	2,645
	_________	_________	_________
Earnings/(loss) per Ordinary share (pence)	3.44	8.52	11.96
	_________	_________	_________
The total column of this statement represents the Group's Income Statement, prepared in accordance with IFRS. The supplementary revenue return and capital columns are both prepared under guidance published by the Association of Investment Companies. All items in the above statement derive from continuing operations.
The Company does not have any income or expense that is not included in profit/(loss) for the year, and therefore the "Profit/(loss) attributable to equity holders of the Group" is also the "Total comprehensive income attributable to equity holders of the Group" as defined in IAS 1 (revised).
All of the profit/(loss) and comprehensive income are attributable to the equity holders of the parent Company. There are no minority interests.
All items in the above statement derive from continuing operations.

Consolidated Statement of Comprehensive Income 

(Continued)

	Six months ended			Year ended
	30 June 2009			31 December 2009
	(unaudited)			(audited)
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Dividend income	697	-	697	1,258	-	1,258
Interest income from investments	344	(20)	324	667	(33)	634
Deposit interest	18	-	18	23	-	23
Other income	-	-	-	134	-	134
Gains on investments held at fair value	-	438	438	-	7,157	7,157
Fair value movement in zero coupon finance derivatives	-	(182)	(182)	-	(274)	(274)
	_______	_______	_______	_______	_______	_______
Total income	1,059	236	1,295	2,082	6,850	8,932
	_______	_______	_______	_______	_______	_______
Expenses
Investment management fees	(59)	(59)	(118)	(127)	(127)	(254)
VAT recoverable on investment management fees	-	-	-	144	144	288
Other administrative expenses	(85)	-	(85)	(212)	-	(212)
Finance costs of borrowing	(187)	(187)	(374)	(279)	(279)	(558)
	_______	_______	_______	_______	_______	_______
Profit/(loss) before taxation	728	(10)	718	1,608	6,588	8,196
	_______	_______	_______	_______	_______	_______
Taxation	-	-	-	-	-	-
	_______	_______	_______	_______	_______	_______
Profit/(loss) attributable to equity holders of the Group	728	(10)	718	1,608	6,588	8,196
	_______	_______	_______	_______	_______	_______
Earnings/(loss) per Ordinary share (pence)	3.29	(0.05)	3.24	7.27	29.80	37.07
	_______	_______	_______	_______	_______	_______
The total column of this statement represents the Group's Income Statement, prepared in accordance with IFRS. The supplementary revenue return and capital columns are both prepared under guidance published by the Association of Investment Companies. All items in the above statement derive from continuing operations.
The Company does not have any income or expense that is not included in profit/(loss) for the year, and therefore the "Profit/(loss) attributable to equity holders of the Group" is also the "Total comprehensive income attributable to equity holders of the Group" as defined in IAS 1 (revised).
All of the profit/(loss) and comprehensive income are attributable to the equity holders of the parent Company. There are no minority interests.
All items in the above statement derive from continuing operations.

Consolidated Balance Sheet

as at 30 June 2010

	As at	As at	As at
	30 June	30 June	31 December
	2010	2009	2009
	(unaudited)	(unaudited)	(audited)
	£'000	£'000	£'000
Non-current assets
Ordinary shares	25,676	16,226	23,084
Convertibles	1,112	1,152	1,206
Corporate bonds	6,069	6,796	6,499
Other fixed interest	3,684	3,737	4,158
	____________	____________	____________
Securities at fair value	36,541	27,911	34,947
Zero coupon finance derivatives at fair value	-	2,542	-
	____________	____________	____________
	36,541	30,453	34,947
	____________	____________	____________
Current assets
Other receivables	800	1,095	400
Cash and cash equivalents	2,425	1,948	2,381
Zero coupon finance derivatives at fair value	472	-	637
	____________	____________	____________
Total current assets	3,697	3,043	3,418
	____________	____________	____________
Total assets	40,238	33,496	38,365
Current liabilities
Trade and other payables	(215)	(128)	(126)
Short-term loan	(7,000)	-	(7,000)
Zero coupon finance derivatives at fair value	(5,769)	-	(5,912)
	____________	____________	____________
Total current liabilities	(12,984)	(128)	(13,038)
	____________	____________	____________
Non-current liabilities
Long-term loan	-	(7,000)	-
Zero coupon finance derivatives at fair value	-	(7,745)	-
	____________	____________	____________
	-	(14,745)	-
	____________	____________	____________
Total liabilities	(12,984)	(14,873)	(13,038)
	____________	____________	____________
Net assets	27,254	18,623	25,327
	____________	____________	____________
Issued capital and reserves attributable to equity holders of the parent
Called-up share capital	11,055	11,055	11,055
Share premium account	11,892	11,892	11,892
Capital redemption reserve	2,032	2,032	2,032
Capital reserve	192	(8,291)	(1,693)
Revenue reserve	2,083	1,935	2,041
	____________	____________	____________
	27,254	18,623	25,327
	____________	____________	____________
Net asset value per Ordinary share (pence)	123.27	84.23	114.55
	____________	____________	____________

Consolidated Statement of Changes in Equity

Six months ended 30 June 2010 (unaudited)		Share	Capital
	Share	premium	redemption	Capital	Revenue
	capital	account	reserve	reserve	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 31 December 2009	11,055	11,892	2,032	(1,693)	2,041	25,327
Revenue profits for the period	-	-	-	-	760	760
Capital profits for the period	-	-	-	1,885	-	1,885
Equity dividends	-	-	-	-	(718)	(718)
	______	______	______	______	______	______
Balance at 30 June 2010	11,055	11,892	2,032	192	2,083	27,254
	______	______	______	______	______	______
Six months ended 30 June 2009 (unaudited)
		Share	Capital
	Share	premium	redemption	Capital	Revenue
	capital	account	reserve	reserve	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 31 December 2008	11,055	11,892	2,032	(8,281)	2,677	19,375
Revenue profits for the period	-	-	-	-	728	728
Capital losses for the period	-	-	-	(10)	-	(10)
Equity dividends	-	-	-	-	(1,470)	(1,470)
	______	______	______	______	______	______
Balance at 30 June 2009	11,055	11,892	2,032	(8,291)	1,935	18,623
	______	______	______	______	______	______
Year ended 31 December 2009 (audited)
		Share	Capital
	Share	premium	redemption	Capital	Revenue
	capital	account	reserve	reserve	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 31 December 2008	11,055	11,892	2,032	(8,281)	2,677	19,375
Revenue profits for the year	-	-	-	-	1,608	1,608
Capital profits for the period	-	-	-	6,588	-	6,588
Equity dividends	-	-	-	-	(2,244)	(2,244)
	______	______	______	______	______	______
Balance at 31 December 2009	11,055	11,892	2,032	(1,693)	2,041	25,327
	______	______	______	______	______	______

Consolidated Cash Flow Statement

for the half year ended 30 June 2010

	Six months ended	Six months ended	Year ended
	30 June 2010	30 June 2009	31 December 2009
	(unaudited)	(unaudited)	(audited)
	£'000	£'000	£'000
Cash flows from operating activities
Investment income received	959	1,041	2,083
Deposit interest received	7	30	165
Investment management fees paid	(142)	(264)	(386)
VAT recovered	-	-	728
Other cash expenses	(123)	(148)	(255)
	___________	___________	___________
Cash generated from operations	701	659	2,335
Interest paid	(192)	(369)	(560)
	___________	___________	___________
Net cash inflows from operating activities	509	290	1,775
	___________	___________	___________
Cash flows from investing activities
Purchases of investments	(5,173)	(5,456)	(11,024)
Sales of investments	5,453	7,374	12,678
	___________	___________	___________
Net cash inflow from investing activities	280	1,918	1,654
	___________	___________	___________
Cash flows from financing activities
Equity dividends paid	(718)	(1,470)	(2,244)
Repayment of loan	-	(3,000)	(3,000)
ZCF financing fees	(27)	-	-
Repayment of September 2009 ZCF position	-	(5,363)	(5,377)
	___________	___________	___________
Net cash outflows from financing activities	(745)	(9,833)	(10,621)
	___________	___________	___________
Net increase/(decrease) in cash and cash equivalents	44	(7,625)	(7,192)
Cash and cash equivalents at the start of the period	2,381	9,573	9,573
	___________	___________	___________
Cash and cash equivalents at the end of the period	2,425	1,948	2,381
	___________	___________	___________
Cash and cash equivalents comprise:
Cash and cash equivalents	2,425	1,948	2,381
	___________	___________	___________

Distribution of Assets and Liabilities

	Valuation at		Movement during the period				Valuation at
	31 December					Gains/	30 June
	2009		Purchases	Sales	Other{A}	(losses)	2010
	£'000	%	£'000	£'000	£'000	£'000	£'000	%
Listed investments
Ordinary shares	23,084	91.1	4,340	(3,820)	-	2,072	25,676	94.2
Convertibles	1,206	4.8	-		-	(94)	1,112	4.1
Corporate Bonds	6,499	25.7	917	(1,627)	(12)	292	6,069	22.3
Other fixed interest	4,158	16.4	-	(320)	-	(154)	3,684	13.5
	_______	_______	_______	_______	_______	_______	_______	_______
	34,947	138.0	5,257	(5,767)	(12)	2,116	36,541	134.1
	_______	_______	_______	_______	_______	_______	_______	_______
Current assets	3,418	13.5					3,697	13.5
Current liabilities	(13,038)	(51.5)					(12,984)	(47.6)
	_______	_______					_______	_______
Net assets	25,327	100.0					27,254	100.0
	_______	_______					_______	_______
Net asset value per Ordinary share	114.6p						123.3p
	_______						_______
{A} Represents amortisation costs on debt securities of £12,000

1.	Accounting policies
	(a)	Basis of accounting
		The Group's financial statements have been prepared in accordance with International Financial Reporting Standards ('IFRS') 34 - 'Interim Financial Reporting', as adopted by the International Accounting Standards Board ('IASB'), and interpretations issued by the International Financial Reporting Interpretations Committee ('IFRIC') of the IASB. They have also been prepared using the same accounting policies applied for the year ended 31 December 2009 financial statements, which received an unqualified audit report.
	(b)	Dividends payable
		Dividends are recognised in the period in which they are paid.

2.	Taxation
	The taxation expense reflected in the Consolidated Statement of Comprehensive Income is based on management's best estimate of the weighted average annual income tax rate expected for the full financial year. The estimated average annual tax rate used for the year to 31 December 2010 is 28%.

3.	Dividends
	The following table shows the revenue for each period less the dividends declared in respect of the financial period to which they relate.
		Six months ended	Six months ended	Year ended
		30 June 2010	30 June 2009	31 December 2009
		£'000	£'000	£'000
	Revenue	760	728	1,608
	Dividends declared	(663){A}	(774){B}	(1,548){C}
		___________	___________	___________
		97	(46)	60
		___________	___________	___________
	{A} Dividends declared relate to first two interim dividends (both 1.50p each) declared in respect of the financial year 2010.
	{B} Dividends declared relate to first two interim dividends (both 1.75p each) declared in respect of the financial year 2009.
	{C} Dividends declared relate to the four interim dividends declared in respect of the financial year 2009 totalling 7.00p.

		Six months ended	Six months ended	Year ended
		30 June 2010	30 June 2009	31 December 2009
4.	Return and net asset value per share	p	p	p
	Revenue return	3.44	3.29	7.27
	Capital return/(loss)	8.52	(0.05)	29.80
		___________	___________	___________
	Total return	11.96	3.24	37.07
		___________	___________	___________
	The figures above are based on the following attributable assets:
		£'000	£'000	£'000
	Revenue return	760	728	1,608
	Capital return/(loss)	1,885	(10)	6,588
		___________	___________	___________
	Total return	2,645	718	8,196
		___________	___________	___________
	Weighted average number of Ordinary shares in issue	22,109,765	22,109,765	22,109,765
		___________	___________	___________
	The net asset value per share is based on net assets attributable to shareholders of £27,254,000 (30 June 2009 - £18,623,000; 31 December 2009 - £25,327,000) and on 22,109,765 (30 June 2009 - 22,109,765; 31 December 2009 - 22,109,765) Ordinary shares in issue at each period end.

5.	Capital reserves
	The capital reserve reflected in the Balance Sheet at 30 June 2010 includes gains of £241,000 (30 June 2009 - losses of £11,118,000; 31 December 2009 - losses of £3,408,000) which relate to the revaluation of investments held at the reporting date.

6.	Transaction costs
	During the period expenses were incurred in acquiring or disposing of investments classified as fair value though profit or loss. These have been expensed through capital and are included within gains on held-at-fair-value investments in the Consolidated Statement of Comprehensive Income. The total costs were as follows:
		Six months ended	Six months ended	Year ended
		30 June 2010	30 June 2009	31 December 2009
		£'000	£'000	£'000
	Purchases	27	19	52
	Sales	4	3	6
		___________	___________	___________
		31	22	58
		___________	___________	___________

7.	Publication of non-statutory accounts
	The financial information contained in this Half-Yearly Financial Report does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The financial information for the six months ended 30 June 2010 and 30 June 2009 has not been audited.
	The information for the year ended 31 December 2009 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 accounts contained no qualification or statement under Section 498 (2), (3) or (4) of the Companies Act 2006.

8.	This Half-Yearly Financial Report was approved by the Board on 26 August 2010.

9.     The half yearly financial report is available on the Company's website, www.shiressmallercompanies.co.uk, and the Interim Report will be posted to shareholders in September 2010 and copies will be available from the investment manager.

Please note that past performance is not necessarily a guide to the future and that the value of investments and the income from them may fall as well as rise.  Investors may not get back the amount they originally invested

 

END

 

 

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