Final Results
ABERFORTH GEARED CAPITAL & INCOME TRUST plc
Audited final results for the year to 31 December 2008
The following is an extract from the Company's Annual Report and Accounts for
the year to 31 December 2008. The Annual Report is expected to be posted to
shareholders on 30 January 2009. Members of the public may obtain copies from
Aberforth Partners LLP, 14 Melville Street, Edinburgh EH3 7NS or from its
website at www.aberforth.co.uk. The Annual Report and Accounts will shortly be
available for inspection at the FSA's document viewing facility at 25 The
North Colonnade, Canary Wharf, London E14 5HS.
FEATURES
Total Returns
Total Assets - 38.4%
Net Asset Value of Capital Shares(1) - 84.1%
Second Interim Dividend per Income Share 6.7p (unchanged)
Total Dividend per Income Share 12.6p (+20%)
(1) Capital Shares asset performance assumes Income Shares have
a capital entitlement of 100p each.
The investment objective of Aberforth Geared Capital & Income Trust plc is to
provide Income Shareholders with a high level of income payable half yearly
with the potential for income growth and to provide Capital Shareholders with
geared capital growth.
All data throughout this Annual Report is to, or as at, 31 December 2008 as
applicable, unless otherwise stated.
CHAIRMAN'S STATEMENT TO SHAREHOLDERS
INTRODUCTION
I reflected last year that 2007 had been a difficult year for the stockmarket
performance of AGCiT's chosen asset class of small UK quoted companies. 2008
proved to be even more challenging with the severe stresses in the financial
system generating a sharp slowdown in the global economy and equity markets
throughout the world experiencing significant declines. The UK has been no
exception. The FTSE All-Share Index, representative of larger UK companies,
produced a negative total return of 29.9%, while the Hoare Govett Smaller
Companies Index (Excluding Investment Companies), the index which represents
AGCiT's chosen asset class, produced a negative total return of 40.8%. The
Total Asset Total Return of AGCiT's portfolio was minus 38.4%.
AGCiT is a geared investment company and has consistently employed debt close
to the available limit of its facilities for the majority of the time. The
effect of gearing for Capital Shareholders is to magnify the underlying
portfolio returns. Consequently, in a period of such significant negative
returns, the effect on the Net Asset Value of the Capital Shares has been
material, reflected in a decline from 579.5p at 31 December 2007 to 91.9p at
31 December 2008, a fall of 84.1%.
AGCiT's debt facilities are provided by Bank of Scotland and were agreed at
the time of listing in 2001. I am pleased to inform Shareholders that AGCiT
was fully compliant with its bank covenants at the most recent annual testing
date of 31 December 2008.
DIVIDENDS
Your Board has declared a second interim dividend of 6.70p per Income Share,
which is the same level declared for the equivalent dividend in 2007. When
taken together with the first interim dividend of 5.90p, the total dividends
for the year of 12.60p represent an increase over the payments in respect of
2007 of 20.0%. The second interim dividend will be paid on 27 February 2009
to Income Shareholders on the register at the close of business on 6 February
2009. The ex-dividend date will be 4 February 2009.
The Company's earnings have been strong this year reflecting good underlying
growth in dividends from portfolio investments, a particular feature of the
first half of the year. Revenue has also been enhanced by the receipt of non
recurring interest relating to VAT. Consequently, following the payment of
the second interim dividend total revenue reserves will be approximately 6p
per Income Share.
It is unlikely that the level of income earned by the portfolio in 2009 will
be as high as 2008. The near term outlook for corporate dividends in the UK
is challenging and many financial commentators are of the view that, in
aggregate, UK dividends will fall in 2009. In this context, the existence of
revenue reserves gives your Board a degree of flexibility.
VALUE ADDED TAX (VAT)
Shareholders will recall from previous reports that VAT is no longer imposed
on management fees and that your Board and Managers reached agreement for
recovery of all VAT on management fees paid by the Company since 2001.
As stated in the Half Yearly Report, a total of £743,000 has been received
from the Managers, comprising £672,000 (accounted for in 2007) of VAT plus
associated interest of £71,000 (accounted for in 2008). I believe that this
represents a most satisfactory outcome for Shareholders.
SUMMARY AND OUTLOOK
2008 has been a difficult year for UK smaller companies with a steep decline
in the level of their share prices. If ever a reminder was needed that equity
investment requires a long term perspective it has been given to us in this
past year. Whilst it would be folly to suggest that there is no more pain to
come, your Managers are of the view that, despite the current uncertainties,
UK small company equities represent attractive value.
Consequently, it is intended that, barring unforeseen circumstances, the
structure and philosophy of the Company will be unaltered. The level of debt
employed will continue to be close to its available limit for the majority of
the time. As a result, Capital Shareholders will be best placed fully to
participate in any stockmarket recovery while Income Shareholders will have
the opportunity to earn a sufficient level of income to attempt to meet the
objective of sustaining their level of dividends over the remaining three
years of the Company's life.
Alastair C Dempster
Chairman
26 January 2009
MANAGERS' REPORT
PERFORMANCE
The total return of the HGSC (XIC) was negative 40.8% in 2008. This was the
second worst result in nominal terms over the index's 54 year history. The
FTSE All-Share performed less poorly but nevertheless experienced a negative
total return of 29.9%. Against this background of extremely weak equity
markets, AGCiT's total return at the total asset level was negative 38.4%.
Recent declines have been so severe that through AGCiT's lifetime, just over
seven years, the FTSE All-Share has registered a total return of just 12.6%
cumulatively, a negative outcome in real terms. Small companies have
performed more strongly, with a return of 18.6% over the same period, while
AGCiT's total return at the total asset level has been 46.8%.
INVESTMENT BACKGROUND
Last year's horrible performance from equities was not confined to the UK.
Stockmarkets around the world declined precipitously, with 50% drops not
uncommon in both established and emerging markets. Nor was the weakness of
these returns confined to equities: any asset class perceived as risky
suffered in 2008 as the credit markets moved from crunch to crisis. By
default, as it were, government debt has been the beneficiary of such extreme
risk aversion: in the US, treasury bill yields have at times dropped below
zero and ten year government bonds ended the year yielding close to 2%. And,
of course, bank deposits were caught up in the maelstrom: at certain points
through the year, equities certainly looked a less risky proposition.
After the relative calm of the first half of the year, the credit crisis
intensified in the third quarter. The process of de-leveraging, which started
over a year ago when US subprime problems were exposed, gathered pace and was
punctuated by large downward lurches. Of these, the most spectacular and deep-
reaching was the failure of Lehman, which brought home the reality of
counterparty risk. The reluctance or inability of the banks to make new loans
was obvious in extended spreads between LIBOR and base rates. The consequent
dearth of funding compromised what has become known as the `shadow-banking
system', which is the complex of hedge funds, prime brokers, money market
funds and securitisation markets that facilitated the build-up of debt in
Western economies over recent years. The forced unwinding of leveraged
investment positions has intensified the cycle of de-leveraging that is at the
heart of the credit crisis.
Meanwhile, real economic conditions deteriorated through the year, to the
extent that recession is with us, whether officially as in the US and Germany
or de facto as in the UK. Housing has been the principal transmission
mechanism of credit market problems to the real economy. On both sides of the
Atlantic, falling house prices, together with the difficulty in securing new
mortgage financing, have tempered consumers' willingness to spend, while
rampant commodity prices earlier in the year eroded disposable income.
Additional pressure is coming from rising unemployment, with many large
redundancy programmes making the headlines towards the end of the year as
businesses, particularly those close to the troubled automotive industry,
adjusted to the environment of weaker demand.
Importantly, however, some relief was forthcoming later in the year from the
remarkable reversal in fortune for commodities. Built on hopes that the
emerging world could decouple from Western economies and continue to grow
through internally generated demand, the prices of commodities, together with
the share prices of the companies exploiting them, reached extravagant levels
earlier in the year. These hopes were undermined as it became clear that the
ructions in credit markets would feed back to affect real economic activity
and that the `China phenomenon' depended substantially on Western,
predominantly American, spending. The extraordinary journey of the oil price,
which rose by almost 51% in the first half before plummeting to end 54% down
for the year, is illustrative of the wider commodity arena.
With the bursting of this latest bubble, the concern about stagflation that
was so prevalent less than six months ago has vanished. Expectations for
inflation have hurtled downwards: at the end of June, the difference between
ten year conventional and index linked gilt yields - a proxy for anticipated
inflation - was over 4%; by the end of the year, this had dropped to almost
1.5%. Similar movements are observable in the US and European bond markets.
With the stagflationary chimaera exposed, financial markets are again
confronted by deflation, with which they last flirted six years ago. The Bank
of England's November inflation report introduced the prospect of CPI
inflation dropping into negative territory at some time in 2009, having been
running at over 5% in the third quarter, as the commodities boom works its way
out of the system. So, the Chancellor may be receiving more letters in 2009,
albeit rather different in tone.
Relenting inflationary pressures have afforded monetary authorities, even the
ECB, the excuse to cut interest rates, though, given the disinflationary
nature of the de-leveraging process and of recession itself, such an excuse
was hardly required. In December, the Fed took US rates to zero. Meanwhile,
UK base rates ended the year at 2% and early in 2009 were cut again to 1.5%,
their lowest level since the foundation of the Bank of England. It is worth
remembering that at the half year futures markets were anticipating a rise by
the year end from the then prevailing level of 5%. As interest rates approach
zero, other remedial measures have been deployed by monetary and fiscal
authorities. Echoing Ben Bernanke's speeches back in 2002, these
unconventional steps include public ownership of swathes of the financial
system and the extension of the range of collateral accepted by the central
banks. Most significantly, as the year drew to a close the Fed confirmed that
it had embraced `quantitative easing', which is the expansion of the central
bank's balance sheet and thus of money supply. The newly printed money is to
be used to purchase government debt together with mortgage and other consumer
loans. These various actions have had some success in bringing interbank
rates to levels more consistent with prevailing base rates, though they have
yet to filter through the extended credit market.
Such measures nevertheless risk encountering the phenomenon of `pushing on a
string': deluged by cheap money, banks may opt to repair balance sheets rather
than lend; similarly, consumers may prefer saving over spending. In order to
deal with this conflict of individual rationality and the collective `good',
governments are stepping up to play their part, with half an eye to the
political capital apparently available from playing `my TARP's bigger than
yours'. In the UK, a combination of partial or full nationalisations, tax
cuts and a commitment to government spending programmes has seen projections
for public sector borrowing rise to around 8% of GDP over the next year or so.
The consequent probability of rising gilt issuance must exert an upwards drag
on gilt yields, though this has so far been overwhelmed by the flight to
safety. So far, the more tangible effects of the UK's difficult economic
circumstances have been sterling's falls of 26% and 23% against the dollar and
euro respectively over the course of 2008.
INVESTMENT PERFORMANCE
Against this background of stress in the real economy, dysfunctional credit
markets and general risk aversion, the share prices of small companies
struggled. As already noted, the HGSC (XIC)'s total return of negative 40.8%
was the second worst since its inception in 1955. With the FTSE All-Share's
29.9% decline, large companies fared relatively well: a much greater exposure
than their smaller peers to the high-profile casualties in banks and
commodities was offset by the benefit of higher weightings in resilient parts
of the market such as utilities and pharmaceutical companies.
The subsequent paragraphs, together with the table, provide an analysis of
AGCiT's relative performance.
· The weakness within the small company universe was widespread: the HGSC
(XIC) entered 2008 with 509 constituents; of those, only 68 managed a positive
total return in 2008. In order to achieve this feat, it helped to be on the
receiving end of M&A activity: 34 of these companies received bids, mostly in
the first half of the year before credit markets seized up in the third quarter.
AGCiT, which entered the year with 78 companies in its portfolio, had holdings
in 12 of the 68 companies noted above. Benefiting from active management, it
had holdings in another eight companies that achieved a positive total return.
As described in greater detail below, AGCiT did well from M&A activity.
PERFORMANCE ATTRIBUTION ANALYSIS
12 Months to 31 December 2008
Basis
Points
Stock Selection 17
Sector Selection 478
-----
Attributable to the portfolio of investments 495
Impact of mid price to bid price (29)
Gearing/cash (4,084)
Management fee (106)
Interest cost (256)
Movement in swap valuation (289)
Other expenses (61)
-----
Total Attribution based on bid prices (4,330)
-----
Note: 100 basis points = 1%. Total Attribution is the
difference between the capital only performance of the
Capital Share net asset value and the HGSC (XIC) (i.e.
Capital Share net asset value = -84.13%; HGSC (XIC) = -
40.83%; difference is -43.30% being -4,330 basis points).
· Stock selection made a small positive contribution, though this was
overshadowed by a strong showing from sector selection to produce AGCiT's
overall out-performance at the portfolio level. Your Managers have not given up
on their fundamentally driven, bottom-up approach to investment! Behind the
contribution from sector selection was a large under-weight position in the
commodities sectors (Industrial Metals, Mining and Oil & Gas), which performed
extremely poorly. Within the small company universe, the constituents of these
sectors are typically involved in exploration and development of resources and,
consequently, seldom generate cash. This positioning was motivated less by an
insight into the commodities prices themselves, which would have been a top-down
consideration, than by the lofty valuations of the individual stocks on offer
within these sectors. These stocks were frequently priced for an improbable
rate of exploration success, on top of some potentially heroic assumptions about
the underlying commodity price. So, this positioning is essentially driven by
bottom-up considerations, although the attribution calculation drags most of the
benefit into sector selection.
· At the interim stage, the portfolio's bias to businesses with overseas
profit streams was noted. This proved advantageous, but the benefit was
substantially confined to the first half. Through the third quarter, the logic
was undermined as it became clear that the implications of the credit crisis
were not confined to the US and UK: the global economy, if not entering
recession, is at least undergoing a meaningful deceleration. The problems
facing the capital goods arena were highlighted by a spate of trading statements
from companies around the world that warned of an extremely sharp contraction in
demand in the fourth quarter. From the portfolio's point of view, the
valuations of its capital goods holdings in many cases appear already to be
discounting a sharp decline in profits. However, at the margin, your Managers
have been tilting the portfolio back towards the domestic economy, adding to
holdings in the Media, Household Goods, Construction & Materials and General
Retailers sectors. Behind this shift, which has been undertaken tentatively,
are the low valuations of businesses within these sectors together with a
contention that these businesses will be among the first to see a pick-up in
profitability, when the recovery comes.
· In a diversified collection of small companies, it is inevitable that
during recession some will see their profitability decline to a level that will
challenge banking covenants. Reflecting this risk, the portfolio retains the
bias to companies with strong balance sheets that was noted in the interim
report. This defensive positioning, which is influenced by the parlous state of
the credit markets, has been beneficial to AGCiT's performance and remains very
much in place: 37% of the portfolio is invested in companies with net cash on
their balance sheets; at the other extreme, 5% of the portfolio sits in
companies whose net debt to EBITDA ratios exceed three times. Where net debt is
a feature, the current emphasis is on the tenure of funding from the banks,
rather than the interest rate margin payable over LIBOR. Margins have been
rising extravagantly as banks seek to restore their own profitability: 100 basis
points a year ago might now be 300 basis points. The alternative to accepting
these new terms would be worse for shareholders.
· As already noted, M&A activity was prevalent in the first half of the year
but tailed off substantially in the second. The credit markets in effect closed
during the third quarter and those companies with sufficiently strong balance
sheets to contemplate acquisitions are often being discouraged from doing so for
the time being by investors, your Managers included. Therefore, with rescue
rights issues becoming common, de-equitisation, which describes the replacement
of equity financing with debt financing and which has provided an underpinning
to UK equity valuations in recent years, has run out of steam. AGCiT benefited
from the completion of seven bids for its holdings over the year, though all
those were completed before October's turmoil. Exit valuations were on the
whole high, typically over 15x EV/EBIT, though trended downwards as the year
wore on. Two holdings received bids in the second half; these had yet to
complete at the year end. As an indication of the change in attitudes, eight
companies within the portfolio received approaches through the year but
subsequently saw the talks ended.
· As described in the `Investment Outlook' section of this report, your
Managers believe that dividend yield will make a crucial contribution to
forthcoming equity returns. Despite last year's deteriorating trading
environment and rising uncertainty, the dividend payments from AGCiT's
investments were robust. Of AGCiT's 67 holdings at the year end, one had
started paying a dividend only in 2008, rendering year on year comparisons
meaningless. Of the remaining 66, eight cut their dividends, a further five
held them unchanged and 53 reported increases. The median company within the 66
raised its dividend payment by 10%. This rate of growth is considerably ahead
of that achieved by UK equities over the longer term and given present economic
challenges is very unlikely to be sustained in 2009. It should be noted that
the median figure does not necessarily reflect AGCiT's actual receipts, since
the portfolio is actively managed and a specific rate of dividend growth is not
targeted.
INVESTMENT OUTLOOK
Coming out of a year of wrenching declines in equity prices, it is difficult
but necessary to take a step back in order to survey the opportunity base with
a degree of objectivity. The easiest observation to make is that the de-
leveraging process has to continue and that the present recession is,
regrettably, an essential part of it. Trading conditions are therefore set to
worsen in 2009, and it will take time for banks to repair their balance sheets
and pass on the benefit of lower interest rates to the private sector.
Despite the fillip of a weak sterling, profits will therefore fall. A decline
of at least 40% is not out of the question, which would put the present
downturn roughly on a par with that of the early 1990s.
Gloomier scenarios are being painted by some commentators, with a replay of
the 1930s depression sometimes cited. Given the extraordinary breadth and
depth of remedial actions taken by monetary and fiscal authorities, your
Managers suspect that a re-run of the deflationary 1930s is unlikely.
However, this is not to say that policy errors have not been made: for
example, a different sleuth of bears reckons that the extreme monetary easing
is foisting a substantial inflation problem in the future, which would
conveniently erode the present burden of debt and ask serious questions of
currently very low government bond yields. At the very least, it would seem
sensible to expect lower returns on equity in the future in an environment of
scarcer debt funding, greater regulation and, eventually, higher taxes.
Profits probably commenced their decline in the second half of 2008. It will
in all likelihood not fit conveniently into one calendar year, so it makes
sense to plan for a trough in profitability some time in 2010. Meetings with
company management teams can throw little light on the timing of the
inevitable recovery. Instead, the focus has to be on attempting to assess
whether the businesses will be around to benefit from the upturn. Scope to
cut costs and balance sheet resilience, preferably to the extent of having net
cash, are therefore crucial.
Also important is the concept of being `paid to wait'. Given the uncertain
duration of the downturn, investors can be rewarded for their faith in a
company through the consistent payment of a dividend. Dividend yields have
accounted for the majority of the real return from UK equities of around 5.1%
over the long term. High yields presently abound in the small company
universe, with the average from the HGSC (XIC) being 5.9%, the first time that
it has exceeded the yield on ten year gilts since 1974. Some of these yields
will prove illusory as cuts to underlying dividends are made. It is a focus
for your Managers at the current time to minimise the effects of such
reductions, and to persuade company boards that cuts motivated by fashion, or
by the argument that the market expects double-digit yields to be cut, are
unacceptable.
The historic yield from AGCiT's portfolio at the year end was 6.1%. In
planning for 2009, your Managers have anticipated a number of dividend cuts.
Importantly, the portfolio is not reliant on a small number of particularly
high yielding companies to generate its income: double-digit yielders on a
forecast basis account for 4% of the portfolio, while 42% is invested in
companies with forecast yields between 2.5% and 5%. With the top ten income
contributors accounting for less than 32% of total forecast income for 2009,
your Managers are hopeful that AGCiT's dividend experience may prove
relatively resilient in what will be a very difficult year for dividends.
Equity market valuations are presently very low against government bonds and
against their own history. The FTSE All-Share ended 2008 valued on a yield of
4.5% and a PE of 7.3x. Valuations in the small company world are more
extreme. At 6.4x, the historic PE ratio is back to the levels of the early
1980s. The average PE over the last 30 years, a period covering two other
recessions, has been almost 13x. So, profits could halve and equities would
still look reasonably valued against their history. The other dimension to
take into account is recovery: the stockmarket will anticipate a pick-up
before profits themselves start to grow. Thus it can take stocks to high
multiples of depressed historic earnings. A relevant example is 1993, when
the HGSC (XIC) rose by almost 42%, moving the historic PE up to over 18x,
despite earnings continuing to fall in that year.
31 December 31 December
2008 2007
Characteristics AGCiT HGSC AGCiT HGSC
(XIC) (XIC)
Number of Companies 67 495 78 509
Weighted Average Market £249m £442m £423m £577m
Capitalisation
Price Earnings Ratio 6.4x 6.4x 13.2x 11.7x
(Historic)
Net Dividend Yield 6.1% 5.9% 3.0% 2.9%
(Historic)
Dividend Cover (Historic) 2.6x 2.6x 2.5x 2.9x
As the table above demonstrates, the portfolio offers similar value to the
HGSC (XIC) on a PE and dividend yield basis. Perhaps the most notable aspect
of its valuation is that it could quite easily have been brought down further
had your Managers not chosen to eschew a grouping of often sizeable companies
within the HGSC (XIC) that trade on exceptionally low multiples, driven by
high levels of debt and substantial defined benefit pension schemes. At some
point it will be appropriate to embrace these highly geared businesses, but
with the trading environment still under pressure it seems appropriate not to
pursue both operational and financial gearing. Another indication of value
within the portfolio comes from its average EV/EBIT multiple, a measure used
in the context of corporate activity. At 5.4x, it is at a significant
discount to the multiples of around 15x at which deals were being done earlier
in the year. To be fair such levels of valuation may be considered an
aberration, born of an M&A culture that had become too reliant on cheap and
freely available debt. Nevertheless, the portfolio stands at a significant
discount to the longer run average of around 10x that has been more typical
over AGCiT's lifetime. So, when the M&A market opens again, your Managers are
confident that AGCiT can benefit.
To state the obvious, to a value investor at least, the probability of
securing a good return from equities over the medium term is increased when
starting from depressed valuations. Your Managers are thus optimistic on the
basis of prevailing valuations but acknowledge that stockmarkets can overshoot
in either direction. Therefore, the duration of the present bear market is
tough to call. That said, sentiment can turn remarkably swiftly once there is
the whiff of recovery in the air. Timing that change in sentiment to the
month or even the quarter requires a large dose of luck. Accordingly, given
the characteristics of the small company universe, it is necessary to start
positioning the portfolio early. This pragmatism was an important motivation
in the recent cautious reorientation of the portfolio to domestic cyclical
sectors. There is, however, a balance to be struck. Strong balance sheets
and a conservatively structured income profile afford AGCiT resilience, which
allows it to look beyond the short term and be in a position to benefit from
the upturn when it comes.
Aberforth Partners LLP
Managers
26 January 2009
DIRECTORS' RESPONSIBILITY STATEMENT
Each of the Directors confirm to the best of their knowledge that:
(a) the financial statements, which have been prepared in accordance with
applicable accounting standards, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company; and
(b) the Annual Report includes a fair review of the development and performance
of the business and the position of the Company, together with a description of
the principal risks and uncertainties that it faces.
On behalf of the Board
Alastair C Dempster
Chairman
26 January 2009
INVESTMENT PORTFOLIO
Thirty Largest Investments as at 31 December 2008
Valua % of
tion
No Company £'000 Total Business Activity
1 Greggs 4,272 6.0 Retailer of sandwiches, savouries
and other bakery products
2 Spirax-Sarco 3,193 4.5 Engineering
Engineering
3 Hampson 2,989 4.2 Aerospace and automotive
Industries
4 BSS Group 2,649 3.7 Distribution of plumbing supplies
& tools
5 Brown (N.) 2,373 3.3 Home shopping catalogue retailer
Group
6 Robert Wiseman 2,325 3.3 Processing and distribution of
Dairies milk
7 e2v 2,127 3.0 Manufacture of electronic
technologies components and sub-systems
8 RPC Group 2,022 2.9 Manufacture of rigid plastic
packaging
9 Beazley Group 2,014 2.8 Insurance
10 Halfords Group 1,895 2.7 Retailer of auto, leisure and
cycling products
Top Ten 25,859 36.4
Investments
11 Domino 1,772 2.5 Manufacture of industrial
Printing printing equipment
Sciences
12 Delta 1,735 2.4 Galvanising, manganese products
and industrial supplies
13 Spectris 1,614 2.3 Manufacture of precision
instrumentation and controls
14 Headlam Group 1,482 2.1 Distribution of floorcoverings
15 Interserve 1,477 2.1 Facilities, project & equipment
services
16 Wilmington 1,439 2.0 B2B publishing and training
Group
17 Phoenix IT 1,335 1.9 IT services
Group
18 Brewin Dolphin 1,320 1.9 Stockbroker and private client
Group fund manager
19 RM 1,272 1.8 IT services for schools
20 Keller Group 1,216 1.7 Ground and foundation engineer
Top Twenty 40,521 57.1
Investments
21 Bellway 1,191 1.7 Housebuilder
22 Evolution 1,187 1.7 Stockbroker and private client
Group fund manager
23 UMECO 1,163 1.6 Advance composite materials and
supply chain management
24 Dunelm Group 1,160 1.6 Homewares retailer
25 Holidaybreak 1,138 1.6 Holiday, travel and educational
services
26 Shanks Group 1,095 1.5 Waste management
27 Collins 1,056 1.5 Stockbroker and private client
Stewart fund manager
28 Communisis 1,028 1.5 Marketing communication services
29 Wincanton 999 1.4 Logistics
30 Hansard Global 987 1.4 Life assurance
Top Thirty 51,525 72.6
Investments
Other 19,405 27.4
Investments
(37)
Total 70,930 100.0
Investments
Net (58,174)
Liabilities
Total Net 12,756
Assets
The Income Statement, Balance Sheet, Reconciliation of Movements in
Shareholders' Funds, and Summary Cash Flow Statement are set out below: -
INCOME STATEMENT
(Audited)
For the year ended 31 December 2008
2008 2007
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Realised (losses)/gains on - (2,378) (2,378) - 19,654 19,654
sales
Unrealised losses - (45,324) (45,324) - (32,197)(32,197)
------ ------- ------- ------ ------- -------
Losses on investments - (47,702) (47,702) - (12,543) (12,543)
Dividend income 4,482 848 5,330 3,925 176 4,101
Interest income 89 - 89 3 - 3
Other income 12 - 12 - - -
Investment management fee (276) (645) (921) (163) (382) (545)
Other expenses (268) (373) (641) (235) (636) (871)
------ ------- ------- ------ ------- -------
Net return before finance 4,039 (47,872) (43,833) 3,530 (13,385) (9,855)
costs and taxation
Finance costs: interest (668) (3,317) (3,985) (695) (1,848) (2,543)
------ ------- ------- ------ ------- -------
3,371 (51,189) (47,818) 2,835 (15,233) (12,398)
Finance costs on Income (3,087) - (3,087) (2,377) - (2,377)
Shares
------ ------- ------- ------ ------- -------
Return on ordinary 284 (51,189) (50,905) 458 (15,233) (14,775)
activities before tax
Tax on ordinary activities (2) - (2) - - -
------ ------- ------- ------ ------- -------
Return attributable to 282 (51,189) (50,907) 458 (15,233) (14,775)
shareholders
===== ===== ===== ===== ====== ======
Returns per share
Income Share 13.75p - 13.75p 11.57p - 11.57p
------ ------- ------- ------ ------- -------
Capital Share - (487.51p)(487.51p) - (145.08p) (145.08p)
------ ------- ------- ------ ------- -------
NOTES
1.The total column of this statement is the profit and loss account of the
Company. The supplementary revenue and capital columns are both prepared
under guidance published by the Association of Investment Companies. All
revenue and capital items in the above statement derive from continuing
operations. No operations were acquired or discontinued in the period. A
Statement of Total Recognised Gains and Losses is not required as all gains
and losses of the Company have been reflected in the above statement.
2.The calculations of revenue return per Income Share are based on net revenue
on ordinary activities before distributions of £3.369 million (2007: £2.835
million) and on 24.5 million Income Shares (2007: 24.5 million). The
calculations of capital return per Capital Share are based on net capital
losses of £51.189 million (2007: losses of £15.233 million) and on 10.5
million Capital Shares (2007: 10.5 million).
3.The 2007 investment management fee expense incorporates the expected
repayment of all VAT paid on investment management fees since the firm's
inception, as set out in the Chairman's Statement. This repayment amounted to
£672,000 of which £202,000 was credited to revenue and £470,000 was credited
to capital.
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
(Audited)
For the year ended 31 December 2008
Share Capital Special Capital Revenue
capital redemption reserve reserve revenue Total
reserve
£'000 £'000 £'000 £'000 £'000 £'000
Equity 105 50 9,674 51,014 2,820 63,663
shareholders'
funds as at 31
December 2007
Return - - - (51,189) 282 (50,907)
attributable to
equity shareholders
----- ----- ------ ------ ----- ------
Equity
shareholders' 105 50 9,674 (175) 3,102 12,756
funds as at 31
December 2008
====== ====== ====== ====== ===== ======
For the year ended 31 December 2007
Share Capital Special Capital Revenue
capital redemption reserve reserve revenue Total
reserve
£'000 £'000 £'000 £'000 £'000 £'000
Equity
shareholders' 105 50 9,674 66,247 2,362 78,438
funds as at 31
December 2006
Return
attributable to - - - (15,233) 458 (14,775)
equity
shareholders
----- ----- ------ ------ ----- ------
Equity
shareholders' 105 50 9,674 51,014 2,820 63,663
funds as at 31
December 2007
====== ====== ====== ====== ===== ======
BALANCE SHEET
(Audited)
As at 31 December 2008
31 31
December December
2008 2007
£'000 £'000
Fixed Assets: Investments
Investments at fair value through 70,930 119,420
profit or loss
------- -------
Current assets
Other debtors 448 1,029
------- -------
448 1,029
------- -------
Creditors (amounts falling due
within one year)
Bank overdraft (136) -
Amounts due to brokers (16) (61)
Other creditors (87) (63)
------- -------
(239) (124)
------- -------
Net current assets 209 905
------- -------
Total assets less current 71,139 120,325
liabilities
Creditors (amounts falling due (58,383) (56,662)
after more than one year)
------- -------
Total net assets 12,756 63,663
====== ======
Capital and reserves: Equity
interests
Called up share capital:
Capital shares 105 105
Reserves:
Capital redemption reserve 50 50
Special reserve 9,674 9,674
Capital reserve (175) 51,014
Revenue reserve 3,102 2,820
------- -------
Total equity 12,756 63,663
====== ======
Net Asset Values:
- per Capital Share 120.16p 620.27p
- per Income Share (Income 100.57p 94.02p
Shares are classified as
financial liabilities)
NOTE
The Company had 24.5 million Income Shares and 10.5 million
Capital Shares in issue as at 31 December 2008 and 31 December
2007.
SUMMARY CASH FLOW STATEMENT
(Audited)
For the year ended 31 December 2008
2008 2007
£'000 £'000
CASH FLOW STATEMENT
Net cash inflow from operating 4,850 2,603
activities
------- -------
Taxation paid
Overseas tax suffered (2) -
Returns on investment and
servicing of finance
Dividends paid (3,087) (2,377)
Interest and other finance costs (2,222) (2,324)
paid
------- -------
Net cash outflow from returns
on investment and servicing of (5,309) (4,701)
finance
------- -------
Capital expenditure and
financial investments
Payments to acquire investments (31,381) (48,417)
Receipts from sales of 31,751 48,966
investments
------- -------
Net cash inflow from capital 370 549
expenditure and financial
investments
------- -------
Net cash outflow before (91) (1,549)
financing activities
------- -------
Financing activities
Loans (repaid)/drawn down (45) 1,548
------- -------
Net cash (outflow)/ inflow from (45) 1,548
financing activities
------- -------
Change in cash during the period (136) (1)
====== ======
Reconciliation of change in cash
to movement in net debt
Change in cash during the period (136) (1)
Loans repaid/(drawn down) 45 (1,548)
Change in fair valuation of (1,757) (225)
interest rate swap
Amortisation of issue costs (9) (9)
during the period
------- -------
Change in net debt (1,857) (1,783)
Opening net debt (56,662) (54,879)
------- -------
Closing net debt (58,519) (56,662)
====== ======
NOTES TO THE FINANCIAL STATEMENTS
1. ACCOUNTING STANDARDS
The financial statements have been prepared in accordance with UK generally
accepted accounting practice (UK GAAP) and the AIC's Statement of Recommended
Practice ``Financial Statements of Investment Trust Companies and Venture
Capital Trusts'' issued in January 2009. The total column of the Income
Statement is the profit and loss account of the Company. All revenue and
capital items in the Income Statement are derived from continuing operations.
No operations were acquired or discontinued in the period. The same
accounting policies used for the year to 31 December 2007 have been applied
for the year to 31 December 2008.
2. INVESTMENT MANAGEMENT FEE
2008 2007
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Investment management 276 645 921 323 754 1,077
fee
VAT paid thereon - - - 42 98 140
VAT recovered - - - (202) (470) (672)
------ ------ ------ ------- ------ ------
276 645 921 163 382 545
====== ====== ====== ======= ====== ======
The VAT recoverable recognised during the year to 31 December 2007
represents the repayment of all VAT paid on investment management fees since
the company's inception (including all VAT previously offset by the
managers).
3. FINANCE COSTS
2008 2007
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Interest on base rate 84 197 281 101 237 338
loans/overdraft
Interest on LIBOR loans 584 1,363 1,947 594 1,386 1,980
Change in fair - 1,757 1,757 - 225 225
valuation of interest
rate swap
------ ------ ------ ------- ------ ------
Total interest costs 668 3,317 3,985 695 1,848 2,543
====== ====== ====== ======= ====== ======
2008 2007
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Second interim dividend 1,642 - 1,642 1,446 - 1,446
for the year ended 31
December 2007 at 6.7p
(2007: 5.9p)
First interim dividend 1,445 - 1,445 931 - 931
for the year ended 31
December 2008 at 5.9p
(2007: 3.8p)
------ ------ ------ ------- ------ ------
Total distribution 3,087 - 3,087 2,377 - 2,377
costs
====== ====== ====== ======= ====== ======
A second interim dividend for the year to 31 December 2008 of 6.7p will be
paid on 27 February 2009 to Income Shareholders on the register on 6
February 2009.
4. RETURNS PER SHARE
2008 2007
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Return on ordinary 282 (51,189) (50,907) 458 (15,235) (14,775)
activities
Add back dividends on 3,087 - 3,087 2,377 - 2,377
Income Shares
------ ------ ------ ------- ------ ------
Earnings attributable 3,369 (51,189) (47,820) 2,835 (15,233) (12,398)
to shareholders
====== ====== ====== ======= ====== ======
Number of Income Shares 24.5m - 24.5m -
Number of Capital - 10.5m - 10.5m
Shares
Returns per share 13.75p (487.51p) 11.57p (145.08p)
5. NET ASSET VALUE
Total net assets have been calculated in accordance with the provisions of
Financial Reporting Standard 4. Income Shares are classified as financial
liabilities and are carried on the balance sheet at their fair value of 100p
each which results in a total fair valuation of the Income Shares of
£24,500,000. This valuation does not reflect the rights of the Income Shares
under the Articles of Association on a return of assets. Set out below is a
reconciliation of Capital and Income share net asset values in accordance
with the Articles.
2008 2007
Capital Income Total Capital Income Total
Shares Shares Shares Shares
£'000 £'000 £'000 £'000 £'000 £'000
Net assets per Balance 12,756 - 12,756 63,663 - 63,663
Sheet
Revenue reserve (3,102) 3,102 - (2,820) 2,820 -
Capital entitlement of - 24,500 24,500 - 24,500 24,500
Income Shares as at 31
March 2011
Capital entitlement not 2,963 (2,963) - 4,286 (4,286) -
yet transferred to
Income Shareholders
------ ------ ------ ------- ------ ------
Net assets per Articles 12,617 24,639 37,256 65,129 23,034 88,163
====== ====== ====== ======= ====== ======
Number of Income Shares - 24.5m - 24.5m
Number of Capital 10.5m - 10.5m -
Shares
NAV per share 120.16p 100.57p 620.27p 94.02p
6. CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
2008 2007
£'000 £'000
Loan facility 1,800 1,845
LIBOR loan facility 30,000 30,000
Less: unamortised issue costs (28) (37)
Income shares 24,500 24,500
Interest rate swap 2,111 354
--------- ---------
Total 58,383 56,662
======== ========
7. FURTHER INFORMATION
The foregoing do not comprise Statutory Accounts (as defined in section
434(3) of the Companies Act 2006) of the Company. The statutory accounts for
the year to 31 December 2007, 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(as amended).
Certain statements in this announcement are forward looking statements. By
their nature, forward looking statements involve a number of risks,
uncertainties or assumptions that could cause actual results or events to
differ materially from those expressed or implied by those statements.
Forward looking statements regarding past trends or activities should not be
taken as representation that such trends or activities will continue in the
future. Accordingly, undue reliance should not be placed on forward looking
statements.
Contact: John Evans - Aberforth Partners LLP - 0131 220 0733
Aberforth Partners LLP, Secretaries - 26 January 2009
ANNOUNCEMENT ENDS
Latest directors dealings
- 1 hour ago Johnson Matthey
- 2 hours ago ASOS
- 2 hours ago Coca-Cola Europacific Partners (DI)
- 2 hours ago Liontrust Asset Management
- 2 hours ago Liontrust Asset Management