Half-yearly report
ABERFORTH GEARED CAPITAL & INCOME TRUST plc
HALF YEARLY REPORT
For the six months ended 30 June 2010
FEATURES
Total Returns
Total Assets + 5.4%
Net Asset Value of Capital + 6.5%
Shares (1)
First Interim Dividend per 6.5p (2009: 5.9p)
Income Share
(1) Capital Shares asset performance assumes Income Shares have
a capital entitlement of 100p each.
All data throughout this Half Yearly Report is to, or as at, 30 June 2010 as
applicable, unless otherwise stated.
CHAIRMAN'S STATEMENT TO SHAREHOLDERS
Introduction
For the six months ended 30 June 2010, Aberforth Geared Capital & Income Trust
plc (AGCiT) recorded a total return on total assets of 5.4%. The RBS Hoare
Govett Smaller Companies Index (Excluding Investment Companies) (HGSC (XIC)),
which is representative of AGCiT's opportunity base, recorded a total return
of 1.2% for the same period. The FTSE All-Share Index, representative of
larger companies, showed a total return of -6.1%.
AGCiT has a highly geared structure and has a policy of maintaining gearing
towards the maximum level over the long term. Borrowings during the period
were consistently above £30m and on some occasions close to the maximum debt
available of £34.3m. At the period end £30.0m of debt was being utilised
reflecting the balance of recent purchases and sales in the portfolio. The
net asset value of a Capital Share (assuming 100p prior charge for the Income
Shares) rose from 301.52p on 31 December 2009 to 321.21p on 30 June 2010, an
increase of 6.5%.
AGCiT has an interest rate swap in place that has an expiry date of 30
September 2011. At that date the swap will have a zero value. As at 30 June
2010 the value of the swap was negative £1,669,000 (30 June 2009 negative
£2,065,000). The negative swap value is charged against capital and is
equivalent, at 30 June 2010, to negative 15.9p per Capital Share. It has
always been the intention of your Board, ceteris paribus, to allow this swap
arrangement to run until its maturity, at which point it will have a zero
value. In the intervening period the value of the swap will be a function of
the prevailing relevant short term interest rates and the length of time until
expiry.
Dividends
I am pleased to announce a first interim dividend of 6.5p per Income Share.
This represents an increase of 10.2% over the 5.9p paid in respect of the same
period in 2009. Dividends paid by companies held in the portfolio have shown,
in aggregate, a welcome increase on those paid in 2009. A particular feature
of the recovery from the recent recession is the speed with which the smaller
company sector has been able to restore or increase dividends. AGCiT's
portfolio has participated fully in this trend.
The revenue reserve, as at 30 June 2010, and after accounting for the first
interim dividend of 6.5p per Income Share is £1,465,000, equivalent to 6p per
Income Share. These reserves were built up consistently over AGCiT's life
prior to 2009 with the intention of smoothing dividend payments to Income
Shareholders in the event of a reduction in income for the Trust. The
reserves were drawn upon in 2009 when total dividends of 12.6p per Income
Share were paid as against earnings per share in that year of 11.4p. Your
Board has resolved to distribute the revenue reserve with the second interim
dividends in 2010 and 2011. Consequently, your Board expects to recommend a
second interim dividend in respect of 2010 of at least 7.3p per Income Share.
The first interim dividend of 6.5p will be paid on 20 August 2010 to Income
Shareholders on the register at 30 July 2010. The "ex dividend" date will be
28 July 2010.
Outlook
The first half of 2010 has been satisfactory for AGCiT. In particular, the
dividend performance of the portfolio has been most encouraging, indicating a
degree of confidence from company boards and management. This is in contrast
to the more macro orientated factors that are currently dominating
stockmarkets and causing uncertainty. As I indicated last year, the path of
the recovery is unlikely to be smooth and I have no reason now to alter that
view. However, I retain confidence in your Managers' ability to steward the
Company's assets in these uncertain times.
Alastair C. Dempster
Chairman
16 July 2010
MANAGERS' REPORT
Investment background
Small UK quoted companies extended the gains achieved in 2009. The HGSC (XIC)
recorded a total return of 1.2%, which exceeded the negative 6.1% return of
large companies as measured by the FTSE All-Share. In an echo of the pre-
crisis bull market, the sweet-spot within the UK was the FTSE 250. The mid
caps, which account for over three quarters of the market capitalisation of
the HGSC (XIC), were up by 2.1%. In contrast, `smaller small' companies, as
measured by the FTSE SmallCap, experienced a total return of negative 3.6%.
While these generally positive returns reflected the ongoing recovery from
recession, the overall figures mask a period of considerable volatility. May
and June witnessed substantial declines for equities worldwide as a
combination of top-down concerns conspired to bring the risk of deflation back
to the fore and to undermine risk appetites and confidence in recovery. The
HGSC (XIC) shared in the pain, falling by 12% from its late April peak to the
end of June.
Of these concerns, that which made most headlines was the Greek sovereign debt
crisis, which threatened to spread around the fringes of the euro zone and
drove the euro down by 13% against the dollar. The financial markets were
initially unconvinced by the official response. However, the European Central
Bank and IMF unveiled a €750bn package in early May, which may go on to
encompass measures such as quantitative easing. This seems to have restored
some confidence, but risks of contagion and the implications for lenders to
these countries continued to buffet the markets as the first half drew to a
close.
Doubts about the euro coincided with the impact of more restrictive policies
within China. Here authorities appear concerned that the success of last
year's stimulus in sustaining GDP growth of above 8% risks over-heating,
particularly in the property sector. The view of China as an autonomous
source of growth played an important part in the rebound in equities around
the globe in 2009. Any challenge to this was always going to test the equity
markets' mettle, as will be the case when the Western economies see fit to
withdraw their own monetary stimuli. Late in June, China wrong-footed the
markets again with an indication that its currency peg to the dollar would be
relaxed. On balance this was taken positively, since, at the margin, a
stronger renminbi would soften China's mercantilism and rebalance growth
towards the Chinese consumer.
On top of these global issues, the UK market has had to contend with the
general election and an austerity budget. With ten year yields dropping from
4.0% to 3.4%, the gilt market was reassured by the outcome of the election,
with the coalition government emphasising fiscal rectitude in the budget.
These actions are not, however, without risk and have alarmed those of a
Keynesian persuasion, who see risks of a double dip recession, or worse, as
fiscal policy is tightened against the background of still uncertain domestic
and international demand. For the Chancellor's strategy to succeed, the onus
is on the private sector and companies in particular to take up the strain.
There is reason for optimism among small UK quoted companies. Results through
the first half of the year were on the whole strong, benefiting from a modest
pick-up in sales and, more particularly, from the deep cost cutting exercises
undertaken last year. Balance sheets in general are in good shape, helped in
some cases by the substantial equity issuance that took place in 2009. With
the corporate sector looking relatively robust in many major developed
economies, these characteristics are not unique to constituents of the HGSC
(XIC). However, as detailed below, many small UK quoted companies are
reflecting their more rapid than expected return to good levels of
profitability in an encouraging dividend performance.
Performance Analysis
The first quarter of the year saw AGCiT secure a total asset total return of
7.7%. With the stockmarket driven on by a continuation of the recovery that
took hold in 2009, the HGSC (XIC)'s return was greater at 8.5%. This was
driven by a 10.3% total return from the FTSE 250. Moving into the second
quarter, the influence of the macro economic concerns previously described
grew. In this environment, AGCiT's relative performance improved: its total
return was -2.2% against -6.7% for the HGSC (XIC). Thus, over the first half
as a whole AGCiT secured a positive absolute return at the same time as out-
performing the HGSC (XIC) by 417 basis points. The following paragraphs
explain this performance.
· Both stock and sector selection were positive, contributing 173 and 244
basis points respectively to relative performance. AGCiT benefited from its
heavy over-weight positions in the capital goods sectors such as Electronic &
Electrical Equipment and Industrial Engineering, which out-performed the HGSC
(XIC) despite growing concerns in May and June about growth in the US and China.
At the stock selection level, there were good contributions from the General
Retailers and Media sectors, where strong results from individual holdings
succeeded in offsetting more general concerns about the domestic economy.
· The portfolio's size positioning was unhelpful and influenced both stock
and sector selection. The HGSC (XIC) has a substantial overlap with the FTSE
250, to the extent that mid caps account for 76% of the HGSC (XIC)'s market
capitalisation. In contrast, the portfolio's weighting in mid caps is 46%.
Therefore, the large spread in performance between the FTSE 250, which was up by
2.1%, and the FTSE SmallCap, which was down by 3.6%, had an impact on relative
returns. This over-weight position in the smaller constituents of the HGSC
(XIC) has been built up over time. It reflects the lower valuations available
to your Managers down the scale of market capitalisations: the forward PE ratio
of the FTSE SmallCap was 20% below that of the FTSE 250 at the end of June.
Meanwhile, the FTSE SmallCap's yield was 34% higher than that of the mid caps.
Some difference to reflect the illiquidity of smaller companies is probably
justified but these levels seem excessive, especially and crucially when there
is little discernible gap in the fundamental prospects of the companies in each
part of the benchmark.
· An indication of the fundamental prospects of the portfolio companies is
the dividend decisions made by boards through the first half. The picture that
emerges from an analysis of the 65 holdings at the end of June is encouraging
and is summarised in the following table:
Band Nil Down Flat +0- +10- +
10% 20% >20%
No. of 2 3 20 16 11 13
holdings
The `Nil' category includes those companies that did not pay a dividend in
the first half. Both are businesses whose profits suffered badly during
recession, forcing a passing of the dividend. In both cases, however, it is
anticipated that payments will resume over the next twelve months. This
phenomenon is relevant to the wider small company universe and can have a
meaningful impact on aggregate reported dividend growth. Three companies
cut their dividends, which is not an abnormal incidence even in steadier
economic conditions. The positive aspect of the analysis is the number of
companies in the three right hand columns: 40 companies chose to announce
increased dividends, some by a significant amount.
Going into recession, your Managers emphasised the notion of being `paid to
wait' for a recovery: i.e. a sustainable dividend yield could provide some
compensation for declines in capital. In the event, last year turned out to
be the worst in terms of dividends in the HGSC (XIC)'s history. AGCiT's
portfolio fared less badly, but there were nevertheless some disappointing
dividend decisions. The turnaround encapsulated in the preceding analysis is
therefore welcome and is indicative of the rapid cost reductions implemented
by the management teams of investee companies last year. It has come earlier
than your Managers had expected even at the start of the year and is clearly
supportive of AGCiT's income account.
· When making their decisions about dividends, the boards of those companies
in which AGCiT invests would have taken comfort from the strength of their
balance sheets. At the end of the half year, 37% of the portfolio was invested
in companies with net cash on their balance sheets. Your Managers' preference
for well financed businesses was unhelpful to relative returns last year, when
the stockmarket's charge was led by companies with indebted balance sheets and
greater potential for recovery. However, the positioning proved assistive in
the pessimism of the second quarter. Beyond this defensive aspect, a strong
balance sheet gives a business the flexibility to invest at a time when more
highly geared competitors remain challenged by the banks' focus on the repair of
their own balance sheets. It is not your Managers' desire to see substantial
balances of net cash reside on balance sheets indefinitely: if it cannot be
invested profitably, a return of surplus cash to shareholders would seem
appropriate.
· Of course, management teams often use strong balance sheets to pursue M&A.
While the dearth of mega deals continues, corporate activity in 2010 has,
consistent with previous cycles, shown signs of life within the small company
world. Last year was depressed with only 14 HGSC (XIC) companies acquired,
against an average of 50 per annum in the preceding five years. However,
through the first half, deals for five companies, one of which was a portfolio
holding, were completed. On top of those, twelve HGSC (XIC) constituents were
at some stage of talks at the end of June. Again, echoing previous cycles, the
predators have frequently been large American companies, which typically trade
on higher valuations than their smaller UK peers and, at the current time,
benefit from the strength of the dollar. Premiums to stockmarket valuations
have often been large, especially in those businesses further down the scale of
market capitalisations. By way of illustration, at the quarter end one company
had agreed a bid with an American trade buyer 262% above its £60m market
capitalisation prior to the announcement of an approach. Regrettably, this
company was not held within the portfolio, but this episode perhaps demonstrates
how a continued recovery in M&A might be one way in which AGCiT stands to
benefit from its size positioning.
Conclusion & Investment Outlook
Confidence in continued recovery and appetite for risk waned in May and June.
Entering the second half, investors are confronted by doubts about China's
contribution to global growth, fears of a `double-dip' recession in the US and
ongoing sovereign debt concerns within Europe. If all that is not enough, the
domestic economy has to cope with the implications of an austerity budget that a
significant number of economists consider inappropriate.
Weighed against these negative factors are the likelihood of very low interest
rates for a number of years that will aid balance sheet repair, the coalition
government's clear plans to control a public sector that has `crowded out'
private sector activity in recent years and the underlying health of the UK
corporate sector. That health is obvious in the world of small UK quoted
companies, which are, on the whole, well financed and, as previously
demonstrated, able to reflect their robustness in good levels of dividend
growth.
But perhaps the most important factor that encourages your Managers in the face
of the various macro economic challenges is the abundance of attractive
valuations on offer within the HGSC (XIC).
30 June 2010 31 December 30 June 2009
2009
Characteristics AGCiT HGSC AGCiT HGSC AGCiT HGSC
(XIC) (XIC) (XIC)
Number of Companies 65 437 61 448 63 480
Weighted Average Market £363m £668m £347m £619m £303m £605m
Capitalisation
Price Earnings Ratio 10.3x 12.8x 8.4x 11.2x 7.3x 8.7x
(Historic)
Net Dividend Yield 4.0% 2.7% 4.2% 2.7% 5.2% 3.6%
(Historic)
Dividend Cover 2.6x 2.9x 2.9x 3.3x 2.7x 3.2x
(Historic)
As the preceding table shows, valuations have moved upwards over the past twelve
months. This reflects both falling profits as the recession took its toll and
rising share prices in anticipation of recovery. The average PE ratio of
AGCiT's portfolio was 9.7x at the end of June. In relation to the average PE of
the HGSC (XIC), the portfolio stands at a 23% discount, which compares with a
long term average discount of 8%. Against its own history, the portfolio also
represents good value, with the average PE over AGCiT's nine years of 12.1x.
Given the falls in profits endured through the recession, a higher than average
valuation might be expected to reflect the scope for profits to grow strongly as
the economy recovers. This is indeed what happened during the recovery from the
recession in the early 1990s. The present valuation therefore reflects the
market's doubts about the sustainability of the present recovery: a lot of the
bad news, if indeed the infamous `double-dip' comes to pass, may already be in
the price.
Some additional comfort may be taken from the well diversified income profile of
the portfolio. Consistent with the dividend experience so far in 2010, the
strong balance sheets within the portfolio and a dividend cover of 2.6x, the
4.0% historic dividend yield might be expected to grow. Echoing the strategy of
2008, being `paid to wait' might provide some compensation as the various macro
economic dramas are played out over the remainder of AGCiT's life.
Aberforth Partners LLP
Managers
16 July 2010
INVESTMENT PORTFOLIO
Fifty Largest Investments as at 30 June 2010
Valuati % of
Valuation on
No. Company £'000 Total Business Activity
1 JD Sports Fashion 4,144 4.5 Retailing - sports goods & clothing
2 Spirax-Sarco Engineering 3,686 4.0 Engineering
3 Domino Printing Sciences 3,673 4.0 Industrial printers & inks
4 RPC Group 3,288 3.4 Plastic packaging
5 Beazley 2,776 3.0 Lloyds insurer
6 Greggs 2,685 2.9 Retailing - baked products &
sandwiches
7 Huntsworth 2,367 2.6 Media - public relations
8 Spectris 2,363 2.5 Diversified electronics businesses
9 Holidaybreak 2,282 2.5 Education & holiday services
10 Hampson Industries 2,180 2.4 Composite tools & components for
aerospace
Top Ten Investments 29,444 31.8
11 Phoenix IT Group 2,176 2.3 IT services & disaster recovery
12 UMECO 2,092 2.3 Supply chain management &
advanced composite materials
13 Bodycote 2,058 2.2 Engineering - heat treatment
14 Tullett Prebon 1,822 2.0 Inter dealer broker
15 Wilmington Group 1,803 2.0 Information & training for
professional business market
16 Dunelm Group 1,781 1.9 Homewares retailer
17 e2v technologies 1,764 1.9 Electronic components &
subsystems
18 Dialight 1,707 1.8 LED based lighting solutions
19 Morgan Crucible Co 1,696 1.8 Engineer - ceramic & carbon materials
20 Brown (N.) Group 1,684 1.8 Catalogue retailer
Top Twenty
Investments 48,027 51.8
21 RM 1,658 1.8 IT services for schools
22 Smiths News 1,639 1.8 Newspaper distribution
23 Collins Stewart 1,619 1.7 Stockbroker & private client fund
manager
24 Keller Group 1,543 1.7 Ground engineering services
25 Microgen 1,541 1.7 Workflow & financial services
software
26 BBA Aviation 1,447 1.6 Aviation - fuelling & maintenance
27 Galliford Try 1,423 1.5 Housebuilding & construction services
28 Evolution Group 1,381 1.5 Stockbroker & private client fund
manager
29 Low & Bonar 1,331 1.4 Manufacture of industrial textiles
30 office2office 1,330 1.4 Distribution of office products
Top Thirty
Investments 62,939 67.9
31 RPS Group 1,288 1.4 Energy & environmental consulting
32 KCOM Group 1,260 1.4 Telecommunications services
33 Regus 1,256 1.4 Serviced office accommodation
34 De La Rue 1,244 1.3 Bank note printer
35 Brewin Dolphin Holdings 1,231 1.3 Stockbroker & private client fund
manager
36 Castings 1,214 1.3 Engineering - automotive castings
37 Elementis 1,202 1.3 Speciality chemicals producer
38 Game Group 1,186 1.3 Video games retailer
39 Go-Ahead Group 1,104 1.2 Bus & rail operator
40 United Business Media 1,089 1.2 B2B media conglomerate
Top Forty
Investments 75,013 81.0
41 Hansard Global 1,075 1.2 Life assurance savings products
42 Chaucer Holdings 1,057 1.1 Lloyds insurer
43 Micro Focus Int'l 1,007 1.1 Software - development & testing
44 Diploma 892 1.0 Distribution conglomerate
46 JKX Oil & Gas 857 0.9 Oil & gas exploration & production
47 Morgan Sindall Group 842 0.9 Office fit out, construction &
civil engineering
48 SThree 794 0.9 Recruitment
49 Robert Wiseman Dairies 792 0.8 Dairy operator
50 Anite 778 0.8 Software - telecoms & travel
Top Fifty
Investments 83,969 90.6
Other Investments 8,692 9.4
(15)
Total Investments 92,661 100.0
Net Liabilities (55,876)
(incl. Income Shares)
Total Net Assets 36,785
INTERIM MANAGEMENT REPORT
Risks and Uncertainties
A review of the half year and the outlook for the Company can be found in the
Chairman's Statement and the Managers' Report. The Directors have established an
ongoing process for identifying, evaluating and managing the key risks faced by
the Company. The Board believes that the Company has a relatively high risk
profile in the context of the investment trust industry. This belief arises from
the Company employing a significant level of gearing to increase its yield and
to provide the potential for a growing level of dividend income and the
potential for geared capital appreciation (further information on the Company's
gearing levels can be found in the Capital Structure section of this report).
Some mitigating factors in the Company's risk profile include the facts that the
Company has a relatively simple capital structure; invests only in a diversified
portfolio of small UK quoted companies; and outsources all of its main
operational activities to recognised, well-established firms.
As the Company's investments consist of small UK quoted companies, the principal
risks facing the Company are market related and include market price, interest
rate, credit and liquidity risk. Additional risks faced by the Company include
investment objective, investment policy, share price discount, regulatory risk,
operational/financial risk and gearing risk. An explanation of these risks and
how they are managed can be found in the Directors' Report contained within the
2009 Annual Report. These principal risks and uncertainties have not changed
from those disclosed in the 2009 Annual Report.
DIRECTORS' RESPONSIBILITY STATEMENT
The Directors confirm that, to the best of their knowledge:
(i) the condensed set of financial statements has been prepared in accordance
with the Statement `Half-yearly financial reports' issued by the UK Accounting
Standards Board; and
(ii) the half-yearly report includes a fair review of information required by:
(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication
of important events during the first six months of the year and their impact
on the financial statements together with a description of the principal risks
and uncertainties for the remaining six months of the year; and
(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being disclosure of
related party transactions and changes therein.
On behalf of the Board
Alastair C. Dempster
Chairman
16 July 2010
The Income Statement, Balance Sheet, Summary Reconciliation of Movements in
Shareholders' Funds, and Summary Cash Flow Statement are set out below: -
INCOME STATEMENT
(unaudited)
For the six months ended 30 June
2010
Revenue Capital Total
£ 000 £ 000 £ 000
Realised net gains on sales - 2,760 2,760
Movement in fair value - 149 149
--------- ---------- ----------
-
Net gains on investments - 2,909 2,909
Dividend income 2,423 - 2,423
Other investment income - - -
Other income 8 - 8
Investment management fee (118) (276) (394)
Transaction costs - (196) (196)
Other expenses (125) - (125)
--------- ---------- ----------
-
Net return before finance 2,188 2,437 4,625
costs and tax
Finance costs:
Interest (296) (691) (987)
Change in fair valuation of - 322 322
interest rate swap
--------- ---------- ----------
-
1,892 2,068 3,960
Finance costs:
Dividends on Income Shares (1,642) - (1,642)
classified as financial
liabilities (Note 2)
--------- ---------- ----------
-
Return on ordinary 250 2,068 2,318
activities before tax
Tax on ordinary activities - - -
--------- ---------- ----------
-
Return attributable to 250 2,068 2,318
shareholders
====== ====== ======
Returns per Share: (Note 3)
Income Share 7.72p - 7.72p
Capital Share - 19.70p 19.70p
DIVIDENDS
On 16 July 2010 the Board declared a first interim dividend for the year
ended 31 December 2010 of 6.5p per Income Share (2009 - 5.9p) payable on 20
August 2010.
INCOME STATEMENT
(unaudited)
For the six months ended 30 June
2009
Revenue Capital Total
£ 000 £ 000 £ 000
Realised net losses on sales - (9,139) (9,139)
Movement in fair value - 17,769 17,769
--------- ---------- ----------
-
Net gains on investments - 8,630 8,630
Dividend income 2,034 74 2,108
Other investment income 27 - 27
Other income 13 - 13
Investment management fee (83) (194) (277)
Transaction costs - (145) (145)
Other expenses (122) - (122)
--------- ---------- ----------
-
Net return before finance 1,869 8,365 10,234
costs and tax
Finance costs:
Interest (303) (706) (1,009)
Change in fair valuation of - 46 46
interest rate swap
--------- ---------- ----------
-
1,566 7,705 9,271
Finance costs:
Dividends on Income Shares (1,642) - (1,642)
classified as financial
liabilities (Note 2)
--------- ---------- ----------
-
Return on ordinary (76) 7,705 7,629
activities before tax
Tax on ordinary activities - - -
--------- ---------- ----------
-
Return attributable to (76) 7,705 7,629
shareholders
====== ====== ======
Returns per Share: (Note 3)
Income Share 6.39p - 6.39p
Capital Share - 73.38p 73.38p
INCOME STATEMENT
(unaudited)
For the year ended 31 December
2009
Revenue Capital Total
£ 000 £ 000 £ 000
Realised net losses on sales - (6,862) (6,862)
Movement in fair value - 30,700 30,700
--------- ---------- ----------
-
Net gains on investments - 23,838 23,838
Dividend income 3,761 150 3,911
Other investment income 30 - 30
Other income 14 - 14
Investment management fee (177) (412) (589)
Transaction costs - (285) (285)
Other expenses (233) - (233)
--------- ---------- ----------
-
Net return before finance 3,395 23,291 26,686
costs and tax
Finance costs:
Interest (602) (1,406) (2,008)
Change in fair valuation of - 120 120
interest rate swap
--------- ---------- ----------
-
2,793 22,005 24,798
Finance costs:
Dividends on Income Shares (3,087) - (3,087)
classified as financial
liabilities (Note 2)
--------- ---------- ----------
-
Return on ordinary (294) 22,005 21,711
activities before tax
Tax on ordinary activities - - -
--------- ---------- ----------
-
Return attributable to (294) 22,005 21,711
shareholders
====== ====== ======
Returns per Share: (Note 3)
Income Share 11.40p - 11.40p
Capital Share - 209.57p 209.57p
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
(unaudited)
For the six months ended 30 June 2010
Capital
Share redemption Special Capital Revenue
capital reserve reserve reserve reserve Total
£ 000 £ 000 £ 000 £ 000 £ 000 £ 000
Equity
shareholders 105 50 9,674 21,830 2,808 34,467
funds as at 31
December 2009
Return
attributable to - - - 2,068 250 2,318
shareholders
----- ----- ----- ----- ----- ------
Equity 105 50 9,674 23,898 3,058 36,785
shareholders
funds as at 30
June 2010
===== ===== ===== ===== ===== ======
For the year ended 31 December 2009
Capital
Share redemption Special Capital Revenue
capital reserve reserve reserve reserve Total
£ 000 £ 000 £ 000 £ 000 £ 000 £ 000 Equity
shareholders 105 50 9,674 (175) 3,102 12,756
funds as at 31
December 2008
Return
attributable to - - - 22,005 (294) 21,711
shareholders
----- ----- ----- ----- ----- ------
Equity
shareholders 105 50 9,674 21,830 2,808 34,467
funds as at 31
December 2009
===== ===== ===== ===== ===== =====
For the six months ended 30 June 2009
Capital
Share redemption Special Capital Revenue
capital reserve reserve reserve reserve Total
£ 000 £ 000 £ 000 £ 000 £ 000 £ 000 Equity
shareholders 105 50 9,674 (175) 3,102 12,756
funds as at 31
December 2008
Return
attributable to - - - 7,705 (76) 7,629
shareholders
----- ----- ----- ----- ----- -----
Equity
shareholders 105 50 9,674 7,530 3,026 20,385
funds as at 30
June 2009
===== ===== ===== ===== ===== =====
BALANCE SHEET
(unaudited)
As at 30 June 2010
30 June 31 30 June
2010 December 2009
2009
£'000 £'000 £'000
Fixed Assets: Investments
Investments at fair value through 92,661 93,514 78,720
profit or loss
------- ------- -------
Current assets
Amounts due from brokers 276 106 284
Other debtors 423 315 557
Cash at bank 1,294 1 11
------- ------- -------
1,993 422 852
------- ------- -------
Creditors (amounts falling due
within one year)
Amounts due to brokers (1,669) - -
Other creditors (45) (46) (45)
------- ------- -------
(1,714) (46) (45)
------- ------- -------
Net current assets 279 376 807
------- ------- -------
Total assets less current 92,940 93,890 79,527
liabilities
Creditors (amounts falling due (56,155) (59,423) (59,142)
after more than one year) (Note
5)
------- ------- -------
Total net assets 36,785 34,467 20,385
====== ====== ======
Capital and reserves: Equity
interests
Called up share capital:
Capital shares 105 105 105
Reserves:
Capital redemption reserve 50 50 50
Special reserve 9,674 9,674 9,674
Capital reserve 23,898 21,830 7,530
Revenue reserve 3,058 2,808 3,026
------- ------- -------
Total equity 36,785 34,467 20,385
====== ====== ======
Net Asset Values:
- per Capital Share 330.64p 317.17p 187.31p
- per Income Share (Income 108.44p 104.75p 102.93p
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 30 June 2010, 31 December 2009
and 30 June 2009.
CASH FLOW STATEMENT
(unaudited)
For the six months ended 30 June 2010
6 months 6 months Year ended
ended ended
30 June 30 June 31 December
2010 2009 2009
£'000 £'000 £'000
Net cash inflow from operating 1,805 1,609 3,233
activities
------- ------- -------
Returns on investments and
servicing of finance
Interest and other finance costs (984) (1,015) (2,006)
paid
Dividends paid (1,642) (1,642) (3,087)
------- ------- -------
Net cash outflow from returns
on investments and servicing of (2,626) (2,657) (5,093)
finance
------- ------- -------
Capital expenditure and
financial investment
Payments to acquire investments (12,768) (12,256) (24,392)
Receipts from sales of 17,832 12,651 25,239
investments
------- ------- -------
Net cash inflow from capital 5,064 395 847
expenditure and financial
investment
------- ------- -------
Net cash inflow/(outflow) before 4,243 (653) (1,013)
financing activities
------- ------- -------
Financing activities
Loans (repaid)/drawn down (2,950) 800 1,150
------- ------- -------
Net cash (outflow)/inflow from (2,950) 800 1,150
financing activities
------- ------- -------
Change in cash during the period 1,293 147 137
====== ====== ======
Reconciliation of net return
before finance costs and
taxation to net cash inflow from
operating activities
Net return before finance costs 4,625 10,234 26,686
and tax
Net gains on investments (2,909) (8,630) (23,838)
Transaction costs 196 145 285
(Increase)/decrease in debtors (108) (109) 133
Increase/(decrease) in creditors 1 (31) (33)
------- ------- -------
Net cash inflow from operating 1,805 1,609 3,233
activities
====== ====== ======
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 ended 31 December 2009 have been
applied.
2. FINANCE COSTS: DIVIDENDS ON INCOME SHARES CLASSIFIED AS
FINANCIAL LIABILITIES
Six months Six months Year ended
ended ended
30 June 2010 30 June 2009 31 December
2009
£'000 £'000 £'000
Amounts recognised as
distributions to Income
Shareholders:
Second interim dividend for the - 1,642 1,642
year ended 31 December 2008 of
6.7p paid on 27 February 2009
First interim dividend for the - - 1,445
year ended 31 December 2009 of
5.9p paid on 21 August 2009
Second interim dividend for the 1,642 - -
year ended 31 December 2009 of
6.7p paid on 26 February 2010
------- ------- -------
1,642 1,642 3,087
====== ====== ======
A first interim dividend for the year ended 31 December 2010
of 6.5p will be paid on 20 August 2010 to Income Shareholders
on the register on 30 July 2010.
3. RETURNS PER SHARE
Six months Six months Year ended
ended ended
30 June 2010 30 June 2009 31 December
2009
£'000 £'000 £'000
Return per Income Statement 1,892 1,566 2,793
Less: Tax on ordinary activities - - -
--------- --------- ---------
Return attributable to Income 1,892 1,566 2,793
Shareholders
======== ======== ========
Number of Income Shares in issue 24,500,000 24,500,000 24,500,000
during the period
Return per Income Share 7.72p 6.39p 11.40p
Six months Six months Year ended
ended ended
30 June 2010 30 June 2009 31 December
2009
£'000 £'000 £'000
Return attributable to Capital 2,068 7,705 22,005
Shareholders
======== ====== ========
Number of Capital Shares in 10,500,000 10,500,000 10,500,000
issue during the period
Return per Capital Share 19.70p 73.78p 209.57p
4. 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 the Capital Share net asset value on the basis of Income
Shares at 100p each and a reconciliation of Capital and Income share net
asset values in accordance with the Articles.
Net Asset Value of Capital Shares (based on Income Shares at
100p)
As at As at As at
30 June 2010 31 December 30 June 2009
2009
£'000 £'000 £'000
Total net assets 36,785 34,467 20,385
Revenue reserve (3,058) (2,808) (3,026)
------- ------- -------
Net Asset Value of Capital 33,727 31,659 17,359
Shares
====== ====== ======
Number of Capital Shares 10,500,000 10,500,000 10,500,000
NAV per Capital Share (Income 321.21p 301.52p 165.32p
Shares at 100p)
Net Asset Value of Capital and Income Shares (Articles basis)
Capital Income Total
Shares Shares
£'000 £'000 £'000
Total net assets as at 30 June 36,785 - 36,785
2010
Revenue reserve (3,058) 3,058 -
Capital entitlement of Income - 24,500 24,500
Shares at 31 March 2011
(valuation of Income Shares
disclosed within Creditors)
Adjustment to reflect capital 990 (990) -
entitlement not yet transferred
to Income Shareholders in
accordance with Articles
------- ------- -------
Net assets per Articles as at 30 34,717 26,568 61,285
June 2009
====== ====== ======
Number of shares 10,500,000 24,500,000
NAV per share (per Articles) 330.64p 108.44p
5. CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
As at As at As at
30 June 2010 31 December 30 June 2009
2009
£'000 £'000 £'000
Loan facility (Base Rate) - 2,950 2,600
Loan facility (LIBOR) 30,000 30,000 30,000
Less: unamortised issue costs (14) (18) (23)
Income shares 24,500 24,500 24,500
Interest rate swap 1,669 1,991 2,065
------- ------- -------
56,155 59,423 59,142
====== ====== ======
6. FURTHER INFORMATION
The foregoing do not constitute 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 2009, 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 498(2) or (3) of the Companies Act
2006. All information shown for the six months to 30 June 2010 is unaudited.
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.
It is anticipated the Half Yearly Report will be posted to shareholders
during the week commencing 26 July 2010. 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.
Capital Structure
Summary
Aberforth Geared Capital & Income Trust plc has a split level capital
structure consisting of 24.5 million Income Shares and 10.5 million Capital
Shares. It has long-term bank debt facilities available amounting to £34.3
million, being equal to 100% of the net proceeds of the original issue of
shares. It is intended that the long-term facilities will be used close to
their full extent throughout the life of the Company. The effect of this
structure is to increase the yield and to provide the potential for a growing
level of dividend income for Income Shareholders, and the potential for geared
capital appreciation for the Capital Shareholders.
Income Shares
All net income earned by the Company is attributable to the Income Shares. It
is the intention to distribute substantially the whole of the net income each
year in accordance with the objective to provide a high dividend yield. The
Directors aim to increase dividends over the planned life of the Company.
Dividends will be paid half yearly.
The Income Shares were issued with an initial capital entitlement upon a
winding up of 50.00p per Income Share which increases daily, from the date of
issue, on a straight line basis until 31 March 2011 at such a rate as will
give a final entitlement of 100.00p. In the event that the Company is not
wound up on the planned winding up date of 31 December 2011, the capital
entitlement of the Income Shares will continue at a value of 100.00p. The
Income Shares will rank after repayment of the bank debt and any other
liabilities of the Company but before any payment on the Capital Shares. In
the event that the value of the investment portfolio falls significantly, then
it is possible that the Income Shares will have no underlying value at the
planned winding up date.
The Board has concluded that the amount of £24.5 million raised through the
issue of the Income Shares falls under the definition of a financial liability
within Financial Reporting Standard 25. Consequently, this amount has been
recorded as a long-term liability in the Company's Balance Sheet. As at 30
June 2010, the middle market price of an Income Share was 111p.
Capital Shares
The Capital Shares have a return that is entirely in the form of capital and
they have no entitlement to income. Capital Shareholders will be entitled to
all the Company's remaining net assets at the planned winding up date after
providing for payment in full of the final capital entitlement of 100.00p per
Income Share.
There are two methods that can be used to calculate a Net Asset Value (NAV) of
a Capital Share. The detailed calculation is shown in note 4. The difference
between the two relates to the NAV assumed for the Income Shares. As described
above the Income Shares have an initial capital entitlement of 50.00p which
increases daily, on a straight line basis, to 100.00p on 31 March 2011. The
NAV of the Income Shares on 30 June 2010 was 108.44p (includes all revenue
reserves). The NAV of a Capital Share on 30 June 2010 is therefore 330.64p, or
alternatively 321.21p if one assumes a capital entitlement of 100.00p for an
Income Share. In the event that the value of the investment portfolio falls
sufficiently, then it is possible that the Capital Shares will have no
underlying value at the planned winding up date of 31 December 2011. As at 30
June 2010, the middle market price of a Capital Share was 273.5p.
Bank Facilities
The Company seeks to enhance the returns to its shareholders by utilising
gearing in the form of bank borrowing. Accordingly, it has bank debt
facilities with Bank of Scotland under which it is entitled to draw down an
aggregate principal amount of up to £34.3 million. Of the facilities, £30
million is linked to LIBOR and has been matched with a swap transaction, which
has the effect of fixing the total interest cost at 6.47% (31 December 2009:
6.47%) for the period to 30 September 2011. The swap transaction is not
included in the Company's investment portfolio. However, changes in its fair
value are recognised on the Income Statement and Balance Sheet. The fair value
of the interest rate swap based on market values at 30 June 2010 was negative
£1,669,000 (31 December 2009: negative £1,991,000). The balance of the debt
facilities, which amount to £4.3 million, has a variable rate of interest
linked to bank base rate and is utilised as required.
The long-term bank debt amounting to £34.3 million is repayable on 31 December
2011, although it may be repayable earlier if an event of default occurs. The
long-term debt facilities agreement contains, amongst others, a financial
covenant (tested annually at 31 December) that the ratio of the amount
outstanding under the long-term debt facilities and all other creditors
(excluding Income Shares and any liabilities arising from the interest rate
swap) to the aggregate value of all Permitted Investments shall not be greater
than 0.7:1. As at 30 June 2010 the ratio of long-term debt facilities and
other creditors (excluding Income Shares and any liabilities arising from the
interest rate swap) to the value of Permitted Investments was 0.34:1.
Interest on the bank debt is charged 70% to the capital reserves of the
Company and 30% to the revenue account of the Company. Changes to the fair
value of the interest rate swap are allocated 100% to Capital Shareholders.
Duration
The Directors are obliged by the Company's Articles of Association to convene
an Extraordinary General Meeting of the Company between 1 October 2011 and 31
December 2011 (both dates inclusive) at which an Ordinary Resolution will be
proposed to wind up the Company voluntarily on the planned winding up date -
being 31 December 2011. In the event that such resolution or any other
resolution to wind up, reconstruct or reorganise the Company is not passed at
such a meeting or any subsequent meeting, the Directors are obliged to convene
an Extraordinary General Meeting for the same date (or the immediately
preceding business day) in each succeeding year at which a resolution to wind
up the Company on the next anniversary of the planned winding up date will be
proposed. Income Shareholders shall have no vote on such resolutions. A
winding up will enable Capital Shareholders to realise the residual capital
value of their investment after the payment of the creditors, liquidation
costs and the capital and dividend entitlements of the Income Shareholders.
The Directors shall not be required to convene such an Extraordinary General
Meeting if a resolution shall previously have been passed to reconstruct or
reorganise the Company. In the event that such a resolution for reconstruction
is put to the Company at any time in the period after 1 April 2011, then
Income Shareholders shall have no vote on such resolution if the proposals
contained in it would result in the Income Shareholders receiving not less
than 100p in cash (in addition to any entitlement to undistributed revenue
reserve) for each Income Share held (whether or not an option may be given to
elect to receive such entitlement otherwise than in cash).
Please note that the above is a summary only. Full details of the rights
attached to the Capital Shares and Income Shares are set out in the Company's
Articles of Association.
Contact: John Evans or David Ross - Aberforth Partners LLP - 0131 220
0733
Aberforth Partners LLP, Secretaries - 16 July 2010
ANNOUNCEMENT ENDS
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