Interim Results
ABERFORTH GEARED CAPITAL & INCOME TRUST plc
INTERIM RESULTS
For the six months to 30 June 2003
FEATURES
Total Assets Total Return +20.3%
Net Asset Value of Notional Unit Total Return +43.0%
HGSC Index (Excluding Investment Companies) Total Return +19.2%
First Interim Dividend 3.075p
First Interim Dividend +2.5%
Notional Unit NAV comprises 70% of the Income Share NAV and 30% of the Capital
Share NAV.
Aberforth Geared Capital & Income Trust plc invests only in small UK quoted
companies, does not invest in any unquoted securities, AiM listed securities or
securities issued by investment trusts or investment companies.
CHAIRMAN'S STATEMENT TO SHAREHOLDERS
I am pleased to report on a period of positive performance for Aberforth Geared
Capital & Income Trust plc (AGCiT). The first half of 2003 witnessed
considerable volatility in stockmarkets but ultimately saw a total return of
6.3% from the FTSE All-Share Index and a 19.2% total return from the Hoare
Govett Smaller Companies Index (Excluding Investment Companies) (HGSC (XIC)).
The constituents of the latter index define AGCiT's investment opportunity base
and it therefore represents an appropriate guide to the performance of AGCiT's
asset class. Consequently, with a strong absolute return from small companies,
AGCiT has enjoyed a total return on total assets of 20.3% for the period.
Given the highly geared structure of your Company, the positive total asset
return translates into significant positive returns for Capital Shareholders.
The volatility of the UK stockmarket in the first half serves to highlight two
particular features of AGCiT - its geared structure and its relatively defensive
portfolio.
First Second
Quarter Quarter Cumulative
FTSE All-Share Index -7.2% 14.5% 6.3%
HGSC (XIC) -6.1% 26.9% 19.2%
AGCiT Total Return on Total Assets -2.6% 23.5% 20.3%
Notional Unit NAV Total Return -7.8% 55.1% 43.0%
The total asset total return was better than that of the HGSC (XIC) in the
declining market of the first quarter. Conversely, the total asset performance
lagged the index in the second quarter in which a substantial increase was
recorded. The portfolio has a number of characteristics that combine to create
some defensive qualities. In particular, the portfolio has a dividend yield
that is greater than, and a Price Earnings ratio that is lower than, the HGSC
(XIC) equivalent. In addition, the Managers have where possible sought to avoid
investment in the shares of companies in which there exists both a high level of
operational and financial leverage. The companies in the portfolio thus possess
many of the attributes that investors regarded as desirable in the weak market
seen in the first quarter of the year.
The portfolio's return lagged the sharp rise in the market in the second
quarter. The reduction in uncertainty following the cessation of hostilities in
Iraq created an environment in which investments with higher perceived risk
performed well. Clearly the "defensive" qualities that worked to AGCiT's
advantage in the first quarter were less sought after in the second quarter and
the fact that AGCiT's total assets generated a lower return than the HGSC (XIC)
in this period is therefore not an inconsistent outcome.
These relative returns are of interest, but it is the absolute returns from the
assets that are of primary importance to Shareholders. The effect of the
gearing on the Company is illustrated by comparing the notional unit return in
the above table with the total asset total return. The notional unit reflects
the Company's structure and expresses the return of a "notional" unit of 30%
Capital Shares and 70% Income Shares. As can be seen the effect of the gearing
is to amplify the return to Shareholders generated by the total assets. Thus
the defensive nature of the portfolio assists in mitigating the effect of
falling equity markets on the portfolio while the gearing enhances the return in
rising markets.
DIVIDEND
A first interim dividend of 3.075p per Income Share has been declared. This
dividend represents a 2.5% increase over the 3.0p paid in respect of the
comparative period last year. The dividend will be paid on 28 August 2003 to
Income Shareholders on the register on 1 August 2003.
INVESTMENT BACKGROUND
The recent rally in stockmarkets around the world would appear to have been
justified by the efficient containment of SARS and a resolution of the Iraqi
conflict, which has helped to lower the price of oil. A remarkable feature of
the rebound has been the concomitant development in the prices of other asset
classes: rising equities have been accompanied by reinvigorated commodities
prices, narrowing spreads on corporate debt and a falling dollar - all
potentially indicative of inflation - but also by a continuation in the bull
market for government bonds - hardly consistent with resurgent inflation.
These unusual price movements have fuelled a debate between those who worry that
the Western world is following Japan into deflation and those who identify
inflation as the true threat. Those in the former camp point to the legacies of
the equity bubble of the late 1990s - excess capacity and a highly indebted
private sector risk - and to China's emergence as a major economy. The US has
responded by cutting interest rates to the lowest level for 45 years, together
with tax cuts and greater public spending. On top of these, ambiguous comments
about the commitment to "the strong dollar" have helped push the US currency
down against the euro by 16% since 30 June 2002. But, most remarkably, Fed
officials have expressed their confidence in "making sure it (deflation) doesn't
happen" through the use of so-called "unconventional measures".
Financial markets are entering uncharted waters, but such measures appear to
entail the use of the printing press to create more money. One mooted tactic,
which gratifyingly goes some way to rationalise the unusual combination of asset
price movements in recent months, is for the Fed to suppress yields of
government bonds of all maturities by buying them with their newly printed
dollars. To date, "unconventional measures" have not been employed, but the
mere suggestion appears to have driven financial markets to build in a greater
likelihood of reflation. Such an outcome would probably prove more benign for
equities than a slide into deflation.
Whether through luck or judgement, however, the spectre of deflation is much
less frightening in the UK. Inflation, as gauged by the RPIX, is running at
around 3% and, thanks to government spending and low interest rates, the economy
is forecast to grow in nominal terms at least as quickly as the US and more
quickly than the Eurozone in 2003. Sterling's weakness against the euro is also
helpful and may assist in addressing some of the imbalances in the UK economy.
In particular, it should be of more direct benefit than lower interest rates to
exporters and those businesses with continental competitors: according to the
National Statistics Office, the manufacturing sector's output managed a small
improvement in the first quarter of 2003 after having fallen for eight
consecutive quarters.
The key to the UK's relative resilience, however, remains the consumer. There
are signs, though, that confidence is slipping and that house price inflation
has fallen sharply from the 26% rate reached at the end of 2002. Against this
background, and with the global economic outlook murky, it is perhaps as well
that the government has opted to maximise the country's fiscal and monetary
flexibility by deciding against EMU entry for the time being.
INVESTMENT PERFORMANCE
The six months to 30 June 2003 can be split into two distinct periods. In a
continuation of the trends that prevailed in the second half of 2002, the first
two and a half months were in the grip of the bear market. AGCiT performed
relatively well in this period. From mid March, however, the stockmarket
staged a strong rally that was ultimately led by small companies. AGCiT's
performance lagged in this recovery phase, as the Managers questioned the
fundamental justification for the revaluation of a number of businesses.
Corporate activity made a minor contribution to AGCiT's performance, though
there are signs that confidence is returning. Although only 22 companies in the
investment universe were acquired in AGCiT's first half, against 53 deals in the
whole of 2002, many more are in discussions or have actually received bids.
Clearly, a proportion of these approaches will fail, but there are grounds for
optimism: large amounts of money in venture capital funds are waiting to be
invested; in a low growth world, management teams may seek to add value through
consolidation; and, as is described below in greater detail, small UK quoted
companies appear to offer good value.
The companies in AGCiT's portfolio have, on the whole, coped well with the
uncertain economic environment. A useful means to assess this assertion is to
examine their dividend payments. The dividends announced by the 82 companies in
the portfolio at 30 June 2003 were 4.9% higher than the corresponding payments
in the previous year. Of these 82 companies in the portfolio, five cut their
dividends (three of which were expected), 21 reported unchanged dividends and
the remaining 56 raised their payouts.
It should be noted, though, that AGCiT will not pick up on the full extent of
this increase owing to subtle changes to the make-up of the portfolio over the
course of the first half. The broadly based declines in the equity prices over
the past twelve months have resulted in the compression of the gap between the
Price Earnings ratios of "value" and "growth" stocks. The Managers have sought
to exploit this by making selective purchases of higher quality businesses whose
valuations would previously have been too demanding. The implications of this
strategy for AGCiT are that its portfolio yield relative to the HGSC (XIC) has
declined but that its dividend growth prospects have been enhanced: the average
dividend cover on the portfolio has risen to 2.1x at 30 June 2003 from 2.0x 12
months previously.
30 June 2003 30 June 2002
Characteristics AGCiT HGSC (XIC) AGCiT HGSC (XIC)
Number of Companies 82 827 78 915
Weighted Average Market Capitalisation £317.9m £334.0m £344.0m £355.4m
Price Earnings Ratio (Historic) 11.2x 13.4x 11.5x 14.3x
Net Dividend Yield (Historic) 4.2% 3.0% 4.3% 2.8%
Dividend Cover (Historic) 2.1x 2.5x 2.0x 2.5x
INVESTMENT OUTLOOK
The threat of deflation, whether real or imagined, has profound implications for
both economies and financial markets. For the Fed, the threat is very real. It
has responded with interest rate cuts and, more recently, talk about
"unconventional measures". The truth is that words are a more powerful weapon
than actual deployment of these measures: the trick is to build confidence among
consumers and businesses that deflation will not happen, so that they resume
spending and investment. The risk is that, as in Japan, loose monetary
conditions do not translate into greater activity in the real economy.
Consumers and businesses may, for example, consider it more rational to reduce
their indebtedness than to spend.
Despite a prompt end to the Iraqi conflict, economic conditions still do not,
therefore, appear conducive to sustained growth in corporate profits, the sine
qua non of successful equity investment. Such doubts are reflected in the
actions of those running the businesses. Judging by the results of AGCiT's
portfolio companies, management teams are doing a fine job in controlling costs.
They are not, though, sufficiently confident yet to invest: their focus remains
on optimising cash generation, often by setting capital expenditure at under
depreciation.
The Managers do not, therefore, foresee an imminent return to double-digit
increases in earnings per share for the stockmarket as a whole. It still seems
appropriate to think of real returns from equities of close to the 5-7% long
term average. They will, though, be prone to wild swings from year to year,
perhaps of the sort witnessed so far in 2003.
Dividend yield and dividend growth may therefore assume greater significance.
From the point of view of investors in small UK quoted companies, the
combination of a 3.0% yield and 2.5x dividend cover is encouraging. Although
larger companies, as gauged by the FTSE All-Share Index (excluding loss makers
and investment companies), boast a higher yield of 3.5%, they do so at the
expense of a lower dividend cover at 1.7x and, therefore, ceteris paribus,
inferior dividend growth prospects.
AGCiT would appear relatively well positioned. In constructing the current
portfolio, the Managers have applied the same principles of value investment to
which they have adhered for the past 13 years. The portfolio is diversified,
with 82 holdings, each of which is considered capable of contributing to the
overall portfolio objectives.
Alastair C Dempster
Chairman
23 July 2003
The Statement of Total Return, summary Balance Sheet and summary Cash Flow
Statement are set out below: -
STATEMENT OF TOTAL RETURN
(Incorporating the Revenue Account 1)
(unaudited)
6 months to 7 September 2001 to
30 June 2003 30 June 2002
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Realised (losses)/gains on sales - (1,188) (1,188) - 646 646
Unrealised gains - 11,827 11,827 - 3,995 3,995
_______________________________________________________
Gains/(losses) on investments - 10,639 10,639 - 4,641 4,641
Dividend income 1,689 - 1,689 1,685 140 1,825
Interest income 50 - 50 103 - 103
Other income - - - 11 - 11
Investment management fee (74) (17) (247) (98) (229) (327)
Other expenses (80) - (80) (113) - (113)
_______________________________________________________
Net return before finance
costs and taxation 1,585 10,466 12,051 1,588 4,552 6,140
Interest payable
and similar charges (312) (728) (1,040) (238) (554) (792)
_______________________________________________________
Return attributable to
non-equity shareholders 1,273 9,738 11,011 1,350 3,998 5,348
Dividends and other apporopiations
in respect of non-equity shares (753) (34) (787) (735) - (735)
_______________________________________________________
Transfer to reserves 520 9,704 10,224 615 3,998 4,613
_______________________________________________________
Returns per non-equity interest2:
Income Share 5.20p - 5.20p 5.51p - 5.51p
Capital Share - 92.74p 92.74p - 38.08p 38.08p
Dividends per Income Share 3.075 - 3.075p 3.00p - 3.00p
NOTES
1. The revenue column of this statement is the profit and loss account of the
Company. All revenue and capital items in the above statement derive from
continuing operations. No operations were acquired or discontinued in the
period. The Company was incorporated on 7 September 2001 and commenced business
following the £35,000,000 issue of 24.5 million Income Shares at £1.00 and 10.5
million Capital Shares at £1.00 on 18 December 2001.
2. The calculations of revenue return per Income Share are based on net
revenue of £1,273,000 (30 June 2002 - £1,350,000) million and on 24.5 million
Income Shares. The calculations of capital return per Capital Share are based
on net capital gains of £9,738,000 (30 June 2002 - £3,998,000) and on 10.5
million Capital Shares.
SUMMARY BALANCE SHEET
(unaudited)
30 June 30 June 31 December
2003 2002 2002
£'000 £'000 £'000
Securities officially listed on
the London Stock Exchange 67,641 70,542 59,685
________________________________
Debtors 1,137 604 349
Cash at bank - - 1
Creditors (1,360) (1,656) (1,258)
________________________________
Net current liabilities (223) (1,052) (908)
Total assets less current liabilities 67,418 69,490 58,777
Creditors (amounts falling due after
more than one year) (31,256) (30,535) (32,873)
________________________________
Total assets less liabilities 36,162 38,955 25,904
________________________________
Capital and reserves: non-equity interests
Called up share capital 350 363 350
Reserves:
Capital redemption reserve 50 - 50
Special reserve 33,929 33,979 33,929
Capital reserve - realised (4,325) 3 (2,236)
Capital reserve - unrealised 5,378 3,995 (6,449)
Revenue reserve 780 615 260
_______________________________
36,162 38,955 25,904
_______________________________
Net Asset Values:
per Income Share 61.43p 55.38p 56.65p
per Capital Share 201.06p 241.64p 114.52p
NOTE
During the period the Company had 24.5m Income Shares and 10.5m Capital Shares
in issue. At 30 June 2002, the Company also had 50,000 Redeemable Preference
Shares in issue, which were redeemed on 16 July 2002.
SUMMARY CASH FLOW STATEMENT
(unaudited)
6 months to 7 September 2001 to
30 June 2003 30 June 2002
£'000 £'000 £'000 £'000
Net cash inflow from
operating activities 1,226 914
Returns on investments and
servicing of finance
Interest and other finance costs paid (1,037) (863)
Non-equity dividends paid (1,225) -
________ ________
Net cash outflow from returns on
investments and servicing of finance (2,262) (863)
Capital expenditure and financial
investment
Payments to acquire investments (12,415) (72,303)
Receipts from sales of investments 15,072 7,287
________ ________
Net cash inflow/(outflow) from capital
expenditure and financial investment 2,657 (65,016)
________ ________
Net cash inflow/(outflow) before financing 1,621 (64,965)
________ ________
Financing
Issue of Shares - 35,013
Expenses paid in respect of the share issue - (671)
Loans (repaid)/drawn down (1,622) 30,623
________ ________
Net cash (outflow)/inflow from financing (1,622) 64,965
________ ________
Change in cash during the period (1) -
________ ________
NOTES
The same accounting policies used for the period to 31 December 2002 have been
applied. The financial statements have been prepared in accordance with
applicable accounting standards and with the Statement of Recommended Practice
"Financial Statements of Investment Trust Companies" (SORP).
The foregoing do not comprise statutory accounts (as defined in section 240(5)
of the Companies Act 1985) of the Company. The statutory accounts for the
period to 31 December 2002 which contained an unqualified Report of the
Auditors, have been lodged with the Registrar of Companies and did not contain a
statement required under section 237(2) or (3) of the Companies Act 1985.
The Interim Report is expected to be posted to shareholders on 26 July 2003.
Members of the public may obtain copies from Aberforth Partners, 14 Melville
Street, Edinburgh EH3 7NS or from its website at www.aberforth.co.uk.
CONTACT: John Evans Aberforth Partners 0131 220 0733
Aberforth Partners, Secretaries - 23 July 2003
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