Final Results

RNS Number : 7776M

Henderson Smaller Cos Inv Tst PLC

30 August 2013

 



 

THE HENDERSON SMALLER COMPANIES INVESTMENT TRUST PLC

 

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 MAY 2013

29 August 2013

This announcement contains regulated information

MANAGEMENT REPORT

FINANCIAL HIGHLIGHTS	31 May 2013	31 May 2012
Total net assets	£403 million	£280 million
Net asset value per ordinary share	540.0p	374.5p
Net asset value per ordinary share on an alternative basis *	535.0p	367.9p
Market price per ordinary share	454.0p	284.3p
Total return/(loss) per ordinary share	171.0p	(19.6)p
Revenue return per ordinary share	6.2p	6.1p
Dividend per ordinary share	6.5p	5.5p
Gearing †	8.2%	8.7%

*Calculated by deducting from the net assets the debt at its market value.

†Defined here as the total market value of the Company's investments less shareholders' funds as a percentage of shareholders' funds.

CHAIRMAN'S STATEMENT

This year has been excellent for the Company and I am delighted to report that the net asset value (NAV) of the Company increased by 46.1% in the year on a total return basis and thus again outperformed its benchmark, the Numis Smaller Companies Index, by 6.8%.

I would like to thank all the Henderson staff and my Board for their efforts throughout the year on behalf of shareholders but in particular pay tribute to Neil Hermon. Last November marked his tenth anniversary as Fund Manager and I should like to repeat the thanks stated in my last interim statement and to congratulate him on his great success. Over the past ten years our net asset value total return has been 382.8% versus a total return from the Numis Smaller Companies Index (excluding investment companies) of 280.6%, the FTSE All-Share Index of 149.6% and the FTSE SmallCap Index of 117.7%. This is a compound annual return to shareholders of 17.1% and demonstrates that a long-term approach is the appropriate one to take when investing in smaller companies. It is also testimony to his great skill in picking undervalued stocks.

I am pleased to report that the Company's performance over the past year has been recognised with a number of awards. The Company won Best UK Smaller Companies Trust and Best UK Equity Trust for Savers and was highly recommended in the Best Large Trust category by Money Observer. The Company also won the award for Best UK Investment Trust by What Investment and Best UK Equity Growth Fund at the Investors Chronicle Fund awards.  Furthermore, Neil was voted Investor of the Year at the Quoted Company Awards.

Revenue and dividend

The revenue return per share has remained relatively flat at 6.2p, compared with 6.1p for the previous year. However, we propose an increase in the final dividend for the year to 6.5p per share (2012: 5.5p). This is of course subject to shareholder approval at the Annual General Meeting in October. If approved this would be a 12-fold increase over these past 10 years, and a compounded annual growth rate of 29.2%.  Since the year end, the Board has agreed a revision to the accounting policy and, with effect from 1 June 2013, all investment management fees and finance costs will be allocated 70% to the capital account and 30% to the revenue account, based on the Board's expected long-term split of total returns. Any performance fees will continue to be charged wholly to capital. This change in policy will enhance the Company's dividend-paying capability in future years.

CHAIRMAN'S STATEMENT (continued)

Discount and Share buy-backs

During the year the smaller companies sector as a whole traded at an average discount of 14.1%, with highs and lows of 17.6% and 11.4% respectively. At the year end, the Company's shares traded at a discount of 15.9%. The Company's discount ranged from 12.8% to 23.6% with the average discount over the year being 18.3%. This offered a compelling investment opportunity and therefore we bought back 40,000 shares at an average discount of 22.1% and average price of 316.43p. This year we appointed Numis as the Company's new broker. An expressed remit of the appointment was to widen and diversify the shareholder base, which we believe could help narrow the discount; however, we accept that this will take time. The Board continues to keep a close eye on the discount and will from time to time buy back shares, even though we do not believe that share buy-backs have a significant effect on the discount other than in the short-term.

Continuation

Our shareholders are asked every three years to vote for the continuation of the Company and a resolution to this effect will be put to the Annual General Meeting in October. Henderson Smaller Companies Investment Trust plc has shown again that active investment management, well-executed within the transparent structure of an investment trust company, is a highly effective means of getting exposure to this class of equity. We are therefore recommending shareholders to vote for the Company to continue.

Regulatory

The Board has noted that the Alternative Investment Fund Managers Directive was written into UK legislation with effect from 22 July 2013.  There is a one-year transition period within which the Company must comply with the provisions of the directive, which includes the appointment of an Alternative Investment Fund Manager ('AIFM') and an independent Depositary, who will provide an independent monitoring role to ensure the Company complies with the regulations. The Board has agreed in principle that Henderson will be appointed as the AIFM and has instructed them to take the necessary actions to ensure that all documentation and processes to enable the Company to comply with the regulations are in place within the transition period. A decision regarding the appointment of the Depositary will be taken in due course.

Outlook

The year under review has been an excellent one for equity markets and for the Company, which will be hard to repeat this year. Admittedly good news continues to flow from the corporate world, with corporate balance sheets strong and earnings look set to see reasonable growth in the coming year. Governments, however, are still beset with seismic economic issues and political leadership is weak, which can only lead to market volatility as investors react and overreact to the news. Despite these problems, I believe the smaller companies market will continue to produce exciting growth opportunities, so with the Company's sound and disciplined approach of value investing, we can look forward to the coming year with confidence.

Annual General Meeting

Our Annual General Meeting will be held at 10:30am on Friday, 4 October 2013 at the Registered Office, 201 Bishopsgate, London EC2M 3AE. The Notice of Meeting is set out in the accompanying circular to shareholders. We would encourage as many shareholders as possible to attend for the opportunity to meet the Board and to watch a presentation from Neil Hermon reviewing the year and looking forward to the year ahead.

CHAIRMAN'S STATEMENT (continued)

Board composition

James Nelson will be retiring from the Board at the AGM in October. I would like to take this opportunity to thank James, on behalf of the Board and shareholders, for his service to the Company over the past eleven years. I would also like to take this opportunity to welcome David Lamb to the Board, who was appointed on 1 August 2013.

J M B Cayzer-Colvin

Chairman

29 August 2013

FUND MANAGER'S REVIEW

Analysis of the portfolio by sector	31 May 2013 %	31 May 2012 %
Support Services	19.4	18.2
Electronic & Electrical Equipment	11.7	12.8
Media	7.3	6.7
Real Estate	7.3	4.6
Travel & Leisure	7.0	3.0
Financial Services	7.0	5.5
Household Goods & Home Construction	5.7	4.7
Software & Computer Services	5.1	7.8
Chemicals	3.9	7.3
Oil & Gas Producers	3.7	5.5
Construction & Materials	3.4	3.3
Aerospace & Defence	3.1	3.1
General Retailers	2.8	3.3
Industrial Engineering	2.8	3.8
Technology Hardware & Equipment	2.6	3.2
Health Care Equipment & Services	2.0	1.7
Oil Equipment, Services & Distribution	2.0	2.4
Pharmaceuticals & Biotechnology	1.6	0.5
Personal Goods	0.7	-
Mobile Telecommunications	0.4	-
Mining	0.3	1.5
Food Producers	0.2	0.2
Industrial Metals & Mining	-	0.6
General Industrials	-	0.3
	100.0	100.0

Market - year in review

The year under review was an excellent one for equity markets. The FTSE All-Share Index rose in every month of the year. This positive performance was due to the actions of the European Central Bank to resolve the Eurozone crisis, loose monetary policies from developed world Central Banks, a marginally improving global macro-economic situation and the relative attractiveness of equities over other asset classes. Additionally the fundamentals of the corporate sector continued to improve. Companies further increased their profits enabling dividends to grow. Balance sheets remained strong. Mergers and acquisition activity, however, remained subdued as management teams were unwilling to take on financial leverage in the face of economic uncertainty.

Smaller companies materially outperformed larger companies over the year. The Numis  Smaller Companies Index (excluding investment companies) has now outperformed the FTSE All-Share Index for the last five years consecutively (and in twelve of the last thirteen years).

Fund performance

The Company had a very strong year in performance terms - outperforming its benchmark and rising substantially in absolute terms. The net asset value rose 46.1%, on a total return basis. This compares to a rise of 39.3% (total return) from the Numis Smaller Companies Index (excluding investment companies) and 46.1% (total return) from the FTSE Small Cap Index (excluding investment companies). The outperformance came from a combination of underlying positive portfolio performance and a positive contribution from gearing in the Company. The year under review is the ninth year of outperformance of our benchmark, the Numis Smaller Companies Index (excluding investment companies), in the last ten years.

FUND MANAGER'S REVIEW (continued)

Gearing

Gearing started the year at 8.7% and ended it at 8.2%. The majority of the gearing is provided by the £20 million 10.5% 2016 Debenture with the remainder by short term bank borrowings. Gearing was a positive contributor to performance in the year as markets rose and has been a significant positive over the 10 years I have managed the investment portfolio.

Attribution analysis

The tables below show the top five contributors to, and the bottom five detractors from, the Company's relative performance.

Principal contributors	12 month return %	Relative contribution %
WSP	+67.2	+1.8
Taylor Wimpey	+134.5	+1.2
Ashtead	+177.5	+1.2
Bellway	+88.3	+0.7
New Britain Palm Oil*	-40.3	+0.6

*Included in the benchmark index but not owned by the Company.

WSP is an international engineering consultant, principally in the built environment. WSP was a long standing investment in our portfolio but had struggled in recent years as investors were frustrated by the lack of profit progress, the uncertain outlook for growth and the cut-backs in UK Government spending. We continued to hold the company as we felt that although trading conditions were tough, recovery potential was significant and there was a high chance of the company being acquired in a consolidating global industry. This patience paid off as WSP was acquired for a near 70% premium by the Canadian company, Genivar, in July 2012.

Taylor Wimpey is a national UK housebuilder. From the depths of the housing downturn in 2007/08 Taylor Wimpey has made an impressive recovery. It has strengthened it's over leveraged balance sheet through the sale of the company's US operation and by raising money through a rights issue. Financial returns have been improving through the acquisition of higher margin land and cost reductions in the building process. The share price performance in the last year has been further helped by strong growth in profitability and a market re-rating of the housebuilding sector. Recent Government initiatives are helping to further boost prospects for the UK housing market and transaction levels and prices are set to rise further.

Ashtead is a plant hire company with operations in the UK and US. The key driver for the company, however, is its US operations which account for over 95% of its profitability. Plant hire is a notoriously cyclical industry and Ashtead suffered badly in the downturn of the US construction markets post the credit crunch. Since then Ashtead has made an impressive recovery aided by a structural shift in the US market from construction companies renting their plant fleet rather than owning it. Additionally Ashtead has taken market share from smaller competitors who have struggled to raise bank finance to invest in their hire fleet. These trends have meant profitability has expanded rapidly. With US construction markets showing signs of recovery the outlook for Ashtead remains strong.

Bellway is also a national UK housebuilder. Much of the commentary on Taylor Wimpey applies equally to Bellway. Bellway went into the downturn with a much stronger balance sheet than Taylor Wimpey and therefore its share price downturn and subsequent recovery has been less dramatic. Nevertheless the last year has been an excellent one for Bellway and with a strong landbank, an ungeared balance sheet and strong management team the prospects for the company are bright.

FUND MANAGER'S REVIEW (continued)

New Britain Palm Oil is a producer of palm oil. The shares have been poor performers in the year as production difficulties and a weak palm oil price have impacted profitability. The Company has no holding in New Britain Palm Oil.

Principal detractors	12 month return %	Relative contribution %
ev2 Technologies	-6.2	-1.2
Rockhopper Exploration	-56.2	-0.5
Dixons Retail*	+191.6	-0.5
Barratt Developments*	+166.7	-0.5
Melrose Industries	+11.6	-0.5
* Included in the benchmark but not owned by the Company

e2v Technologies manufactures high technology electronic components. After enjoying a strong recovery from the last recession the company has had a tough last 12 months. Profitability has not been as strong as expected due to weakness in industrial end markets, a downturn in US defence

spending, a delay in a project with the mining giant Rio Tinto and delivery issues with a number of its space projects. Although e2v is a company with significant technology and high margins it has struggled to deliver consistent growth. This has led to a below market valuation for the business. There is significant pressure building on the management team to find a solution to this problem and the recent appointment of a new chairman will hopefully accelerate this process.

Rockhopper Exploration is an oil and gas exploration company focusing on the Atlantic Basin to the north of the Falkland Islands. The company made a major discovery in 2010 and its share price rose substantially. Last year it successfully 'farmed down' its position in the Sea Lion discovery to Premier Oil, thereby reducing its commitment and cost in developing the field. However, given the long term nature of oil development, with first production not till 2017, the lack of exploration activity and negative market sentiment towards junior oil and gas companies have meant the share price has performed poorly. Going into 2014 exploration activity is likely to re-commence which should re-ignite interest in the company.

Dixons Retail is an electrical retailer. The market in which it operates is fiercely competitive. New competitors, like Amazon, and other internet retailers have driven prices and margins down over the last few years. In the last year Dixons has benefited from capacity withdrawal from the market as the likes of Comet and Best Buy have exited the UK. The Company has no holding in Dixons Retail.

Barratt Developments is a national UK housebuilder. Like Taylor Wimpey and Bellway the company has benefited from a recovery in the UK housing market over the last year. The Company has no holding in Barratt Developments.

Melrose Industries is a diversified engineering group. Its raison d'etre is to acquire under-performing companies and then turn round their performance through the application of strict financial controls, better management practices and investment in growth areas leading to significant expansion in margins and cash generation. When this has been achieved and significant value created Melrose will sell the business on to a trade or private equity buyer. This has been done to great effect with the acquisitions of Dynacast, McKechnie, FKI and more recently Elster. After a very strong 2011/12 Melrose had a relatively weaker 2012/13 due to profit taking, indigestion

around the rights issue to fund the acquisition of Elster and some weakness in its power generation end markets.

FUND MANAGER'S REVIEW (continued)

Portfolio activity

Trading activity in the portfolio was consistent with an average holding period of five years. Our approach is to consider our investments as long term in nature and to avoid unnecessary turnover. The focus has been on adding stocks to the portfolio that have good growth prospects, sound financial characteristics and strong management, at a valuation level that does not reflect these strengths. Likewise we have been employing strong sell discipline to cut out stocks that fail to meet these criteria.

In the year we have added a number of new positions to our portfolio. We increased our exposure to the travel and leisure sector. In the past few years we had a very under-weight position in this area as we were concerned by the pressure on UK consumers' net disposable income and the effect this would have on consumer spending. This strategy has added significant relative value. However as the UK economy has started to show signs of improvement we felt it would be appropriate to add to our weighting. Acquisitions included Cineworld, a leading operator of cinemas, and Thomas Cook, the leading tour operator business.

Other new additions to our portfolio included:

Dechra is an international veterinary pharmaceutical business. Dechra has a very strong track record over the last ten years driven by a combination of acquisition and organic growth. The company has diversified internationally from UK origins to now having a strong presence in Europe and US whilst reducing its exposure to the low margin distribution business. The future looks bright with prospects boosted by a growing market and a range of new drugs expected to be launched over the coming years.

Hays is a leading international recruitment consultant. Recruitment is an activity which is closely linked to economic growth. With conditions in the global economy showing signs of improvement Hays is well placed to benefit. Additionally its German operations are benefiting from structural growth in temporary employment whilst the UK business has significant recovery potential from a cyclically depressed level.

Sherborne Investors is an investment vehicle fronted by Edward Bramson. He has built a reputation for taking a stake in an under-performing business, gaining management control and turning around its fortunes. In the UK he has had great success at 4Imprint, Elementis, Spirent and more recently F&C Asset Management. We backed his money making skills by investing in Sherborne B which has subsequently bought a stake in 3i, the private equity, infrastructure and debt management group.

Xaar is a digital ink jet printing business. The company supplies print heads and ink to industrial users who use these products for printing on glass, cardboard, ceramics, metals, paper and textiles. Xaar has had a phenomenal year, more than doubling its profits, on the back of rapid take-up in the ceramic market where its technology has revolutionised the market. This growth is likely to continue as to remain competitive ceramic tile manufacturers need to adopt Xaar print head technology. Longer term there is a good chance that other industries could follow the ceramics market.

We invested in three IPOs (initial public offerings) in the year. These were - Clinigen, a fast growing provider of services to the pharmaceutical industry, Countrywide, a leading UK estate agency business that is poised to benefit significantly from the improvement in housing transactions, and HellermannTyton, a global manufacturer of cable management solutions.

FUND MANAGER'S REVIEW (continued)

To balance the additions to our portfolio we have disposed of positions in companies which we felt were set for poor price performance. We disposed of our holding in Goals Soccer Centres, the 5-a-side football operator, where a slowing roll-out of new centres and high debt mean profit progress is

likely to be anaemic. We also disposed of our holding in London Mining, the West African iron ore miner, where the Marampa project has been beset by operational issues and a weak ironore price. Additionally we sold our small positions in Metminco, Avocet Mining and Bullabulling as we believe the prospects for junior miners is poor with weak commodity prices and a lack of finance for new projects.

A notable feature in the year was the sale of a number of investments where the company had been elevated into the FTSE 100 Index. These investments have proved to be very successful since acquisition and our job is to find alternative opportunities which will replicate their success. Disposals in this category include Aberdeen Asset Management, the fund manager, Babcock, the support services group, Croda, the speciality chemicals company, Melrose, the diversified engineering group and Wood Group, the oil services company.

We benefited from a level of takeover activity in the year. The level was down on the previous year as the macro-economic uncertainty meant corporates were unwilling to be overly aggressive in leveraging their balance sheets to acquire competitors. Within our portfolio takeover bids were received for WSP, an international engineering consultancy, from Genivar and Nautical Petroleum, a North Sea oil and gas explorer, from Cairn Energy.

Portfolio outlook

The following table shows the Company's key stock positions versus the Numis Smaller Companies Index (excluding investment companies) at the end of May 2013.

Top ten active positions at 31 May 2013	Holding %	Index Weight %	Active Weight %
Taylor Wimpey	3.0	-	3.0
Informa	2.7	-	2.7
Spectris	2.7	-	2.7
Ashtead	2.5	-	2.5
Oxford Instruments	2.7	0.6	2.1
e2v Technologies	2.0	0.2	1.8
Rotork	1.8	-	1.8
Bellway	2.7	0.9	1.8
Interserve	2.1	0.4	1.7
Paragon	2.1	0.6	1.5

Brief descriptions of Taylor Wimpey, Ashtead, Bellway and e2v Technologies have been included earlier. A brief description of the remaining largest active positions follows:

Informa is a leading business to business information group. Its activities include the provision of academic journals, books, data services, trade exhibitions, conferences and training services. The company produced a very resilient profit performance during the downturn, helped by aggressive cost cutting. Additionally the balance sheet has been strengthened and the company is set for a return to growth in coming years. Given its low valuation, we believe the share price is set for further gains.

FUND MANAGER'S REVIEW (continued)

Spectris manufactures, designs and markets products for the electronic control and process instrumentation sectors. The company has a number of subsidiaries which tend to be market leaders in global market niches. Cash generation is very sound, the management team is well respected and the balance sheet is strong. Profit growth in recent years has been strong and although end markets in the short term have softened, longer term the company is well set for growth.

Oxford Instruments produces advanced instrumentation equipment for industrial and scientific research markets. The company has benefited from strong demand for its products, especially in the nanotechnology area which is an emerging area of research and is set to grow strongly in future years. The company has been substantially re-structured by its management team over recent years and is seeing strong growth in margins and profitability. Although in the coming year there are headwinds around the completion of profitable contracts and some weakness in industrial end markets, longer term the business is well positioned for superior growth.

Rotork designs and manufactures actuators and related products for use in the valve industry. Its products are principally used in the oil and gas, power and water industries. It is a global leader in its industry and has consistently grown market share through high levels of quality and investment in new product development. The company has a fantastic long term track record and has consistently grown faster than its peer group. Margins are high, the balance sheet is strong, sales exposure is geared towards growing industries and emerging economies and management are high quality. Although the shares are on a reasonably high valuation Rotork has and will continue to be a fantastic long term investment.

Interserve is an international construction and support services group operating principally in the UK and Middle East. The principal driver of the business is currently the UK support services operation where margins are rising from depressed levels. Additionally the UK construction activities are proving resilient in the face of tough market conditions and the Middle East is benefiting from economic growth. Interserve have strengthened their balance sheet in the last year by selling a large proportion of their PFI assets which has enabled the company to reduce its pension deficit and give the company substantial firepower for acquisitions.

Paragon is a provider of buy to let mortgages and consumer finance. The business environment for Paragon has noticeably improved in the last year. Funding markets have opened up and allowed Paragon to resume lending. The quality of the existing loan book remains very high with impairments at low levels. Paragon is also benefiting by buying, at attractive prices, parcels of loans from banks which need to de-gear their balance sheets. With the UK housing market strengthening the outlook for Paragon looks strong.

Market outlook

The year under review has been a very positive one for equity markets despite an uncertain global economic backdrop. These uncertain conditions remain in place with a slowing Chinese economy, most European economies in recession and the US still suffering the effects of sequestration. However at the margin conditions are arguably improving particularly in the US where a rise in the

housing market is boosting consumer confidence.

FUND MANAGER'S REVIEW (continued)

The UK economy has shown at best minimal growth. The need to rein in public spending and reduce the public sector deficit has forced large cuts in government spending. This, combined with weak economies of our major trading partners in Europe, has dampened economic recovery. In this

environment, with high unemployment, low wage growth and a rising cost of living, the resilience of the UK consumer is being tested and is making conditions for domestically focused businesses

challenging. However, like the US, economic conditions are showing recent signs of improvement with the UK housing market starting to see a recovery in prices and transaction levels.

Another factor that the equity market will have to deal with in the coming year is the potential end or tapering of quantitative easing. This 'drug' of easy money is something the market has become reliant on over the last few years and it is unclear how it will react to its withdrawal. However, it is unlikely that this will happen until it is clear economic conditions are getting materially better.

Even after the rise in the last year, stock market valuations are still below historic standards and compare well to other asset classes. Corporate profitability has proved robust and earnings look set to see reasonable growth in the coming year. Mergers and acquisition activity however is currently subdued as management teams are unwilling to take on financial leverage in the face of economic uncertainty. An increase in M&A would be helpful for smaller companies in particular as mergers and acquisition activity tends to be focused in this area.

In conclusion, the year under review has been an excellent one for the equity market and the Company. Relative performance was strong and our portfolio companies have, overall, performed robustly. Our investments are generally trading well, are soundly financed and attractively valued. Additionally, the small company market continues to throw up exciting growth opportunities in which the Company can invest.

Neil Hermon

Fund Manager

29 August 2013

INVESTMENT PORTFOLIO

at 31 May 2013

Company	Main Activity	Valuation £'000	% of portfolio
Taylor Wimpey	house building	12,889	2.95
Bellway	house building	11,940	2.74
Informa	business to business information	11,938	2.73
Spectris	electronic control and process instrumentation	11,896	2.72
Oxford Instruments	advanced instrumentation equipment	11,882	2.72
Ashtead	plant hire	10,916	2.50
Intermediate Capital	mezzanine finance	10,062	2.31
Victrex	speciality chemicals	9,361	2.14
Senior	aerospace and automotive products	9,330	2.14
Paragon	buy to let mortgage provider	9,172	2.10
10 largest		109,386	25.05
Interserve	international contractor	8,987	2.06
e2v Technologies	electronic components	8,899	2.04
WS Atkins	engineering consultancy	8,013	1.83
Restaurant Group	restaurants	7,829	1.79
Rotork	process control solutions	7,722	1.77
Domino Printing Sciences	industrial printing equipment	7,208	1.65
Howden Joinery	kitchen manufacturer and retailer	7,026	1.61
Grainger	residential property investor	6,945	1.59
LSL Property Services	retail property investor	6,840	1.57
Playtech	internet gaming software	6,757	1.55
20 largest		185,612	42.51
AZ Electronic Materials	speciality chemicals	6,338	1.45
Filtrona	speciality plastic and fibre producer	6,135	1.41
Northgate	commercial vehicle hire	5,979	1.37
Anite	telecom software	5,856	1.34
Thomas Cook	tour operator	5,783	1.32
Renishaw	precision measuring and calibration equipment	5,775	1.32
Premier Oil	oil and gas exploration and production	5,668	1.30
Perform	online media information	5,568	1.28
John Menzies	news distributor and aviation services	5,452	1.25
Fidessa	financial software	5,170	1.18
30 Largest		243,336	55.73
Carphone Warehouse	mobile telephone retailer	5,151	1.18
*Tyman	construction and materials	5,022	1.15
Dunelm	homewares retailer	5,018	1.15
Aveva Group	design software	4,836	1.11
Greene King	pub operator	4,785	1.09
Euromoney Institutional Investor	business to business information	4,757	1.09
Jupiter Fund Management	investment management company	4,645	1.06
Hunting	oil equipment and services	4,562	1.04
Fenner	industrial engineering	4,485	1.03
Hays	business training and employment agencies	4,319	0.99
40 Largest		290,916	66.62

INVESTMENT PORTFOLIO (continued)

at 31 May 2013

Company	Main Activity	Valuation £'000	% of portfolio
*RWS	patent translation services	4,286	0.98
SIG	builders merchant	4,238	0.97
ITE Group	exhibition organiser	4,157	0.95
Ultra Electronic Holdings	specialist defence contractor	4,131	0.95
CSR	semi conductors	4,085	0.94
Capital Regional	retail property investor	4,047	0.93
Hellermann Tyton	electrical components and equipment	3,763	0.86
Shaftesbury	property investor	3,693	0.85
Synergy Healthcare	healthcare support services	3,691	0.84
Afren	oil and gas production and exploration	3,641	0.83
50 largest		330,648	75.72
Balfour Beatty	international contractor	3,613	0.83
Countrywide	real estate services	3,557	0.82
Keller	ground engineering	3,555	0.81
Kentz	oil and gas contractor	3,469	0.80
Tribal Group	education support services and software	3,465	0.79
Laird	electronic products	3,370	0.77
Ted Baker	clothing retailer	3,334	0.76
St Modwen Properties	real estate holding and investment	3,133	0.72
NCC	IT security	3,119	0.71
Chime Communications	media agencies	3,070	0.70
60 largest		364,333	83.43
NMC Health	healthcare provider	3,004	0.69
F & C Asset Management	investment management company	2,842	0.65
Cineworld	recreational services	2,784	0.64
*Clinigen	pharmaceutical services	2,768	0.63
RPS Group	business support services	2,730	0.63
Ophir Energy	oil and gas explorer	2,687	0.62
Spirent Communications	telecoms testing	2,682	0.61
Speedy Hire	tool hire	2,674	0.61
Dechra Pharmaceuticals	veterinary pharmaceuticals	2,668	0.61
Hyder Consulting	engineering consultancy	2,652	0.61
70 Largest		391,824	89.73
Costain	contractor	2,555	0.59
Spirit Pub	pub operator	2,546	0.58
Kofax	electronic capture software	2,369	0.54
Unite Group	student accommodation investor	2,276	0.52
Consort Medical	healthcare products	2,059	0.47
*WYG	engineering consultancy	1,972	0.45
*Majestic Wines	wine retailer	1,902	0.44
Premier Farnell	industrial suppliers	1,897	0.43
Rathbone Brothers	private client asset management	1,860	0.43
*LXB Retail Properties	retail property investor	1,794	0.41
80 Largest		413,054	94.59

INVESTMENT PORTFOLIO (continued)

at 31 May 2013

Company	Main Activity	Valuation £'000	% of portfolio
*Sherborne Investors	investment company	1,785	0.41
*Monitise	mobile banking software	1,743	0.40
*Abcam	internet retailer of antibodies	1,693	0.39
Xaar	digital print technology	1,630	0.37
*Digital Barriers	digital security	1,626	0.37
Heritage Oil	oil and gas exploration and production	1,525	0.35
Mears	business support services	1,385	0.32
Elementis	speciality chemicals	1,176	0.27
Kenmare Resources	titanium dioxide mining	1,166	0.27
*IQE	semiconductor manufacturer	1,094	0.25
90 Largest		427,877	97.99
Moneysupermarket	price comparison website	1,088	0.25
*Faroe Petroleum	oil and gas exploration and production	1,016	0.23
RM	education software	976	0.22
Tarsus Group	exhibition organiser	914	0.21
Brammer	industrial suppliers	869	0.20
*Rockhopper Exploration	oil and gas exploration	860	0.20
*Next Fifteen Communications	PR and media services	853	0.20
*Providence Resources	oil and gas exploration	827	0.19
*Asian Plantations	palm oil plantations	761	0.17
*Enteq Upstream	oil equipment and services	618	0.14
100 largest investments		436,659	100.00
Total Investments		436,659	100.00

There were no convertible or fixed interest securities at 31 May 2013.

* quoted on the Alternative Investment Market.

PRINCIPAL RISKS AND UNCERTAINTIES

The principal risks and uncertainties facing the Company relate to the activity of investing in the shares of smaller companies that are listed (or quoted) in the United Kingdom. Although the Company invests almost entirely in securities that are quoted on recognised markets, share prices may move rapidly and it may not be possible to realise an investment at the Manager's assessment of its value. The companies in which investments are made may operate unsuccessfully, or fail entirely, such that shareholder value is lost. The Company is also exposed to the operational risk that one or more of its suppliers may not provide the required level of service. The Board considers regularly the principal risks facing the Company in order to mitigate them as far as practicable. A fuller description of the principal risks and uncertainties follows.

With the assistance of the Manager, the Board has drawn up a risk matrix which identifies the key risks to the Company. These key risks fall broadly under the following categories:

Investment activity and strategy

An inappropriate investment strategy (for example, in terms of asset allocation or the level of gearing) may lead to under performance against the Company's benchmark and the companies in its peer group; it may also result in the Company's shares trading at a wider discount to the net asset value per share. The Board manages these risks by ensuring a diversification of investments and a regular review of the extent of borrowings. The Manager operates in accordance with investment limits and restrictions determined by the Board; these include limits on the extent to which borrowings may be used. The Board reviews its investment limits and restrictions regularly and the Manager confirms its compliance with them each month. The Manager provides the directors with management information, including performance data and reports and shareholder analysis. The Board monitors the implementation and results of the investment process with the Fund Manager, who attends all Board meetings, and reviews regularly data that monitors risk factors in respect of the portfolio. The Board reviews investment strategy at each Board meeting.

Accounting, legal and regulatory

In order to qualify as an investment trust the Company must comply with section 1158 of the Corporation Tax Act 2010. A breach of section 1158 could result in the Company losing investment trust status and, as a consequence, capital gains realised within the Company's portfolio would be subject to Corporation Tax. The section 1158 criteria are monitored by the Manager and the results are reported to the directors at each Board meeting. The Company must comply with the provisions of the Companies Act 2006 ('the Companies Act'), and, as the Company's shares are listed for trading on the London Stock Exchange, the Company must comply with the UK Listing Authority's Listing Rules and Disclosure and Transparency Rules and the Prospectus Rules ('UKLA Rules'). A breach of the Companies Act could result in the Company and/or the directors being fined or becoming the subject of criminal proceedings. Breach of the UKLA Rules could result in the suspension of the Company's shares which would in turn lead to a breach of section 1158. The Board relies on its company secretary and its professional advisers to ensure compliance with the Companies Act and UKLA Rules.

Operational

Disruption to, or failure of, the Manager's accounting, dealing or payment systems or the Custodian's records could prevent the accurate reporting and monitoring of the Company's financial position. The Manager has contracted some of its operational functions, principally those relating to trade processing, investment administration and accounting, to BNP Paribas Securities Services. Details of how the Board monitors the services provided by the Manager and its other suppliers, and the key elements designed to provide effective internal control are explained further in the internal control section of the Corporate Governance Statement contained in the Annual Report.

PRINCIPAL RISKS AND UNCERTAINTIES (continued)

Financial instruments and the management of risk

By its nature as an investment trust, the Company is exposed in varying degrees to market risk (comprising market price risk, currency risk and interest rate risk), liquidity risk and credit and counterparty risk. An analysis of these financial risks and the Company's policies for managing them are set out in the Annual Report.

Going Concern

The Company's shareholders are asked every three years to vote on the continuation of the Company. The next continuation vote will be put to shareholders at the forthcoming AGM in October

2013. The assets of the Company consist almost entirely of securities that are listed (or quoted on AIM) and, accordingly, the directors believe that the Company has adequate financial resources to continue in operational existence for the foreseeable future. For these reasons, the Board has decided that it is appropriate for the financial statements to be prepared on a going concern basis. In reviewing the position as at the date of this report, the Board has considered the guidance on this

matter issued by the Financial Reporting Council.

Future Developments

The future success of the Company is dependent primarily on the performance of its investments, which will to a significant degree reflect the performance of the stock market and the Manager. Although the Company invests in companies that are listed or quoted in the United Kingdom, the underlying businesses of those companies are affected by various economic factors, many of an international nature. The Board's intention is that the Company will continue to pursue its investment objective in accordance with its investment policy. Further comment on the outlook for the Company is given in the Chairman's Statement and in the Fund Manager's Review.

Related Party Transactions

Other than the relationship between the Company, and its Directors, the provision of services by Henderson is the only related party arrangement currently in place. Other than fees payable by the Company in the ordinary course of business, there have been no material transactions with this related party affecting the financial position of the performance of the Company during the year under review.

STATEMENT OF DIRECTORS' RESPONSIBILITIES (UNDER DTR 4.1.12)

Each of the directors confirm that to the best of their knowledge:

·     the financial statements, which have been prepared in accordance with IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Company; and

·     the directors' report in 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.

For and on behalf of the Board

J M B Cayzer-Colvin

Chairman

29 August 2013

STATEMENT OF COMPREHENSIVE INCOME

for the year ended 31 May 2013

		Year ended 31 May 2013			Year ended 31 May 2012
Notes		Revenue Return £'000	Capital Return £'000	Total £'000	Revenue Return £'000	Capital Return £'000	Total £'000
2	Investment income	8,447	-	8,447	8,195	-	8,195
3	Other income	158	-	158	36	-	36
	Gains/(losses) on investments held at fair value through profit or loss	-	125,057	125,057	-	(19,160)	(19,160)
	Total income	8,605	125,057	133,662	8,231	(19,160)	(10,929)
	Expenses
4	Management and performance fees	(1,206)	(2,000)	(3,206)	(1,008)	-	(1,008)
	Other expenses	(489)	-	(489)	(422)	-	(422)
	Profit/(loss) before finance costs and taxation	6,910	123,057	129,967	6,801	(19,160)	(12,359)
	Finance costs	(2,235)	-	(2,235)	(2,261)	-	(2,261)
	Profit/(loss) before taxation	4,675	123,057	127,732	4,540	(19,160)	(14,620)
	Taxation	(14)	-	(14)	(2)	-	(2)
	Net profit/(loss) for the year and total comprehensive income	4,661	123,057	127,718	4,538	(19,160)	(14,622)
5	Basic and diluted earnings/(loss) per ordinary    share	6.24p	164.72p	170.96p	6.07p	(25.62)p	(19.55)p

The total column of this statement represents the Statement of Comprehensive Income, prepared in accordance with IFRS as adopted by the European Union.

The revenue return and capital return columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies.

STATEMENT OF CHANGES IN EQUITY

for the year ended 31 May 2013

		Year ended 31 May 2013
		Retained earnings
Notes		Called up share capital £'000	Capital Redemption Reserve £'000	Capital Reserves £'000	Revenue Reserve £'000	Total £'000
	Total equity at 1 June 2012	18,686	26,735	224,150	10,355	279,926
	Total comprehensive income: Profit for the year	-	-	123,057	4,661	127,718
	Transactions with owners,    recorded directly to equity:
6	Ordinary dividends paid	-	-	-	(4,104)	(4,104)
7	Buy-backs of ordinary shares	(10)	10	(120)	-	(120)
	Total equity at 31 May 2013	18,676	26,745	347,087	10,912	403,420
		Year ended 31 May 2012
		Retained earnings
		Called up share capital £'000	Capital Redemption Reserve £'000	Capital Reserves £'000	Revenue Reserve £'000	Total £'000
	Total equity at 1 June 2011	18,727	26,694	243,800	8,963	298,184
	Total comprehensive income:
	(Loss)/profit for the year	-	-	(19,160)	4,538	(14,622)
	Transactions with owners,    recorded directly to equity:
6	Ordinary dividends paid	-	-	-	(3,146)	(3,146)
	Buy-backs of ordinary shares	(41)	41	(490)	-	(490)
	Total equity at 31 May 2012	18,686	26,735	224,150	10,355	279,926

BALANCE SHEET

at 31 May 2013

Notes		2013 £'000	2012 £'000
	Non current assets
	Investments held at fair value through profit or loss	436,659	304,333
	Current assets
	Receivables	2,017	1,493
	Tax recoverable	14	28
	Cash and cash equivalents	2,595	270
		4,626	1,791
	Total assets	441,285	306,124
	Current liabilities
	Payables	(2,330)	(94)
	Bank loans	(15,531)	(6,100)
		(17,861)	(6,194)
	Total assets less current liabilities	423,424	299,930
	Non current liabilities
	Financial liabilities	(20,004)	(20,004)
	Net assets	403,420	279,926
	Equity attributable to equity shareholders
7	Called up share capital	18,676	18,686
	Capital redemption reserve	26,745	26,735
	Retained earnings:
	Capital reserves	347,087	224,150
	Revenue reserve	10,912	10,355
	Total equity	403,420	279,926
8	Basic and diluted net asset value per ordinary share	540.0p	374.5p

CASH FLOW STATEMENT

for the year ended 31 May 2013

	2013 £'000	2012 £'000
Operating activities
Profit/(loss) before taxation	127,732	(14,620)
Add: interest payable	2,235	2,261
(Less)/add: (gains)/losses on investments held at fair value through profit or loss	(125,057)	19,160
Purchases of investments	(80,416)	(35,933)
Sales of investments	73,147	36,584
(Increase)/decrease in other receivables	(42)	7
Increase in amounts due from brokers	(580)	-
Decrease in accrued income	98	100
Increase/(decrease) in payables	2,003	(1,634)
Increase/(decrease) in amounts due to brokers	197	(502)
Taxation on investment income	-	3
Net cash (outflow)/inflow from operating activities before
interest and taxation	(683)	5,426
Interest paid	(2,199)	(2,261)
Net cash (outflow)/inflow from operating activities	(2,882)	3,165
Financing activities
Equity dividends paid	(4,109)	(3,146)
Dividends unclaimed after 12 years	5	-
Buy-backs of ordinary shares	(120)	(490)
Drawdown of bank loans	9,431	100
Net cash inflow/(outflow) from financing activities	5,207	(3,536)
Increase/(decrease) in cash and cash equivalents	2,325	(371)
Exchange movements	-	(1)
Cash and cash equivalents at the start of the year	270	642
Cash and cash equivalents at the end of the year	2,595	270

NOTES TO THE FINANCIAL STATEMENTS

1	Accounting policies - Basis of preparation
	The Henderson Smaller Companies Investment Trust plc ('the Company') is a company incorporated and domiciled in the United Kingdom under the Companies Act 2006. The financial statements of the Company for the year ended 31 May 2013 have been prepared in accordance with International Financial Reporting Standards ('IFRS') as adopted by the European Union and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. These comprise standards and interpretations approved by the International Accounting Standards Board ('IASB'), together with interpretations of the International Accounting Standards and Standing Interpretations Committee approved by the International Financial Reporting Standards Committee ('IFRSC') that remain in effect, to the extent that IFRS have been adopted by the European Union. The financial statements have been prepared on a going concern basis and on the historical cost basis, except for the revaluation of certain financial instruments held at fair value through profit or loss. The principal accounting policies adopted are set out below. Where presentational guidance set out in the Statement of Recommended Practice ('the SORP') for investment trusts issued by the Association of Investment Companies ('the AIC') in January 2009 is consistent with the requirements of IFRS, the directors have sought to prepare the financial statements on a basis consistent with the recommendations of the SORP.
2	Investment Income						2013 £'000				2012 £'000
	Franked income from companies listed or quoted in the United Kingdom:
	Dividends						7,168				7,346
	Special Dividends						317				116
	Unfranked income from companies listed or quoted in the United Kingdom:
	Dividends						890				665
	Property income distributions						72				68
	Total Investment Income						8,447				8,195
3	Other Income						2013 £'000				2012 £'000
	Bank interest						7				3
	Underwriting income (allocated to revenue)*						151				33
							158				36
	*None of the income receivable from  sub-underwriting commitments was allocated to capital during the year (2012: £nil)
	NOTES TO THE FINANCIAL STATEMENTS (continued)
4	Management and performance fees	Revenue Return £'000	2013 Capital Return £'000	Total £'000	Revenue Return £'000			2012 Capital Return £'000			Total £'000
	Management fee	1,206	-	1,206	1,008			-			1,008
	Performance fee	-	2,000	2,000	-			-			-
		1,206	2,000	3,206	1,008			-			1,008
	A summary of the Management Agreement is available in the Directors report with the Annual Report.
5	Earnings per ordinary share				2013 £'000				2012 £'000
	Net revenue profit				4,661				4,538
	Net capital profit/(loss)				123,057				(19,160)
	Net total profit/(loss)				127,718				(14,622)
	Weighted average number of ordinary shares in issue during the year				747,705,358				74,781,723
					Pence				Pence
	Revenue earnings per ordinary share				6.24				6.07
	Capital earnings/(loss) per ordinary share				164.72				(25.62)
	Total earnings/(loss) per ordinary share				170.96				(19.55)
6	Dividends					2013 £'000				2012 £'000
	Amounts recognised as distributions to equity holders in the year:
	Final dividend for the year ended 31 May 2012 of 5.50p
	(2011: 4.20p) per ordinary share					4,109				3,146
	Write-back of unclaimed dividends relating to prior years					(5)				-
						4,104				3,146
	The final dividend of 5.50p per ordinary share in respect of the year ended 31 May 2012 was paid on 12 October 2012 to shareholders on the register of members at the close of business on 21 September 2012. The dividend paid amounted to £4,109,000 in total. Subject to approval at the Annual General Meeting, the proposed final dividend of 6.5p per ordinary share will be paid on 11 October 2013 to shareholders on the register of members at the close of business on 20 September 2013. The proposed final dividend for the year ended 31 May 2013 has not been included as a liability in these financial statements. Under IFRS, the final dividend is not recognised until approved by the shareholders. The total dividends payable in respect of the financial year which form the basis of the test under section 1158 of the Corporation Tax Act 2010 are set out below:

NOTES TO THE FINANCIAL STATEMENTS (continued)

	Dividends continued
					2013 £'000
	Revenue available for distribution by way of dividends for the year				4,661
	Proposed final dividend for the year ended 31 May 2013: 6.5p
	(based on the [74,701,796] shares in issue at 29 August 2013)				(4,856)
	Shortfall for year *				(195)
	* All current year income has been distributed, the shortfall of £195,000 has been transferred from revenue reserves.
7		Called up share capital	2013 £'000			2012 £'000
		Allotted issued and fully paid:
		74,701,796 ordinary shares of 25p each (2012: 74,741,796)	18,676			18,686
		During the year the Company purchased for cancellation 40,000 of its own issued ordinary shares (2012: 165,000) at a total cost of £120,000 (2012: £490,000). [Since 31 May 2013 the Company has not purchased any ordinary shares.]
8		Net asset value per Ordinary share
		The net asset value per ordinary share is based on the net assets attributable to the ordinary shares of £403,420,000 (2012: £279,926,000) and on the 74,701,796 ordinary shares in issue at 31 May 2013 (2012: 74,741,796). An alternative net asset value per ordinary share can be calculated by deducting from the total assets less current liabilities of the Company, the preference stock and the debenture stock at their market (or fair) values rather than at their par (or book) values (see note 16 (vii) of the annual report. The net asset value per ordinary share at 31 May 2013 calculated on this basis was 535.0p (2012: 367.9p). The Company has no securities in issue that could dilute the net asset value per ordinary share. The movement during the year of the net assets attributable to the ordinary shares was as follows:
				2013 £'000		2012 £'000
		Net assets attributable to the ordinary shares at 1 June 2012		279,926		298,184
		Net gains/(losses) for the year		127,718		(14,622)
		Ordinary dividend paid in the year		(4,109)		(3,146)
		Dividends unclaimed after 12 years		5		-
		Buy-backs of ordinary shares		(120)		(490)
		Net assets attributable to the ordinary shares at 31 May		403,420		279,926
9		2013 financial statements
		The figures and financial information for the year ended 31 May 2013 are compiled from an extract of the latest financial statements of the Company and do not constitute the statutory accounts for that year. Those financial statements included the report of the auditors which was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. They have not yet been delivered to the Registrar of Companies.
		NOTES TO THE FINANCIAL STATEMENTS (continued)
10		2012  financial statements
		The figures and financial information for the year ended 31 May 2012 are compiled from an extract of the published financial statements of the Company and do not constitute the statutory accounts for that year. Those financial statements have been delivered to the Registrar of Companies and included the report of the auditors which was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006.
11		Annual report and financial statements
		The Report and Financial Statements for the year ended 31 May 2013 will be posted to shareholders in September 2013 and copies will be available thereafter from the Secretary at the Company's Registered Office, 201 Bishopsgate, London EC2M 3AE. The Annual General Meeting will be held on Friday 4 October 2013 at 10.30 am.
12		Website
		This document, and the Report and Financial Statements for the year ended 31 May 2013, will be available on the following website: www.hendersonsmallercompanies.com.

ENDS

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

For further information please contact:

Neil Hermon

Fund Manager

The Henderson Smaller Companies Investment Trust plc

Telephone: [phone]

James de Sausmarez

Head of Investment Trusts

Henderson Global Investors

Telephone: [phone]

Sarah Gibbons-Cook

Investor Relations and PR Manager

Henderson Global Investors

Telephone: [phone]

 

END

 

 

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