Final Results

RNS Number : 3971Q

Henderson Smaller Cos Inv Tst PLC

01 September 2014

 



This announcement contains regulated information

MANAGEMENT REPORT

FINANCIAL HIGHLIGHTS	31 May 2014	31 May 2013
Total net assets	£476 million	£403 million
Net asset value per ordinary share	637.6p	540.0p
Net asset value per ordinary share on an alternative basis *	634.3p	535.0p
Market price per ordinary share	547.0p	454.0p
Total return per ordinary share	107.0p	171.0p
Revenue return per ordinary share	12.7p	6.2p
Dividends per ordinary share #	11.0p	6.5p
Gearing†	9.1%	8.2%

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

#An interim dividend of 3.0p was paid on 7 March 2014. The final dividend of 8.0p is subject to approval at the Annual General Meeting.

†Calculated in accordance with the definition on page 58 of the Annual Report.

CHAIRMAN'S STATEMENT

It has been another excellent year for the Company with a 22.7% total return for shareholders. The net asset value of the Company increased by 19.9% in the year on a total return basis and again outperformed its benchmark, the Numis Smaller Companies Index (excluding investment companies) which increased by 19.1%.

Over the past ten years our net asset value total return has been 306.8% versus a total return from the Numis Smaller Companies Index (excluding investment companies) of 242.3%, the FTSE All-Share Index of 135.1% and the FTSE SmallCap Index of 113.6%. This is a compound annual return

to shareholders of 15.1% and is testimony to the skills of our Manager, Neil Hermon.

The Company's performance over the past year has for the second year been recognised by Money Observer, with the Company being awarded Best UK Smaller Companies Trust 2014.

I would like to thank all the Henderson staff and my Board for their efforts throughout the year on behalf of shareholders.

Revenue and dividend

The revenue return per share has increased to 12.7p, compared with 6.2p for the previous year. This increase is due in part to the change in accounting policy to charge a proportion of expenses to capital and also reflects the growth in dividend payments from our portfolio companies. The Board proposes an increase in the final dividend for the year to 8.0p per share, making a total dividend for the year of 11.0p (2013: 6.5p) as an interim dividend of 3.0p was paid in March. The final dividend is of course subject to shareholder approval at the Annual General Meeting in October.

Discount* and Share buy-backs

During the year the smaller companies sector as a whole traded at an average discount of 9.2% to NAV, with highs and lows of 13.3% and 6.0% respectively. At the year end, the Company's shares traded at a discount of 12.9%. The Company's discount ranged from 18.7% to 8.0% with the average discount over the year being 12.7%.

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.

Regulatory

In accordance with the Alternative Investment Fund Managers Directive, the Company has appointed Henderson Investment Funds Limited to act as its Alternative Investment Fund Manager. HSBC Bank plc has been appointed as the Company's Depositary. Further details are contained in the Strategic Review in the Annual Report.

Outlook

Uncertainty faces the UK, with votes on Scottish independence in September this year and a UK-wide general election in 2015. However, at long last the buds of economic growth are appearing in Western economies. Good news continues to flow from the corporate world, and the smaller companies market will continue to produce some exciting growth opportunities. So with Neil's proven and disciplined approach to investing, I believe we are well set for the year ahead.

Annual General Meeting

Our Annual General Meeting will be held at 10:30am on Friday, 3 October 2014 at the Registered Office, 201 Bishopsgate, London EC2M 3AE. The Notice of Meeting is available on the Company's website at www.hendersonsmallercompanies.com. 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.

*The annual discount is calculated as a simple average of the daily discounts downloaded from Datastream

J M B Cayzer-Colvin

Chairman

29 August 2014

FUND MANAGER'S REVIEW

Analysis of the portfolio by sector	31 May 2014 %	31 May 2013 %
Support Services	17.9	19.4
Electronic & Electrical Equipment	10.7	11.7
Real Estate	8.0	7.3
Travel & Leisure	7.6	7.0
Media	6.8	7.3
Software & Computer Services	6.2	5.1
Financial Services	6.1	7.0
Household Goods & Home Construction	4.9	5.7
General Retailers	3.8	2.8
Aerospace & Defence	3.6	3.1
Construction & Materials	3.0	3.4
Technology Hardware & Equipment	2.7	2.6
Pharmaceuticals & Biotechnology	2.7	1.6
Health Care Equipment & Services	2.6	2.0
Chemicals	2.6	3.9
Oil & Gas Producers	2.5	3.7
Oil Equipment, Services & Distribution	2.4	2.0
Industrial Engineering	2.3	2.8
Personal Goods	0.9	0.7
Non-Life Insurance	0.8	-
Industrial Transportation	0.8	-
Mining	0.5	0.3
Food & Drug Retailers	0.3	-
Food Producers	0.3	0.2
Mobile Telecommunications	-	0.4
	100.0	100.0

Market - year in review

The year under review was a positive one for equity markets. This was due to loose monetary policies from developed world Central Banks, a gently 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 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 perceived 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 six years consecutively (and in fourteen of the last fifteen years).

Fund performance

The Company had a good year in performance terms - outperforming its benchmark and rising in absolute terms. The net asset value rose 19.9%, on a total return basis. This compares to a rise of 19.1% (total return) from the Numis Smaller Companies Index (excluding investment companies) and 23.9% (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, which can be seen in the attribution analysis on page 15 of the Annual Report. The year under review is the tenth year of outperformance of our benchmark, the Numis Smaller Companies Index (excluding investment companies), in the last eleven years.

Gearing

Gearing started the year at 8.2% and ended it at 9.1%. 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 eleven years I have managed the investment portfolio.

Attribution analysis

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

Principal contributors	12 month return %	Relative contribution %
WS Atkins	+53.4	+0.5
Ashtead	+41.2	+0.4
Kenmare Resources*	-61.0	+0.4
Partnership Assurance*	-65.2	+0.4
Kentz	+85.5	+0.4

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

WS Atkins is an international engineering consultant, with operations principally in the UK, USA, Middle East and Asia. A new management team has been re-structuring the company with low margin activities sold and operations rationalised. With this re-structuring mostly completed, the company is starting to see growth in profitability and future prospects look strong. The company also enjoys a cash-rich balance sheet and is looking to deploy this on acquisitions that will augment organic growth.

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.

Kenmare Resources is a mining company with a major deposit of heavy minerals, including the titanium minerals ilmenite and rutile, in Mozambique. The company has had issues with weak product pricing and power supply issues, which have affected cashflow and profitability. The Company sold its position in Kenmare early in the financial year.

Partnership Assurance is a provider of enhanced annuities. The shares have been poor performers in the year after the Government changed the requirement for consumers to purchase an annuity on retirement. This has severely affected prospects for new annuity sales. The Company has no holding in Partnership Assurance.

Kentz is an international engineering services company supplying the oil and gas and mining industries. It has grown strongly over the past few years and has a strong record for delivering contracts on time and to budget to its global customer base. It was an eventful year for Kentz with a failed bid approach from engineering rival AMEC followed by the significantly earnings-enhancing acquisition of Valerus, an oil and gas handling company. Kentz also saw its order book grow substantially after the award of several major contracts. These events led to an upwards re-rating of Kentz with a sharp jump in the share price over the year. Subsequent to the year-end Kentz received an agreed bid from SNC-Lavalin at a significant premium to the prevailing share price.

Principal detractors	12 month return %	Relative contribution %
Oxford Instruments	-21.5	-0.8
Anite	-27.3	-0.4
Rotork	-7.4	-0.4
Ocado*	+62.5	-0.4
Perform	-51.7	-0.4
* Included in the benchmark index up to 31 December 2013 but not owned by the Company.

Oxford Instruments produces advanced instrumentation equipment for industrial and scientific research markets. The company has high exposure to 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. It has been a significant contributor to the performance of the Company in recent years. However, the share price struggled in 2013/14 due to a number of reasons - austerity cutbacks by Western governments, weakness in demand from emerging economies and the strength of sterling. Prospects for the coming year look brighter, aided by the complementary acquisition of Andor Technology and in the longer term, the business is well positioned for superior growth.

Anite is a telecom testing software business and is a global leader in its field. The company struggled in the year after it issued a profit warning. This was caused by a downturn in sales to a number of customers who were going through corporate change and re-structuring. As software sales are high margin, the shortfall in sales led to a more significant drop in profits. Prospects for the coming years look much stronger, aided by the growth in 4G/LTE services the telecom operators are rolling out globally.

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 product quality and client service provision. 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. The shares had a tougher year as investors fretted over Rotork's exposure to the oil and gas industry where capital expenditure is under pressure.

Ocado is an online food retailer. The company has shown strong sales growth without ever translating that into sustainable profitability or cash flow. However the share price rose as investors bought into the long-term potential prospects of the business. The company was additionally boosted by a service and software contract with William Morrisons. The Company has no holding in Ocado.

Perform commercialises sport and entertainment rights, mostly in the online gambling and advertising markets. The company grew strongly, aided by the growth of in-play betting and a number of complementary acquisitions. However Perform issued a severe profit warning in the year

as advertising markets saw unexpected weakness and costs over-ran budgeted levels. Given the suddenness of the warning, poor integration of acquisitions and the lack of control on costs, we sold our investment.

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 disciplines to cut out stocks that fail to meet these criteria.

In the year we have added a number of new positions to our portfolio. These included:

EMIS - a market leader of software to GP surgeries through its EMIS Web product. EMIS Web allows primary, secondary and community healthcare practitioners to view and contribute to a patient's cradle-to-grave healthcare record. EMIS has expanded its operations into other areas of the healthcare market, including hospital pharmacy, A&E and mental health and community trusts. The strength of EMIS's market position and the recurring nature of its revenues ensures the company has excellent cash flow characteristics. With additional funds being allocated to healthcare IT spending, EMIS is set to grow steadily into the medium term.

Esure - a general insurer with a focus on the UK motor market. The UK motor insurance market has been through a very weak period over the last 2-3 years, with falling claims costs resulting in large decreases in premiums. The industry has reached a point at which a significant portion of underwriting is loss-making. This, we believe, is becoming unsustainable. We expect a more positive environment for motor premiums to emerge over the medium term and for Esure, with its market leading underwriting ability and attractive cost structure, to be a prime beneficiary.

UTV Media - a UK and Irish media group with interests in radio and television. The company has been enjoying a resurgence in advertising revenues driven by the improvement in the UK and Irish economies. Additionally it is well placed to benefit from the World Cup through its Talk Sport radio channel. The launch of a new commercial TV station in Eire will provide UTV with medium term growth. All these factors mean that UTV is well set to grow profitability strongly in the coming years.

Vectura - a pharmaceutical product development company focussing on broncho-pulmonary diseases which include asthma and chronic obstructive pulmonary disease. Vectura is the partner of choice for big pharmaceutical companies such as Novartis and GlaxoSmithKline which validates its technology. Our investment case centres around rapid top-line growth as royalty streams ramp up from both branded and generic products which achieved regulatory approval in 2013.

Safestore - a self-storage company which has a nationwide presence in the UK and a near monopoly in Paris. The company recently went through a period of change which included a debt refinancing and change in management. The company is benefiting from both increased demand

driven by the housing market recovery and restricted supply. Additionally we have confidence that the operational improvements the new management team have implemented will increase conversion rates and earnings.

Optimal Payments - a global provider of online payment solutions. The company should benefit from structural growth in global e-commerce with a large portion of its revenues related to the online gaming industry, the company is well placed to benefit from the much-anticipated regulation and reopening of the US market.

We invested in a number of IPOs (initial public offerings) in the year. These included Servelec, a provider of software solutions to the health industry and control solutions to the oil and gas, nuclear and utilities market; Safestyle, a provider of windows and doors in the UK; Koovs, an online fashion retailer in the Indian market run by the founding management of ASOS; DX Services, a logistics and parcel distribution company; and Patisserie Holdings, a growing chain of coffee and cake shops.

To balance the additions to our portfolio we have disposed of positions in companies which we felt were set for poor price performance. We sold our holding in Premier Farnell, the electronic component distributor, where the company is sacrificing margins to maintain sales in a competitive market. We also disposed of our holding in Monitise, the mobile banking platform technology company, where profitability has been pushed out for a number of years through the need to re-invest in technology development. We sold our position in Kofax, the electronic capture software company, after a dual listing on NASDAQ pushed the shares up to levels where the valuation looks excessive.

We benefited from a degree of takeover activity in the year. Within our portfolio, takeover bids were received for AZ Electronics, a speciality chemicals manufacturer, from Merck; Heritage Oil, an oil and gas explorer with its main interests in Nigeria, from Middle Eastern investors; and F&C Asset Management, from Bank of Montreal.

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 2014.

Top ten active positions at 31 May 2014	Holding %	Index Weight %	Active Weight %
Bellway	2.5	-	2.5
Taylor Wimpey	2.4	-	2.4
Spectris	2.4	-	2.4
Informa	2.1	-	2.1
e2v Technologies	2.2	0.2	2.0
Interserve	2.4	0.5	1.9
Victrex	1.9	-	1.9
Thomas Cook	1.8	-	1.8
Intermediate Capital	1.8	-	1.8
Howden Joinery	1.7	-	1.7

A brief description of the largest active positions follows:

Bellway is a national UK housebuilder. The UK housing market has seen an impressive recovery in the recent past, aided by improving consumer confidence, low interest rates and Government initiatives, particularly Help to Buy. Margins, volumes and profits have been rising strongly and the outlook remains for continued strong growth. Bellway is looking to exploit these conditions by expanding its national footprint, whilst maintaining a strong land bank and balance sheet. Although the housebuilders have had a more difficult time recently, as investors fret over potential interest rate rises, the sector remains well placed given the structural under-supply of housing in the UK and the capital discipline Bellway and its peers are displaying.

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 its overleveraged balance sheet through the sale of its 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. Much of the housing market commentary of Bellway also applies to Taylor Wimpey. The major difference between the two companies' strategies is that whilst Bellway is looking to expand its volumes (albeit from a much lower base), Taylor Wimpey is aiming to return significant amounts of cash, through dividends, to shareholders. This provides a very attractive prospective yield for investors.

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 sound, the management team is well respected and the balance sheet is strong. Profit growth in 2013 and 2014 has been muted due to softness in end markets and sterling strength but in the longer term, the company is well positioned for growth, especially if it deploys its balance sheet on acquisitions. 

Informa is a leading business-to-business information group. Its activities include the provision of academic journals, books, data services, trade exhibitions and conferences. The company produced a very resilient profit performance during the downturn, helped by aggressive cost cutting. Additionally the balance sheet has been strengthened and cash generation has been strong. A new CEO has been appointed and if he can drive growth from a collection of high-quality assets then the

share price has significant scope to re-rate upwards.

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 have risen 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 has recently acquired Initial, the facilities management business, from Rentokil, which will boost earnings growth and bulk up the capabilities of the support

services division. The valuation of Interserve remains attractive given the growth opportunities.

e2v Technologies manufactures high technology electronic components. 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 and CEO will hopefully accelerate this process. There is significant potential for e2v to re-rate if new management deliver on their strategic plans.

Victrex is a manufacturer of a speciality thermoplastic PEEK. It is the world leader in its field with a dominant market share. Victrex has shown consistent long-term growth as demand for PEEK has grown as customers look to replace metals with lighter plastics with similar thermal properties. This is best evidenced by the aerospace industry, where the most technologically advanced large commercial jet in the world, the Boeing 787, uses one tonne of PEEK per plane compared to minimal use in jets of a decade ago. Although demand for PEEK is subject to the vagaries of the economic cycle, in the longer term its use will continue to increase and drive Victrex's profitability upwards. Additionally Victrex has developed a very successful medical business with PEEK used particularly in spinal and arthroscopy operations, which is growing independent of the economic cycle.

Thomas Cook is a leisure travel company, which predominantly operates in the UK and Europe. The company is in its second year of its multi-year turnaround strategy, which has involved a large scale refinancing, divestment of non-core assets and operational overhaul of the business. Whilst future-proofing the business can be a painful exercise in the short-run, in the long run the business should benefit from capacity coming out of the market and rationalisation of the industry. Our investment case centres around the attractive valuation and multiple levers the company can pull

to grow earnings.

Intermediate Capital is an alternative finance provider and asset manager. Intermediate Capital is a leading provider of mezzanine finance to LBO markets. It also owns a highly successful mezzanine and credit fund management operation. Its portfolio of investments are performing well, the company is looking to grow its loan book and the fund management business has an ambition to double in the next 4 years. The valuation looks very appealing, trading at a discount to net assets.

Howden Joinery is a manufacturer and retailer of kitchens in the UK. From launch in 1990 it has organically grown to over 560 branches and taken a significant market share by providing a first- class service to its client, the jobbing builder, with keen prices and excellent stock availability. The company is also very cash generative but in the past this cash has been consumed by pension and property issues it inherited from its once parent, MFI. However these issues have now been effectively worked through and Howden are starting to aggressively raise the dividend to shareholders. With branch roll-out continuing and the kitchen market beginning to recover Howden is well placed to grow profitability strongly.

Market outlook

Equity markets have performed strongly over the last year. The global macro-economic environment has been getting gradually better with world GDP forecast to show faster growth in both 2014 and 2015. This is being driven mostly from developed rather than emerging economies.

The UK economy has seen a strong recovery with a number of upgrades to economic growth over the last year. There has been a noticeable improvement in the housing market, with a rise in prices and transaction levels, aided by low interest rates and Government initiatives. The unemployment rate has fallen and there are signs that wage inflation is starting to rise, albeit modestly. All these factors are boosting consumer confidence. With the UK economy strengthening, the focus has now shifted as to the likely timing of an interest rate rise. Guidance on this matter from the Bank of England has fluctuated over the past few months but the consensus view is that we can expect the first move in late 2014 or early 2015. However, as it currently stands, rates are expected to rise slowly and to levels well below historic norms which should allow the nascent UK economic recovery to continue.

After the rise in the past few years, stock market valuations are now back to long-run historic averages. Corporate profitability has proved robust but has not shown much growth in recent years. It is difficult to see the market making material progress from current levels without an increase in corporate earnings. However, given an improving economic backdrop we are hopeful that the outlook for corporate profitability is improving somewhat. Mergers and acquisition activity is currently subdued as management teams are unwilling to take on financial leverage in the face of perceived 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 a good one for the equity market and the Company. Relative performance was satisfactory and our portfolio companies have, overall, performed robustly. Our investments are generally trading well, 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 2014

INVESTMENT PORTFOLIO

at 31 May 2014

Company	Main activity	Valuation as at 31 May 2014 £'000	% of portfolio
Bellway	house building	12,834	2.47
Taylor Wimpey	house building	12,725	2.45
Interserve	international contractor	12,468	2.40
Spectris	electronic control and process instrumentation	12,398	2.38
Paragon	buy to let mortgage provider	11,835	2.28
e2v Technologies	electronic components	11,546	2.22
Informa	business to business information	11,062	2.13
WS Atkins	engineering consultancy	10,504	2.02
Senior	aerospace and automotive products	10,367	2.00
Victrex	speciality chemicals	9,747	1.88
10 largest		115,486	22.23
Thomas Cook	travel and leisure	9,259	1.78
Intermediate Capital	mezzanine finance	9,094	1.75
Howden Joinery	kitchen manufacturer and retailer	8,940	1.72
Grainger	residential property investor	8,755	1.68
Northgate	commercial vehicle hire	8,717	1.68
Oxford Instruments	advanced instrumentation equipment	8,423	1.62
Domino Printing Sciences	industrial printing equipment	8,327	1.60
Ashtead	plant hire	7,925	1.53
Playtech	internet gaming software	7,684	1.48
Aveva Group	design software	7,389	1.42
20 largest		199,999	38.49
Rotork	process control solutions	7,158	1.38
Restaurant Group	restaurants	7,143	1.37
Kentz	oil and gas contractor	7,088	1.36
Essentra	speciality plastic producer and distribution	6,948	1.34
LSL Property Services	retail property investor	6,479	1.25
Laird	electronic products	6,457	1.24
HellermannTyton	electrical components and equipment	6,451	1.24
NMC Health	healthcare provider	6,014	1.16
Euromoney Institutional Investor	business to business information	5,897	1.13
NCC	IT security	5,874	1.13
30 largest		265,508	51.09
Ultra Electronic Holdings	specialised defence contractor	5,865	1.13
Renishaw	precision measuring and calibration equipment	5,858	1.13
Premier Oil	oil and gas exploration and production	5,808	1.12
*RWS	patent translation services	5,599	1.08
Fidessa	financial software	5,556	1.07
SIG	builders merchant	5,467	1.05
Dixons	electrical good retailer	5,335	1.03
Capital & Regional	retail property investor	5,328	1.02
Jupiter Fund Management	investment management company	5,300	1.02
Balfour Beatty	international contractor	5,284	1.02
40 largest		320,908	61.76

INVESTMENT PORTFOLIO (continued)

at 31 May 2014

Company	Main Activity	Valuation as at 31 May 2014 £'000	% of portfolio
Countrywide	real estate services	5,224	1.01
Hunting	oil equipment and services	5,198	1.00
Synergy Healthcare	healthcare support services	4,945	0.95
*Clinigen	pharmaceuticals	4,938	0.95
Fenner	industrial engineering	4,725	0.91
Ted Baker	clothing retailer	4,699	0.90
Tyman	building products	4,666	0.90
Afren	oil and gas production and exploration	4,425	0.85
Greene King	pub operator	4,275	0.82
Esure	motor and property insurer	4,256	0.82
50 largest		368,259	70.87
Chime Communications	media agencies	4,233	0.82
*DX Group	logistics and parcel distribution	4,153	0.80
Hays	business training and employment agencies	4,082	0.79
Spirent Communications	telecoms testing	4,048	0.78
St Modwen Properties	real estate holding and investment	3,910	0.75
Anite	telecom software	3,870	0.74
Dunelm	homewares retailer	3,843	0.74
Elementis	speciality chemicals	3,718	0.72
Tribal Group	education support services and software	3,685	0.71
CSR	semi conductors	3,677	0.71
60 largest		407,478	78.43
Spirit Pub	pub operator	3,612	0.69
ITE Group	exhibition organiser	3,568	0.69
Cineworld	cinema operator	3,481	0.67
Dechra Pharmaceuticals	vetinary pharmaceuticals	3,475	0.67
Brown (N) Group	apparel retailers	3,283	0.63
*Safestyle	window replacement retailer	3,264	0.63
John Menzies	news distributor and aviation services	3,126	0.60
Servelec	computer services	3,123	0.60
Keller	ground engineering	3,053	0.59
*WYG	engineering consultancy	2,968	0.57
70 largest		440,431	84.77
Tarsus Group	exhibition organiser	2,956	0.57
Brammer	industrial suppliers	2,912	0.56
Unite Group	student accommodation investor	2,910	0.56
Go-Ahead	bus and rail operator	2,860	0.55
*EMIS	healthcare IT services	2,855	0.55
Urban & Civic	real estate investment and services	2,841	0.55
Vectura	respiratory pharmaceuticals	2,796	0.54
Hyder Consulting	engineering consultancy	2,698	0.52
Kazakhmys	mining	2,627	0.51
Costain	contractor	2,527	0.49
80 largest		468,413	90.17

INVESTMENT PORTFOLIO (continued)

at 31 May 2014

Company	Main activity	Valuation as at 31 May 2014 £'000	% of portfolio
Mecom Group	local newspaper publishing	2,510	0.48
CLS	real estate investment and services	2,475	0.48
Rathbone Brothers	private client asset management	2,473	0.47
Xaar	electronic equipment	2,405	0.46
*Optimal Payments	online money transfer service	2,362	0.45
Consort Medical	healthcare products	2,331	0.45
Qinetiq	defence products and services	2,311	0.44
Lookers	automotive retailer	2,308	0.44
UTV Media	radio and TV broadcaster	2,121	0.41
Speedy Hire	tool and plant hire	1,904	0.37
90 largest		491,613	94.62
RM	education software and services	1,895	0.36
*Koovs	online fashion retailer	1,872	0.36
Safestore Holdings	self storage operator	1,861	0.36
*Faroe Petroleum	oil and gas exploration and production	1,833	0.35
*LXB Retail Properties	retail property investor	1,776	0.34
Mears	business support services	1,768	0.34
McColls	convenience food retailer	1,742	0.34
Sherborne Investors	speciality finance	1,741	0.34
*Asian Plantations	palm oil plantations	1,729	0.33
*Abcam	internet retailer of antibodies	1,714	0.33
100 largest		509,544	98.07
*Ebiquity	media agency	1,660	0.32
Kofax	electronic capture software	1,492	0.29
*Patisserie Holdings	restaurants	1,450	0.28
*Horizon Discovery	biotechnology research services	1,255	0.24
*Plus 500	financial instrument trading	1,190	0.23
*Next Fifteen Communications	PR and media services	1,120	0.21
*Digital Barriers	digital security	1,085	0.21
*Rockhopper Exploration	oil and gas explorer	756	0.15
Total investments		519,552	100.00

There were no convertible or fixed interest securities at 31 May 2014.

* 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.

 

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 note 15 of the Annual Report.

Going concern

The Company's shareholders are asked every three years to vote on the continuation of the Company as an Investment Trust. An ordinary resolution to this effect was put to the AGM on 4 October 2013 and passed by a substantial majority. A similar resolution will be put to shareholders in 2016. 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 Strategic 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 2014

STATEMENT OF COMPREHENSIVE INCOME

for the year ended 31 May 2014

		Year ended 31 May 2014			Year ended 31 May 2013
Notes		Revenue return £'000	Capital return £'000	Total £'000	Revenue return £'000	Capital return £'000	Total £'000
2	Investment income	11,050	-	11,050	8,447	-	8,447
3	Other income	121	-	121	158	-	158
	Gains on investments held at fair value through profit or loss	-	73,959	73,959	-	125,057	125,057
	Total income	11,171	73,959	85,130	8,605	125,057	133,662
	Expenses
4	Management and performance fees	(491)	(1,696)	(2,187)	(1,206)	(2,000)	(3,206)
	Other expenses	(443)	-	(443)	(489)	-	(489)
	Profit before finance costs and taxation	10,237	72,263	82,500	6,910	123,057	129,967
	Finance costs	(760)	(1,773)	(2,533)	(2,235)	-	(2,235)
	Profit before taxation	9,477	70,490	79,967	4,675	123,057	127,732
	Taxation	(9)	-	(9)	(14)	-	(14)
	Net profit for the year and total comprehensive income	9,468	70,490	79,958	4,661	123,057	127,718
5	Basic and diluted earnings per ordinary share	12.67p	94.37p	107.04p	6.24p	164.72p	170.96p

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 2014

		Year ended 31 May 2014
		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 2013	18,676	26,745	347,087	10,912	403,420
	Total comprehensive income: Profit for the year	-	-	70,490	9,468	79,958
	Transactions with owners, recorded directly to equity:
6	Ordinary dividends paid	-	-	-	(7,097)	(7,097)
	Total equity at 31 May 2014	18,676	26,745	417,577	13,283	476,281
		Year ended 31 May 2013
		Retained earnings
		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)
	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

BALANCE SHEET

at 31 May 2014

Notes		2014 £'000	2013 £'000
	Non current assets
	Investments held at fair value through profit or loss	519,552	436,659
	Current assets
	Receivables	2,687	2,017
	Tax recoverable	17	14
	Cash and cash equivalents	1,154	2,595
		3,858	4,626
	Total assets	523,410	441,285
	Current liabilities
	Payables	(1,095)	(2,330)
	Bank loans	(26,030)	(15,531)
		(27,125)	(17,861)
	Total assets less current liabilities	496,285	423,424
	Non current liabilities
	Financial liabilities	(20,004)	(20,004)
	Net assets	476,281	403,420
	Equity attributable to equity shareholders
7	Called up share capital	18,676	18,676
	Capital redemption reserve	26,745	26,745
	Retained earnings:
	Capital reserves	417,577	347,087
	Revenue reserve	13,283	10,912
	Total equity	476,281	403,420
8	Basic and diluted net asset value per ordinary share	637.6p	540.0p

CASH FLOW STATEMENT

for the year ended 31 May 2014

	2014 £'000	2013 £'000
Operating activities
Profit before taxation	79,967	127,732
Add: interest payable	2,533	2,235
Less: gains on investments held at fair value through profit or loss	(73,959)	(125,057)
Purchases of investments	(121,204)	(80,416)
Sales of investments	112,270	73,147
Decrease/(increase) in receivables	133	(42)
Increase in amounts due from brokers	(791)	(580)
(Increase)/decrease in accrued income	(12)	98
(Decrease)/increase in payables	(1,170)	2,003
(Decrease)/increase in amounts due to brokers	(102)	197
Taxation on investment income	(9)	-
Net cash outflow from operating activities before
interest and taxation	(2,344)	(683)
Interest paid	(2,496)	(2,199)
Income tax	(3)	-
Net cash outflow from operating activities	(4,843)	(2,882)
Financing activities
Equity dividends paid	(7,097)	(4,109)
Dividends unclaimed after 12 years	-	5
Buy-backs of ordinary shares	-	(120)
Drawdown of bank loans	10,499	9,431
Net cash inflow from financing activities	3,402	5,207
(Decrease)/increase in cash and cash equivalents	(1,441)	2,325
Exchange movements	-	-
Cash and cash equivalents at the start of the year	2,595	270
Cash and cash equivalents at the end of the year	1,154	2,595

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 2014 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. These policies have been applied consistently throughout the year. 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						2014 £'000				2013 £'000
	Franked income from companies listed or quoted in the United Kingdom:
	Dividends						9,129				7,168
	Special dividends						1,079				317
	Unfranked income from companies listed or quoted in the United Kingdom:
	Dividends						752				890
	Property income distributions						90				72
	Total investment income						11,050				8,447
3	Other Income						2014 £'000				2013 £'000
	Bank interest						4				7
	Underwriting income (allocated to revenue)*						117				151
							121				158
	*None of the income receivable from sub-underwriting commitments was allocated to capital during the year (2013: £nil).
	NOTES TO THE FINANCIAL STATEMENTS (continued)
4	Management and performance fees	Revenue return £'000	2014 Capital return £'000	Total £'000	Revenue Return* £'000			2013 Capital return £'000			Total £'000
	Management fee	491	1,145	1,636	1,206			-			1,206
	Performance fee	-	551	551	-			2,000			2,000
		491	1,696	2,187	1,206			2,000			3,206
	*All management fees were allocated to revenue in 2013. A summary of the Management Agreement is given in the Strategic Review of the Annual Report.
5	Earnings per ordinary share				2014 £'000				2013 £'000
	Net revenue profit				9,468				4,661
	Net capital profit				70,490				123,057
	Net total profit				79,958				127,718
	Weighted average number of ordinary shares in issue during the year				74,701,796				74,705,358
					Pence				Pence
	Revenue earnings per ordinary share				12.67				6.24
	Capital earnings per ordinary share				94.37				164.72
	Total earnings per ordinary share				107.04				170.96
6	Dividends					2014 £'000				2013 £'000
	Amounts recognised as distributions to equity holders in the year:
	Final dividend for the year ended 31 May 2013 of 6.5p
	(2012: 5.5p) per ordinary share					4,856				4,109
	Interim dividend for the year ended 31 May 2014 of 3.0p (2013: nil) per ordinary share					2,241				-
	Write-back of unclaimed dividends relating to prior years					-				(5)
						7,097				4,104
	The final dividend of 6.5p per ordinary share in respect of the year ended 31 May 2013 was paid on 11 October 2013 to shareholders on the register of members at the close of business on 20 September 2013. The dividend paid amounted to £4,856,000 in total. Subject to approval at the Annual General Meeting, the proposed final dividend of 8.0p per ordinary share will be paid on 10 October 2014 to shareholders on the register of members at the close of business on 19 September 2014. The proposed final dividend for the year ended 31 May 2014 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
			2014 £'000		2013 £'000
	Revenue available for distribution by way of dividends for the year		9,468		4,661
	Interim dividend for the year ended 31 May 2014 of 3.0p (2013: nil) per ordinary share		(2,241)		-
	Proposed final dividend for the year ended 31 May 2014: 8.0p
	(based on the 74,701,796 shares in issue at 28 August 2014)		(5,976)		-
	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)
	Retained revenue/(shortfall) for year		1,251		(195)
	In 2013, all income was distributed, the shortfall of £195,000 was transferred from revenue reserves.
7		Called up share capital	2014 £'000			2013 £'000
		Allotted, issued and fully paid:
		74,701,796 ordinary shares of 25p each (2013: 74,701,796)	18,676			18,676
		During the year the Company made no purchases of its own issued ordinary shares (2013: 40,000) at a total cost of £nil (2013: £120,000). Since 31 May 2014 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 £476,281,000 (2013: £403,420,000) and on the 74,701,796 ordinary shares in issue at 31 May 2014 (2013: 74,701,796). 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 15 of the Annual Report. The net asset value per ordinary share at 31 May 2014 calculated on this basis was 634.3p (2013: 535.0p). 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:
				2014 £'000		2013 £'000
		Net assets attributable to the ordinary shares at 1 June		403,420		279,926
		Net profit for the year		79,958		127,718
		Ordinary dividend paid in the year		(7,097)		(4,109)
		Dividends unclaimed after 12 years		-		5
		Buy-backs of ordinary shares		-		(120)
		Net assets attributable to the ordinary shares at 31 May		476,281		403,420
		NOTES TO THE FINANCIAL STATEMENTS (continued)
9		2014 Financial Statements
		The figures and financial information for the year ended 31 May 2014 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.
10		2013  Financial Statements
		The figures and financial information for the year ended 31 May 2013 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 Annual Report and Financial Statements for the year ended 31 May 2014 will be posted to shareholders in September 2014 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 3 October 2014 at 10.30 am.
12		Website
		This document, and the Annual Report and Financial Statements for the year ended 31 May 2014, 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

Director and 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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