Half-year Report

RNS Number : 6570S

Schroder UK Mid Cap Fund PLC

27 June 2018

 

27 June 2018

Half Year Report

Schroder UK Mid Cap Fund plc (the "Company") hereby submits its Half Year Report for the period ended 31 March 2018 as required by the UK Listing Authority's Disclosure Guidance and Transparency Rule 4.2. 

The Half Year Report is also being published in hard copy format and an electronic copy of that document will shortly be available to download from the Company's website www.schroders.co.uk/ukmidcap. Please click on the following link to view the document:

http://www.rns-pdf.londonstockexchange.com/rns/6570S_1-2018-6-26.pdf

The Company has submitted a pdf of the hard copy format of its Half Year Report to the National Storage Mechanism and it will shortly be available for inspection at www.morningstar.co.uk/uk/NSM.

Enquiries:

Benjamin Hanley

Schroder Investment Management Limited                                           

Tel: [phone]

Half Year Report and Accounts for the six months ended 31 March 2018

Chairman's Statement

Investment and share price performance

The Company's share price produced a positive total return of 2.1% over the six months ended 31 March 2018. This period was a challenging one for the mid cap sector, which edged down. The Company's net asset value ("NAV") produced a total return of -2.0%, slightly trailing the Company's benchmark total return of -1.1%.

Full details of investment performance, as well as portfolio activity, policy and outlook, may be found in the Manager's Review.

Interim dividend

Revenue return per share has risen by 1.9% compared to the first half of the 2017 financial year, reflecting a 3.0% rise in dividend income from investments. In light of this, and having regard to our income expectations in the second half of the year, the Board has declared an increased interim dividend of 3.30 pence (2017: 3.10 pence) per share for the year ending 30 September 2018. The dividend will be paid on 10 August 2018 to shareholders on the register on 13 July 2018. A final dividend for the year ending 30 September 2018 will be proposed at the next Annual General Meeting, as in previous years.

Gearing facility

The Company has not drawn on its £15 million credit facility during the period. At 1 October 2017 the Company held net cash of 0.5% which had reduced to 0.3% on 31 March 2018. However the Manager has utilised the facility after the period end to take advantage of market opportunities and at 20 June 2018 the Company had drawn down £7.5 million and was 1.3% net geared. Gearing levels are closely monitored by the Board.

Share purchases and discount management

The share price discount to net asset value remained wide during the period, ranging from 13.8% to 17.9%, with an average discount of 15.8% as investors remained cautious, and for part of the time, sentiment towards the mid cap sector was weak. The Company did not buy back any of its shares during the period under review.

Your Board continues to believe that the most sustainable way to close the discount is to increase demand for the Company's shares over the longer term with effective marketing, supported by strong investment management performance. In the meantime, it will continue to monitor the discount at which the Company's shares trade both in absolute terms and relative to its peer group and to consider whether share buy backs should be deployed.

Outlook

The first half of the Company's year was like the previous six months, with the NAV moving in a narrow range and ending much where it started. It is however reassuring that during the period the companies in your portfolio have continued to grow their businesses. Dividend income from them continues to grow; domestic sales have not been as poor as some feared; and the value in many mid caps has been reflected in the large number of bids for them. This last factor may have given further momentum to the rise in share prices since the end of March, sending the NAV and the share price to new highs.

What is apparent, however, is that large swathes of the UK corporate sector are facing challenges to their

business model. Whatever the cause of the disruption - the internet, Brexit, the regulatory environment, new competition, etc - it is creating both losers and winners. Historically the mid cap sector has produced companies with the flexibility and skills to adapt to a changing environment, and we see no reason why your Company cannot continue to benefit from this in future. Your Company continues to deliver strong capital returns over the long-term, while remaining invested in financially prudent, growing businesses, and I expect this to continue.

Eric Sanderson

Chairman

27 June 2018

Manager's Review

Market review

The UK equity market moved in a narrow band in the six months to the end of March 2018, in line with global equities. On a relative basis the FTSE 250 (ex-Investment Companies) Index outperformed the FTSE 100 Index, falling 1.1% vs. the large cap index's 2.5% fall (source: Morningstar, total returns).

Global markets followed the US, lower on the back of fears around the pace of policy tightening by the Federal Reserve in response to growing inflationary pressures. The market weakness was exacerbated by a rise in the VIX (volatility) index, which forced leveraged short volatility strategies to close their positions. Government bond yields rose, driving a rotation away from more stable and defensive areas of the market. While the "Goldilocks" scenario of low and stable growth and inflation was put to the test, hopes remained that the world economy would continue to enjoy a sustained and synchronised recovery.

Sterling recovered as the Bank of England increased base rates for the first time since November 2007, from a record low of 0.25% to 0.50%. Markets welcomed progress with Brexit negotiations, with an agreement struck to allow talks to proceed to the future of trade arrangements.

Portfolio performance

The NAV underperformed the index by 0.9% during the period (source: Schroders). This was largely down to specific stock performances and not holding some of the companies bid for.

Online retailer N Brown disappointed the market with a curate's egg of weaker-than-expected product margins in a highly promotional market, offset by better margins in the credit division. We see competition intensifying in this market as well as a tightening of regulatory screws, which will likely more than offset any benefit from foreign exchange transactions and the return to real earnings growth seen in the UK. We have trimmed the exposure to this stock.

The holding in Capita also detracted as the market responded to new management's decision to cut the

dividend and launch a rights issue. The market compared the company to Carillion, a far lower margin business, and did not give the company credit for the potential disposal of non-core businesses. The shares' valuation reflects only downside, wherein lies the opportunity.

Shares in Cineworld fell as the company announced a rights issue to raise capital for its acquisition of US

operator Regal, which will make the company the second largest cinema group in the world. We supported the rights issue as management have demonstrated strength in previous acquisitions and believe that the long-term investment proposition has strengthened further as a result of the deal.

On the positive side, veterinary products business Dechra Pharmaceuticals, the standout contributor last year, has continued to deliver strong returns. The shares have outperformed, underpinned by strong interim results and the earnings-accretive acquisition of Dutch firms AST Farma and Le Vet, which further strengthened the company's companion animal proposition.

Travel food and beverage company SSP Group, also one of the top performers last year, was another key

contributor. The company maintained its strong operational performance, particularly in the growth

market of international airport catering where it continues to win new contracts, and in its interesting new Indian Rail JV.

The portfolio benefited from not holding highly-indebted satellite company Inmarsat, energy services company Wood Group, and insurance and travel group Saga. We have subsequently started a position in the latter, the company having put a credible plan in place to address its shortcomings, and to benefit as two new cruise ships come online. Not owning bid targets NEX Group, UBM and Ladbrokes Coral detracted from performance.

Portfolio activity

Among the new holdings to the portfolio, low cost airline Wizz Air specialises in travel to Eastern Europe, a structural growth market due to rising income amongst young travellers; Spectris is an electronics and specialist engineering product designer and supplier; and we see opportunity in a change of management at generic pharmaceutical company Hikma.

Exits included Kennedy Wilson Europe, acquired by its parent, and Halma, which was promoted to the FTSE 100. We also sold out of companies on valuation grounds or where recent developments meant the holding no longer fits our investment strategy. These included Crest Nicholson and Laird. Where positions had become very large and/or valuations stretched, we trimmed our holdings, for example in SSP,  Redrow, Renishaw, Dechra and Paragon.

Outlook - elephants don't gallop

We see an ever-faster pace of disruption amongst UK plc, and nowhere is this more keenly felt than on the high street. Companies which are not carrying out the disruption or adapting to take account of this disruption will be strongly disadvantaged. We see opportunities for management teams which are nimble and creative to take advantage of disruptive trends. The economy can support this because companies and households continue to spend. Mid caps are in a stronger position to adapt to this new world than large caps thanks to their relative size; elephants don't gallop. Looking outside the UK, the mid 250 also offers opportunities, as up to half of the revenues generated by the opportunity set are generated here.

Finally, although the global investor community may be gloomy on the UK's prospects, the global corporate sector is not, evidenced by the spike in inbound M&A in recent months.

Our investment management strategy

We continue to seek organic growth and pricing power, and avoid companies with too much debt. Our strategy remains one of being highly selective in light of structural change caused by the evolution of the internet and ecommerce, which is disrupting many traditional business models by driving down prices and in some cases offering better product or service. We endeavour to be on the right side of this trend: as well as looking for the next mid cap disruptor, we are always looking to avoid exposure to the next industry to be disrupted.

The growing number of opportunities has also led us to use the loan facility since the end of March, with net gearing of 1.3% as at 20 June 2018.

We believe that the holdings are well placed to continue to generate superior long-term returns. Many are enjoying a virtuous circle where a rising stream of earnings is underpinning progressive dividend policies and simultaneously supporting reinvestment into the business to drive future growth.

Schroder Investment Management Limited

27 June 2018

Directors' Disclosures

Principal risks and uncertainties

The principal risks and uncertainties with the Company's business fall into the following categories: strategy and competitiveness risk; investment management risk; financial and currency risk; accounting, legal and regulatory risk; custodian and depositary risk; and service provider risk. A detailed explanation of the risks and uncertainties in each of these categories can be found on pages 14 and 15 of the Company's published Annual Report and Accounts for the year ended 30 September 2017.

These risks and uncertainties have not materially changed during the six months ended 31 March 2018, although the Board now more closely monitors performance of the Company against its peers.

Going concern

Having assessed the principal risks and uncertainties, and the other matters discussed in connection with the viability statement as set out on page 16 of the published Annual Report and Accounts for the year ended 30 September 2017, the Directors consider it appropriate to adopt the going concern basis in preparing the accounts.

Related party transactions

There have been no transactions with related parties that have materially affected the financial position or the performance of the Company during the six months ended 31 March 2018.

Directors' responsibilities statement

The Directors confirm that, to the best of their knowledge, this set of condensed financial statements has been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (UK GAAP), in particular FRS 104 "Interim Financial Reporting", and with the Statement of Recommended Practice, "Financial Statements of Investment Companies and Venture Capital Trusts" issued in November 2014 and that this Interim Management Report includes a fair review of the information required by 4.2.7R and 4.2.8R of the FCA's Disclosure Guidance and Transparency Rules.

Half Year Report and Accounts for the six months ended 31 March 2018

Income Statement

	(Unaudited) For the six months ended 31 March 2018			(Unaudited) For the six months ended 31 March 2017			(Audited) For the year ended 30 September 2017
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
(Losses)/gains on investments held at fair value through profit or loss	-	(6,840)	(6,840)	-	14,912	14,912	-	35,316	35,316
Income from investments	2,388	1,187	3,575	2,318	116	2,434	5,933	274	6,207
Other interest receivable and similar income	-	-	-	-	-	-	-	-	-
Gross return/(loss)	2,388	(5,653)	(3,265)	2,318	15,028	17,346	5,933	35,590	41,523
Investment management fee	(239)	(558)	(797)	(210)	(489)	(699)	(442)	(1,030)	(1,472)
Administrative expenses	(251)	-	(251)	(238)	-	(238)	(457)	-	(457)
Net return/(loss) before finance costs and taxation	1,898	(6,211)	(4,313)	1,870	14,539	16,409	5,034	34,560	39,594
Finance costs	-	-	-	(3)	(6)	(9)	(3)	(6)	(9)
Net return/(loss) on ordinary activities before taxation	1,898	(6,211)	(4,313)	1,867	14,533	16,400	5,031	34,554	39,585
Taxation (note 3)	(12)	-	(12)	-	-	-	-	-	-
Net return/(loss) on ordinary activities after taxation	1,886	(6,211)	(4,325)	1,867	14,533	16,400	5,031	34,554	39,585
Return/(loss) per share (note 4)	5.26p	(17.32)p	(12.06)p	5.16p	40.21p	45.37p	13.96p	95.87p	109.83p

The "Total" column of this statement is the profit and loss account of the Company. The "Revenue" and "Capital" columns represent supplementary information prepared under guidance issued by The Association of Investment Companies. The Company has no other items of other comprehensive income, and therefore the net return on ordinary activities after taxation is also the total comprehensive income for the period.

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the period.

Statement of Changes in Equity

For the six months ended 31 March 2018 (unaudited)

	Called-up		Capital		Share
	share	Share	redemption	Merger	purchase	Capital	Revenue
	capital	premium	reserve	reserve	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 30 September 2017	9,036	13,971	220	2,184	13,934	180,277	6,955	226,577
Net (loss)/return on ordinary activities	-	-	-	-	-	(6,211)	1,886	(4,325)
Dividend paid in the period (note 5)	-	-	-	-	-	-	(3,585)	(3,585)
At 31 March 2018	9,036	13,971	220	2,184	13,934	174,066	5,256	218,667

For the six months ended 31 March 2017 (unaudited)

	Called-up		Capital		Share
	share	Share	redemption	Merger	purchase	Capital	Revenue
	capital	premium	reserve	reserve	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 30 September 2016	9,036	13,971	220	2,184	15,477	145,723	6,107	192,718
Net return on ordinary activities	-	-	-	-	-	14,533	1,867	16,400
Dividend paid in the period (note 5)	-	-	-	-	-	-	(3,072)	(3,072)
At 31 March 2017	9,036	13,971	220	2,184	15,477	160,256	4,902	206,046

For the year ended 30 September 2017 (audited)

	Called-up		Capital		Share
	share	Share	redemption	Merger	purchase	Capital	Revenue
	capital	premium	reserve	reserve	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 30 September 2016	9,036	13,971	220	2,184	15,477	145,723	6,107	192,718
Net return on ordinary activities	-	-	-	-	-	34,554	5,031	39,585
Repurchase of the Company's own shares into treasury	-	-	-	-	(1,543)	-	-	(1,543)
Dividends paid in the year (note 5)	-	-	-	-	-	-	(4,183)	(4,183)
At 30 September 2017	9,036	13,971	220	2,184	13,934	180,277	6,955	226,577

Statement of Financial Position at 31 March 2018

	(Unaudited)	(Unaudited)	(Audited)
	31 March	31 March	30 September
	2018	2017	2017
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	212,634	200,127	225,659
Current assets
Debtors	724	714	1,063
Cash at bank and in hand	7,111	6,049	1,020
	7,835	6,763	2,083
Current liabilities
Creditors: amounts falling due within one year	(1,802)	(844)	(1,165)
Net current assets	6,033	5,919	918
Net assets	218,667	206,046	226,577
Capital and reserves
Called-up share capital (note 6)	9,036	9,036	9,036
Share premium	13,971	13,971	13,971
Capital redemption reserve	220	220	220
Merger reserve	2,184	2,184	2,184
Share purchase reserve	13,934	15,477	13,934
Capital reserves	174,066	160,256	180,277
Revenue reserve	5,256	4,902	6,955
Total equity shareholders' funds	218,667	206,046	226,577
Net asset value per share (note 7)	609.93p	570.07p	631.99p

Notes to the Accounts

1.       Financial Statements

The information contained within the accounts in this half year report has not been audited or reviewed by the Company's independent auditor.

The figures and financial information for the year ended 30 September 2017 are extracted from the latest published accounts of the Company and do not constitute statutory accounts for that year. Those accounts have been delivered to the Registrar of Companies and included the report of the auditor which was unqualified and did not contain a statement under either section 498(2) or 498(3) of the Companies Act 2006.

2.       Accounting policies

Basis of accounting

The accounts have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice and with the Statement of Recommend Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" issued by the Association of Investment Companies in November 2014 and updated in February 2018.

All of the Company's operations are of a continuing nature.

The accounting policies applied to these accounts are consistent with those applied in the accounts for the year ended 30 September 2017.

3.       Taxation

The Company's effective corporation tax rate is nil, as deductible expenses exceed taxable income. Taxation comprises irrecoverable overseas withholding tax deducted from dividends receivable.

4.       Return/(loss) per share

	(Unaudited)	(Unaudited)
	For the	For the	(Audited)
	six months	six months	For the
	ended	ended	year ended
	31 March	31 March	30 September
	2018	2017	2017
	£'000	£'000	£'000
Revenue return	1,886	1,867	5,031
Capital (loss)/return	(6,211)	14,533	34,554
Total (loss)/return	(4,325)	16,400	39,585
Weighted average number of shares in issue during the period	35,851,190	36,143,690	36,043,409
Revenue return per share	5.26p	5.16p	13.96p
Capital (loss)/return per share	(17.32)p	40.21p	95.87p
Total (loss)/return per share	(12.06)p	45.37p	109.83p

5.       Dividends

	(Unaudited)	(Unaudited)
	For the	For the	(Audited)
	six months	six months	For the
	ended	ended	year ended
	31 March	31 March	30 September
	2018	2017	2017
	£'000	£'000	£'000
2017 final dividend paid of 10.00p (2016: 8.50p)	3,585	3,072	3,072
Interim dividend of 3.10p	-	-	1,111
	3,585	3,072	4,183

An interim dividend of 3.30p (2017: 3.10p) per share, amounting to £1,183,000 (2017: £1,111,000), has been declared payable in respect of the year ending 31 September 2018.

6.       Called-up share capital

	(Unaudited)	(Unaudited)
	Six months	Six months	(Audited)
	ended	ended	Year ended
	31 March	31 March	30 September
	2018	2017	2017
	£'000	£'000	£'000
Ordinary shares allotted, called up and fully paid:
Opening balance of 35,851,190 (31 March 2017 and 30 September 2017: 36,143,690) shares of 25p each	8,963	9,036	9,036
Repurchase of nil (31 March 2017: nil and 30 September 2017: 292,500) shares into treasury	-	-	(73)
Subtotal of 35,851,190 (31 March 2017: 36,143,690 and 30 September 2017: 35,851,190) shares	8,963	9,036	8,963
292,500 (31 March 2017: nil and 30 September 2017: 292,500) shares held in treasury	73	-	73
Closing balance of 36,143,190 shares including shares held in treasury	9,036	9,036	9,036

7.       Net asset value per share

Net asset value per share is calculated by dividing shareholders' funds by the number of shares in issue at 31 March 2018 excluding shares held in treasury, of 35,851,190 (31 March 2017: 36,143,690 and 30 September 2017: 35,851,190).

8.       Financial instruments measured at fair value

The Company's financial instruments that are held at fair value comprise its investment portfolio. At 31 March 2018, all investments in the Company's portfolio were categorised as Level 1 in accordance with the criteria set out in paragraph 34.22 (amended) of FRS 102. That is, they are all valued using unadjusted quoted prices in active markets for identical assets (31 March 2017 and 30 September 2017: same).

9.       Events after the interim period that have not been reflected in the financial statements for the interim period

The Directors have evaluated the period since the interim date and have not noted any events which have not been reflected in the financial statements.

 

END

 

 

IR UNVSRWOANUAR