Half-year Report

RNS Number : 6208C

Schroder UK Mid Cap Fund PLC

22 June 2021

 

Half Year Report and Accounts for the six months ended 31 March 2021

Schroder UK Mid Cap Fund plc (the "Company") hereby submits its Half Year Report for the period ended 31 March 2021 as required by the Financial Conduct 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/6208C_1-2021-6-21.pdf

The Company has also submitted a pdf of the hard copy format of its Half Year Report to the National Storage Mechanism. It will shortly be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism .

Enquiries:

Gareth Faith

Schroder Investment Management Limited

Tel: [phone]

Half Year Report and Accounts for the six months ended 31 March 2021

Chairman's Statement

I am pleased to present my first report as Chairman following the retirement of Eric Sanderson from the Board at the AGM in February 2021. Unfortunately, he was not able to say farewell to shareholders in person owing to pandemic-related restrictions. My Board colleagues and I would like to thank Eric for his nine years of service to the Company, six of them as Chairman, and we wish him well for the future.

Investment and share price performance

During the six month period to 31 March 2021, the Company's net asset value total return ("NAV") was 23.9% compared to the 28.8% from the Company's Benchmark (FTSE 250 ex Investment Trusts Index). While this was a strong absolute return our relative performance was impacted by the rise in the UK equity market being dominated by those companies which were seen as shorter-term winners from the re-opening of the economy. However, over the last 12 months the share price has produced a total return to shareholders of 47.1%, reflecting in part a return of interest in the UK equity market and in particular to mid cap stocks, as well as the discount to NAV that the Company trades at narrowing significantly to 4.6% at the end of March 2021. This reduction in the share price discount to NAV has been maintained and was 3.9% as of Friday, 18 June 2021. In the 12 months to the end of March 2021 the NAV of the Company has delivered 15.8% outperformance of the Company's Benchmark, building upon a good longer-term record.

The Board is encouraged by this performance and believes it reflects the refinements our Manager has made to their investment strategy. These include reducing the number of investments in the portfolio in favour of an approach with higher conviction and maintaining a specific focus on resilient companies with strong finances, which lead on sustainable business practices and have clear strategic direction. While this emphasis upon higher quality companies will not deliver outperformance in all periods, the historical equity market evidence supports the Board's belief that over the longer-term it should deliver superior returns to shareholders.

More detailed comment on the performance of your Company may be found in the Manager's review.

Gearing

Net gearing as at 31 March 2021 was 4.8% vs. 5.3% at the year end, as the Manager continued to see opportunities in the market to deploy some of the Company's £25 million term loan. The use of gearing increased the returns from the portfolio and contributed to the strong share price performance.

Revenue and dividends

In the Annual Report for the year ended 30 September 2020, my predecessor informed shareholders of the reduction in portfolio income received during the year, as a result of the COVID-19 induced lockdowns, and the cut or suspension of dividends from portfolio companies that resulted from it. The Board therefore decided to reduce the dividend to a realistic and sustainable level which we would hope to at least maintain in future years and in so doing utilised some of the Company's strong revenue reserves thus mitigating the recent fall in dividend income.

The Board has announced an unchanged interim dividend of 3.80 pence per share for the year ending 30 September 2021.

Discount management

In the six month period to 31 March 2021 and up to the date of this report, the Company has not utilised its share buyback authorities as the Company's share price has seen a significant re-rating and is trading much closer to its underlying NAV. The Board continues to monitor the discount and will consider share repurchases should it widen to a level at which the Board believes buybacks are in shareholders' best interests.

Similarly, the Board will consider the issuance of shares from treasury to satisfy demand in the market should the Company's shares trade at a sustained premium to NAV, as the Board believes it is in the best interests of shareholders to support the growth of the Company's available investment capital through issuance.

Outlook

While the pandemic has created severe short-term challenges for the economy, in doing so it has tested business models and allowed those with the strongest long-term potential to thrive. In our last Annual Report, our portfolio managers described how Schroders sought to invest in these resilient companies that could grow sustainably, and the Board believes that the Company's performance over the last twelve months demonstrates the benefits of our Manager's consistent approach.

The Board is pleased with the strong absolute progress made by the Company in the six months ended 31 March 2021 as the UK economy has continued to emerge from lockdown. The ongoing COVID-19 crisis still poses some risks to the recovery in economic activity but current forecasts paint the picture of growing confidence and building momentum. This should present our portfolio managers with many opportunities to identify interesting stock picking investment ideas for the benefit of shareholders. In the absence of a further serious wave of COVID-19 infections in the UK, the Board remains optimistic about the prospects for the second half of the Company's financial year.

Robert Talbut

Chairman

22 June 2021

Manager's Review

Market background

Equities performed very well on the back of positive news around COVID-19 vaccines, which allowed markets to look past the global pandemic with more confidence. The FTSE 250 ex Investment Trusts Index rose 28.8% over the period compared to a 16.4% gain in the FTSE 100.

Lowly valued and economically sensitive areas of the market outperformed as did many UK assets, including sterling and UK equities, reversing some of the underperformance they suffered versus other regions early on in the pandemic. Within markets there was a rotation away from resilient businesses which had performed very well for the most part of 2020, including a number of perceived direct beneficiaries of the pandemic.

UK equities responded well to the vaccine news in November and then again to the Brexit trade deal. An improving domestic economic outlook was the key driver in Q1 as the country's vaccination programme set the benchmark for distribution standards. Domestically focused areas and small and mid cap equities responded particularly well to this confluence of events.

In common with expansive fiscal policies in other developed economies, the UK chancellor confirmed in his annual budget that austerity remained firmly off the table as the country took tentative first steps to ease lockdown restrictions. UK inward merger and acquisition activity regained momentum as global dealmaking picked up, with mid caps a particular focus (see: Why are UK mid caps in such an M&A sweetspot right now)¹.

₁ https://www.schroders.com/en/insights/economics/why-are-uk-mid-caps-in-such-an-ma-sweetspot-right-now/

Portfolio performance

The NAV achieved a total return of 23.9%, but underperformed the Benchmark by 4.9% over the six month period. However the share price achieved a total return of 47.1%, having recovered from its March 2020 low of 288p to end the period at 664p, the discount having narrowed significantly to 4.6%. This in our view reflects the strong +15.8% 12-month NAV outperformance of the Benchmark.

The largest detractors over this period have been some of our best long-term (3 years plus) investments. Pet retailer and services provider Pets at Home underperformed as the market checked its exceptional performance during the first three quarters. We remain confident that there is further potential for strong sales growth in pet care and veterinary services in particular, driven by the recent boom in pet ownership: UK households have added an additional 3.2m pets since the onset of the pandemic (source: PFMA). Another of our holdings which gave back some previous stellar performance is fantasy games company Games Workshop . Despite enforced store closures, the market viewed the stock as a 'Lockdown leader' and with restrictions beginning to ease, performance unwound over the period. Whilst it is true that Games Workshop has had a "cracking" year (to quote its CEO), its best ever, we believe that there is further to go as stores reopen, the US expansion continues, and further licensing deals are done. Home furnishing retailer Dunelm , also viewed by the market, we believe rather one-dimensionally, as a lockdown winner, detracted from performance. A management share sale during the period added to the pressure, as did a period of pandemic related store closures, which resulted in weaker than expected sales in the January-March 2021 period. However, the company has since reported that since stores have re-opened, sales are +59% compared with 2019 (as one year ago stores were closed, therefore making comparison less relevant) and that it is winning market share, proof that the combination of stores and a strong online offer is key in the new retail battleground. Despite delivering consecutive upgrades during the period, Computacenter shares also underperformed, again tarred with the "lockdown winner" brush. This is another example of a company which can continue to benefit from a structural growth market (ongoing digitalisation) in addition to any lockdown boost. All of the companies discussed above now have stronger balance sheets than they did pre pandemic which we believe can only mean a strengthened competitive position from here; see our outlook commentary on the strong getting stronger as we exit the pandemic.

Positive contributors in the period included domestic housebuilders Crest Nicholson and Vistry . Housebuilders have seen a surge in demand for properties, particularly houses, with the onset of the working from home revolution, government support from the extension to the stamp duty holiday, and spend being directed away from travel and leisure (anything enjoyable, more generally) and into housing. Online gaming company Gamesys , a new holding in 2020, was bid for. Automotive distributor and retailer Inchcape posted a better-than-expected full-year profit and resumed its annual dividend, thanks to a strengthened, net cash, balance sheet. Being able to offer click and collect meant that it could continue delivering vehicles despite car showrooms being shut due to the pandemic. The company's new CEO, who has a technology background, has launched a new strategy to harness the huge amount of data Inchcape gathers from each vehicle sold and serviced so that the company will capture more of a vehicle's lifetime value (e.g. 3rd and 4th owners). Royal Mail shares continued to perform, as the pandemic further fuelled online sales and parcel deliveries. The company delivered 496 million parcels (+30% vs the prior year) in the final three months of 2020, a record performance. The pandemic has meant that, amazingly, this year's revenues are three years ahead of where they were expected to be. Post the period end, the stock has been promoted to the FTSE 100, which is a satisfying result and a key element of our investment strategy of looking to invest in the FTSE 100 companies of the future.

Turning to stocks not held, our lack of exposure within the travel sector most notably weighed on returns. Not owning Easyjet and Tui, for example, whose shares rose dramatically on the news of the vaccine, detracted from performance. These types of shares continued to rise during the period as restrictions and the lockdown roadmap was announced. Both have since reported increasingly heavy losses and very high levels of net debt (£2bn and €6.8bn, respectively). Lack of exposure to media firm ITV and aerospace firm Meggitt, both seen as vaccine winners, also detracted from performance.

Portfolio activity

Attractively priced structural growth opportunities continued to influence our new additions to the portfolio. We added holdings in NCC and Chemring , both of which have significant operations in cyber security, a trend which is set to continue to grow in a post COVID-19 world. We believe both stocks represented good value versus other cyber security companies. We started a new position in industrial and electronics distributor Electrocomponents , which we believe is set to gain market share online in this space and which has a competitive and high margin own label offering. Continuing with the theme of online commerce, we participated in the IPO of Trustpilot . With online reviews becoming an essential part of winning new customers, this open review platform provides consumers with essential information about both products and services. We expect that a Trustpilot rating will become more and more of a "must have" for small and medium sized consumer facing businesses not only in the home markets of the UK and Denmark but also, potentially, in markets such as the US where the company is already making inroads.

Moving to the more notable complete sales for the period, within the travel and leisure sector, we sold our holding in JD Wetherspoon when, following their capital raise, which we supported, the shares went to a significant premium. Valuation remains a key element of our sales discipline as demonstrated by the disposal of airline Wizz Air. Finally, we disposed of our position in bookmaker William Hill following a bid from US partner Caesars. The deal seeks to consolidate the joint venture partnership between the two companies to take advantage of the fast growing and deregulating online sports gaming market in the US.

We currently hold 51 stocks in the portfolio, down from 54 at the financial year end. Gearing at the end of the period was 4.8% vs. 5.3% at the September year end.

Outlook

We're increasingly optimistic on the outlook for the UK economy and many of the domestically-focused mid cap companies exposed to it. The building congestion on our roads is clear, everyday evidence of an economic recovery. Official statistics are also highly supportive of this view - higher than expected employment, lower than expected unemployment, very strong retail sales data and rising house prices to name a handful. The Bank of England is now forecasting GDP growth of 7.25% for the UK this year (upgraded from 5.0%), a level of growth last seen post-WWII, and helpful in the context of paying down national debt via the tax take.

Just over a year ago, when the implications of the pandemic were becoming clear, we kept faith in our homework. The crisis has meant that companies have had to accelerate fundamental changes to their businesses driven by customers' changing needs. As usual, it has been the companies with genuine competitive advantages which have been most successful during the period in terms of market positions and balance sheets. As mentioned above, many have stronger balance sheets than they had before the crisis (the majority of the companies listed below, for example), without needing to raise any capital, other than for earnings accretive M&A purposes. This is an exciting position to be in, particularly given the backdrop of the chancellor's super deduction, which could see management teams seeking to increase investment to grow companies. This demonstrates the importance of keeping some investment discipline in what feels like an increasingly short-term world.

With this in mind, as investors, we continue to primarily focus on seeking out the next mid cap disruptor, while looking to avoid the next industry to be disrupted.

Schroder Investment Management Limited

22 June 2021

Half Year Report

Principal risks and uncertainties

The Directors consider that the principal risks and uncertainties faced by the Company for the remaining six months of the financial year, which could have a material impact on performance, remain consistent with those on pages 19 to 21 in the Annual Report and Accounts for the year ended 30 September 2020.

Going concern

Having assessed the Company's principal risks and uncertainties, the impact of the COVID-19 pandemic, its current financial position, its cash flows, its liquidity position and FRC guidance, 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 2021.

Directors' responsibility 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 and with the Statement of Recommended Practice, "Financial Statements of Investment Companies and Venture Capital Trusts" issued  in October 2019 and that this Interim Management Report includes a fair review of the information required by 4.2.7R and 4.2.8R of the Financial Conduct Authority's Disclosure Guidance and Transparency Rules.

Income Statement

For the six months ended 31 March 2021 (unaudited)

	(Unaudited) For the six months ended 31 March 2021			(Unaudited) For the six months ended 31 March 2020			(Audited) For the year ended 30 September 2020
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Gains/(losses) on investments held at fair value through
profit or loss	-	46,049	46,049	-	(66,485)	(66,485)	-	(18,945)	(18,945)
Income from investments	2,376	736	3,112	2,265	-	2,265	4,155	-	4,155
Other interest receivable and similar income	-	-	-	4	-	4	4	-	4
Gross return/(loss)	2,376	46,785	49,161	2,269	(66,485)	(64,216)	4,159	(18,945)	(14,786)
Investment management fee	(242)	(564)	(806)	(208)	(484)	(692)	(402)	(939)	(1,341)
Administrative expenses	(259)	-	(259)	(300)	-	(300)	(516)	-	(516)
Net return/(loss) before finance costs and taxation	1,875	46,221	48,096	1,761	(66,969)	(65,208)	3,241	(19,884)	(16,643)
Finance costs	(57)	(133)	(190)	(27)	(65)	(92)	(86)	(200)	(286)
Net return/(loss) before taxation	1,818	46,088	47,906	1,734	(67,034)	(65,300)	3,155	(20,084)	(16,929)
Taxation (note 3)	-	-	-	-	-	-	-	-	-
Net return/(loss) after taxation	1,818	46,088	47,906	1,734	(67,034)	(65,300)	3,155	(20,084)	(16,929)
Return/(loss) per share(note 4)	5.18p	131.43p	136.61p	4.89p	(189.20)p	(184.31)p	8.92p	(56.79)p	(47.87)

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 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 2021 (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 2020	9,036	13,971	220	2,184	9,908	157,980	6,225	199,524
Net return after taxation	-	-	-	-	-	46,088	1,818	47,906
Dividend paid in the period (note 5)	-	-	-	-	-	-	(3,331)	(3,331)
At 31 March 2021	9,036	13,971	220	2,184	9,908	204,068	4,712	244,099

For the six months ended 31 March 2020 (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 2019	9,036	13,971	220	2,184	13,337	178,064	9,612	226,424
Repurchase of the Company's own shares into treasury	-	-	-	-	(2,103)	-	-	(2,103)
Net (loss)/return after taxation	-	-	-	-	-	(67,034)	1,734	(65,300)
Dividend paid in the period (note 5)	-	-	-	-	-	-	(5,198)	(5,198)
At 31 March 2020	9,036	13,971	220	2,184	11,234	111,030	6,148	153,823

For the year ended 30 September 2020 (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 2019	9,036	13,971	220	2,184	13,337	178,064	9,612	226,424
Repurchase of the Company's own shares into treasury	-	-	-	-	(3,429)	-	-	(3,429)
Net (loss)/return after taxation	-	-	-	-	-	(20,084)	3,155	(16,929)
Dividends paid in the year (note 5)	-	-	-	-	-	-	(6,542)	(6,542)
At 30 September 2020	9,036	13,971	220	2,184	9,908	157,980	6,225	199,524

Statement of Financial Position at 31 March 2021

	(Unaudited)	(Unaudited)	(Audited)
	31 March	31 March	30 September
	2021	2020	2020
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	254,666	164,498	210,161
Current assets
Debtors	1,556	365	1,380
Cash at bank and in hand	13,400	14,686	14,504
	14,956	15,051	15,884
Current liabilities
Creditors: amounts falling due within one year	(523)	(726)	(1,521)
Net current assets	14,433	14,325	14,363
Total assets less current liabilities	269,099	178,823	224,524
Creditors: amounts falling due after more than one year (note 6)	(25,000)	(25,000)	(25,000)
Net assets	244,099	153,823	199,524
Capital and reserves
Called-up share capital (note 7)	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	9,908	11,234	9,908
Capital reserves	204,068	111,030	157,980
Revenue reserve	4,712	6,148	6,225
Total equity shareholders' funds	244,099	153,823	199,524
Net asset value per share (note 8)	696.11p	435.01p	568.99p

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 2020 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 October 2019.

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 2020.

3.  Taxation

The Company's effective corporation tax rate is nil, as deductible expenses exceed taxable income.

4.  Return/(loss) per share

	(Unaudited)	(Unaudited)	(Audited)
	For the	For the	For the
	six months	six months	year ended
	ended	ended	30 September
	31 March 2021	31 March 2020	2020
	£'000	£'000	£'000
Revenue return	1,818	1,734	3,155
Capital return/(loss)	46,088	(67,034)	(20,084)
Total return/(loss)	47,906	(65,300)	(16,929)
Weighted average number of shares in issue during the period	35,066,190	35,430,370	35,362,365
Revenue return per share	5.18p	4.89p	8.92p
Capital return/(loss) per share	131.43p	(189.20)p	(56.79)p
Total return/(loss) per share	136.61p	(184.31)p	(47.87)p

5.  Dividends

	(Unaudited)	(Unaudited)	(Audited)
	For the	For the	For the
	six months	six months	year ended
	ended	ended	30 September
	31 March 2021	31 March 2020	2020
	£'000	£'000	£'000
2020 final dividend paid of 9.5p (2019: 14.7p)	3,331	5,198	5,198
Interim dividend of 3.8p	-	-	1,344
	3,331	5,198	6,542

An interim dividend of 3.8p (2019: 3.8p) per share, amounting to £1,333,000 (2019: £1,344,000), has been declared payable in respect of the six months ended 31 March 2021.

6.  Creditors: amount falling due after more than one year

			(Audited)
	(Unaudited)	(Unaudited)	30 September
	31 March 2021	31 March 2020	2020
	£'000	£'000	£'000
Bank Loan	25,000	25,000	25,000

The bank loan is a £25 million three-year term loan from Scotiabank Europe plc, expiring in February 2023 and carrying a fixed interest rate of 1.546% per annum.

7.  Called-up share capital

	(Unaudited)	(Unaudited)	(Audited)
	Six months	Six months	Year ended
	ended	ended	30 September
	31 March 2021	31 March 2020	2020
	£'000	£'000	£'000
Changes in called-up share capital during the period were as follows:
Opening balance of ordinary shares of 25p each, excluding shares held in treasury	8,766	8,935	8,935
Repurchase of shares into treasury	-	(95)	(169)
Subtotal of ordinary shares of 25p each, excluding shares held in treasury	8,766	8,840	8,766
Shares held in treasury	270	196	270
Closing balance of ordinary shares of 25p each, including shares held in treasury	9,036	9,036	9,036
	(Unaudited)	(Unaudited)	(Audited)
	Six months	Six months	Year ended
	ended	ended	30 September
	31 March 2020	31 March 2019	2019
Changes in the number of shares in issue during the period were as follows:
Ordinary shares of 25p each, allotted, called-up and fully paid
Opening balance of shares in issue, excluding shares held in treasury	35,066,190	35,741,190	35,741,190
Repurchase of shares into treasury	-	(380,000)	(675,000)
Closing balance of shares in issue, excluding shares held in treasury	35,066,190	35,361,190	35,066,190
Closing balance of shares held in treasury	1,077,500	782,500	1,077,500
Closing balance of shares in issue, including shares held in treasury	36,143,690	36,143,690	36,143,690

8.  Net asset value per share

Net asset value per share is calculated by dividing shareholders' funds by the 35,066,190 (31 March 2020: 35,361,190 and 30 September 2020: 35,066,190) shares in issue, excluding shares held in treasury.

9.  Financial instruments measured at fair value

The Company's financial instruments that are held at fair value comprise its investment portfolio. At 31 March 2021, 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 2020 and 30 September 2020: same).

10.  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

 

 

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