Half-year Report

RNS Number : 2788Z

F&C Global Smaller Companies PLC

14 December 2017

 

Date:                14 December 2017

Contact:           Peter Ewins                                                   

                        F&C Investment Business Limited                   

                        020 7628 8000                                               

F&C Global Smaller Companies PLC

Unaudited statement of results

for the half-year ended 31 October 2017

SUMMARY OF UNAUDITED RESULTS FOR THE HALF-YEAR ENDED 31 OCTOBER 2017

·     Diluted Net Asset Value ("NAV") rose to 1,357.10p, giving a total return of 8.0% compared to the Benchmark total return of 7.4%

·     Share price total return of 6.9% with share price up to 1,352p

·     Interim dividend up by 10.0% to 4.4p per ordinary share

 

Manager's Review

Peter Ewins. Lead Manager

The period under review saw many equity markets around the globe move up to reach new highs. Risks from several dimensions in the political sphere have been a headwind, but investors were heartened by generally encouraging economic and corporate earnings data. A number of European economies in particular, are now doing notably better than in recent years and while there is always a difference in pattern across the various markets, smaller company share prices broadly matched larger company returns over the six months.

Performance

The Company's Benchmark is calculated from the returns of the MSCI All Country World ex UK Small Cap Index and the Numis UK Smaller Companies (excluding investment companies) Index in a 70%/30% proportion, and this delivered a 7.4% return on a total return basis. Taking the dilution from the Convertible Unsecured Loan Stock into account, the net asset value ("NAV") total return over the six months was 8.0%, while on an un-diluted basis the NAV was up by 8.2%, so the fund was ahead of the Benchmark over the period.

The Company's share price remained close to the diluted NAV through the full period, but ended at a 0.4% discount compared to a 0.8% premium at the start of the year, meaning that the share price total return for the six months was 6.9%. Pleasingly the Company's share count continues to grow, with just over 1.2 million new shares issued in the period at a premium to the diluted NAV at the point of issue. Regular share issuance and the strong performance of the fund over recent years have increased the market capitalisation to a scale that has led to the Company's shares qualifying for inclusion in the FTSE 250 index with effect from December 18th.

Dividends

With corporate earnings improving and feeding through into dividend receipts, revenue returns per share were up 9.6%. As a result and reflecting a positive outlook for the remainder of the year, the Board have decided to pay a 4.4p interim dividend, up 10.0% on last year. This will be paid to shareholders on 31 January 2018.

Economic and market background

The last few years have seen central banks around the world employ loose monetary policy and provide direct support to financial markets, for example via bond purchases. In some countries there is evidence that this support is no longer warranted, and during the period interest rates were raised in the US and Canada, with the Bank of England following suit in November. The US Federal Reserve also indicated that it was looking to gradually reduce its balance sheet holdings of assets in the coming years. These initiatives had been heavily flagged to the markets and did not create the amount of volatility in either equity or bond markets that some observers had anticipated earlier in the year.

Hopes for tax reform in the US have been a factor in the performance of equities since the election of Donald Trump as President in November 2016. Over the course of the six months, political challenges in the form of a succession of senior personnel changes in the Trump administration, allegations about interference in the election from Russia, plus the failure of health reform, meant that little progress in relation to tax policy was made. In October, details of a plan to cut the headline corporation tax rate to 20%, plus amendments to the treatment of international income and the tax deductibility of interest along with lower personal tax rates, were finally announced, but the path to adoption could still prove tricky. US small cap stocks performed satisfactorily over the six months, taking account of the fact that they had been very strong in the year before.  

Not many expected the Brexit negotiations to be easy and so it has proved to date with the added complication of a weakened government post the general election. UK small cap stocks however, proved resilient to slower growth in the economy, although some parts of the market most closely linked to domestic consumer confidence lagged. A post Brexit rise in inflation is placing pressure on disposable income. More positively, the labour market has remained strong and there have been signs that UK export trade is benefitting from a more competitive sterling level.

An improving prognosis for the European economy plus the market-friendly Presidential election result in France in May lifted global investor's appetite for Continental European exposure. Later in the period however, the weaker than expected result for Angela Merkel's CDU party in the German elections and more pertinently the constitutional crisis in Catalonia, led to something of a reversal in sentiment.

North Korea's nuclear testing programme caused periodic bouts of weakness in Asian markets, but on the whole the region was in favour, with the key being that the Chinese economy appeared to be maintaining its growth trajectory. North Asian markets such as China itself and Korea were strong, while those further south lagged. Japanese small cap shares did well, with the small cap index here surpassing returns elsewhere. Weakness in the yen, better retail sales numbers and a rise in exports combined with the re-election of Prime Minister Shinzo Abe in October, were all helpful influences on the market.

Portfolio performance

We divide our portfolio into five segments; North America, the UK, Europe, Japan and the Rest of the World (with our Rest of World portfolio principally made up of investments in Asian orientated funds). With markets rising around the globe, the table below shows that positive total returns in sterling terms were delivered across the board, as was the case in the last financial year. We were ahead in the two markets where we have the most invested, namely the US and the UK. Our weakest relative performance during the period was in Europe.

Geographical performance (total return sterling adjusted)
for the half-year ended 31 October 2017
	Portfolio	Local smaller companies index
North America	+5.9%	+5.2%
UK	+12.0%	+6.7%
Europe	+6.3%	+11.0%
Japan	+11.3%	+12.2%
Rest of World	+8.3%	+9.0%  (Pacific ex Japan) +11.9%  (Latin America)
Source: F&C

In the US, we were helped by positive stock selection within the healthcare sector. Wellcare Health Plans posted strong earnings growth as a new management team accelerated plans to turn around the business, whilst an expected change of leadership also boosted Molina Healthcare. One of our largest holdings, STERIS, the sterilisation services supplier, produced good results and the shares were re-rated. The Ensign Group benefitted from improved management of its recently acquired skilled nursing facilities and progress on its managed care contract business. Contract pharmaceuticals research company ICON enjoyed a good run, despite the partial loss of a large customer, as it gained new business and benefitted from generally firm market demand.

Telecoms business GTT Communications and American Vanguard, the agricultural chemicals supplier, were both good performers as they made progress on their acquisition strategies. Another winner in the period was golf and country clubs business Clubcorp, which received a bid from a private equity company. Back-up power company Generac's shares rose late in the period as investors priced in additional business as a result of the three major US hurricanes. These storms however, were a double-edged sword for the portfolio, as our insurance holding Alleghany fell as claims for damage came through, while ATN International's Caribbean telecoms business also took a hit.

In terms of the poorer performers in the US, financial holdings were generally under pressure. Franklin Financial Network was the weakest of our bank holdings with margins facing a squeeze from higher deposit costs as short term interest rates rose. Shares in debt purchaser PRA Group were lower as costs rose and brokers cut forecasts. Stock selection in technology was disappointing, with travel software business Sabre suffering from higher costs and the loss of a customer, while Nuance Communications was hit by a cyber security attack. Cardtronics, the cash machine operator, was weak as a result of negative regulatory news in Australia and a lack of the anticipated recovery in the US. Other weaker performers included the cinema business Cinemark, hampered by an uninspiring film release schedule, hobby retailer Michaels Co where margins remained under pressure, and Carrizo Oil & Gas, whose share price fell after the company issued new shares at a low price to fund a large deal.

There was a pleasing performance from the UK portfolio. In financials, Premier Asset Management, announced steady inflows into its multi-asset and income orientated funds, and IFA consolidator AFH Financial Group was strong as the accretion from acquisitions fed through into results. Document management specialist Restore produced strong figures and waste business Biffa was also in favour as the market started to appreciate the defensive nature of its earnings.

Clinigen, the services provider to the pharmaceutical and biotechnology sectors, announced strong results and an earnings enhancing acquisition. Power control solutions supplier XP Power's shares did well as a surge in orders came through, while Senior Group, which had been weak in the last year, recovered as it reported stability in margins with new aerospace business starting to contribute better profitability. Media company Huntsworth performed well as its US centric healthcare businesses demonstrated strong growth, while its other businesses showed improving returns. This more than offset the hit from sports agency business TLA Worldwide, which saw its shares suspended due to delays in filing accounts.

There were few poor performers in the UK, with company news-flow generally being solid, although car dealer Vertu lagged as the underlying car market slowed. Revolution Bars was down over the six months, with a profit warning being followed by a bid for the company which failed to gain shareholder support, and subsequent management departures. Not all consumer orientated stocks were weak however and tonics supplier Fevertree Drinks was up by more than a third in share price terms, as incremental distribution led to dynamic sales and profits growth. Carpets supplier Victoria continued its strategy of successfully buying and integrating businesses in the floorcoverings space.

While European markets were strong, our portfolio lagged. In media, holdings in Atresmedia and Mediaset España were weak as it became apparent that advertising spend was not following its traditional relationship to GDP progression. Swedish based windows supplier Inwido was one of the more disappointing holdings, with the company cutting guidance as a result of a failure to profitably manage an increased amount of business. Gerresheimer was also weak as the company's pharmaceutical company customers cut back on orders after the US election, while a new inhaler product has also been delayed. Two other lagging holdings were textiles supplier Lenzing, with the market becoming concerned about global overcapacity in viscose lines, and office supplies business Takkt which reported weak first half results.

It was not all bad news in Europe however, and our Scandinavian financial holdings Sparebank and Storebrand continued their good form from the previous year. Both companies have emerged from a period when their near term prospects had looked bleak, and the markets are now better appreciating the strengths of their business models. While the Catalonian crisis meant that Spanish stocks on the whole were under some pressure, we did see good returns from bottle maker Vidrala which moved to acquire a Portuguese peer on sensible terms. Good results from long standing holdings Rational (catering equipment) and Christian Hansen (specialist ingredients) drove further positive share price returns. Credit information supplier Cerved Information Solutions based in Italy signed some important contracts to manage the collections on some non-performing loans portfolios, opening up a new stream of earnings for the company. Finally Norma Group rose, as its exposure to a recovering US agricultural equipment market and progress elsewhere in the group, led to broker upgrades.

As stated above, the Japanese small cap market did well. We get exposure to the market by way of two fund holdings and in this period, the Eastspring Investments Japan Smaller Companies Fund broadly matched the MSCI Japan Small Cap Index but the Aberdeen managed fund lagged. Our Rest of the World fund holdings produced mixed returns. Pleasingly two of the holdings that we had added during the course of 2016/17, managed by Pinebridge and HSBC, performed strongly. The Manulife Global Fund - Asian Smaller Cap Equity Fund also did well, helped by a high exposure to North Asian markets. However, The Scottish Oriental Smaller Companies Trust failed to keep up in the period, and despite having increased its exposure to Latin American markets, which were strong, the Utilico Emerging Markets fund lagged as cyclical stocks did better than the more defensive infrastructure and utility sectors that it focuses on.

Asset allocation

While this is a stock-picking fund, we need to take account of the potential for diverging returns across regions, not least because varying economic conditions, political developments and/or currency moves can sometimes have a big impact. In the last financial year sterling was weak across the board in the aftermath of Brexit, but over the course of the period under review, the pound regained some ground versus the US dollar and yen in spite of the unsettled state of domestic politics.

Geographical distribution of the investment portfolio
	Portfolio weighting
	31 October 2017 %	30 April 2017 %
North America	39.1	40.7
UK	27.7	27.5
Europe	12.2	12.3
Rest of World	11.9	11.1
Japan	9.1	8.4
Source: F&C

While allocations at a market level can give a misleading picture of genuine effective exposures at the portfolio level, our view that the UK economy was bound to slow relative to others led us to maintain an underweight stance towards the UK. Given the improving growth across Europe, we remained overweight here. As the period progressed, we slightly reduced exposure to the US market in favour of Asian and Japanese markets, where earnings trends appeared to be strengthening. The asset allocation decisions made a modest positive contribution to performance versus the overall Benchmark, mainly due to the overweight stance towards Europe.

Gearing

The Board's policy is to maintain leverage on a strategic basis, taking the view that markets are likely to appreciate over time. During the six months, a new £30m Revolving Credit Facility with RBS was agreed, and at the end of the period £12m of this had been drawn down in sterling. As a result the Company ended the six months with effective gearing of 5.0% (3.4% at the end of April 2017).

Outlook

Calling the outlook for markets as a whole is always challenging, not least at the present time due to a myriad of potential political challenges, whether they be Brexit, the Spanish regional elections in December, the national elections in Italy in 2018, or the progress of tax reform in the US. Risks to financial markets in relation to evolving central bank policies should not be dismissed. On the other hand, economic conditions remain favourable and should be reflected in company results. We still feel optimistic about the potential to find new opportunities for the portfolio in the coming period.

 

 

Unaudited Condensed Income Statement

for the half-year ended 31 October	2017			2016
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Gains on investments	-	59,417	59,417	-	102,523	102,523
Foreign exchange (losses)/gains	(4)	(5)	(9)	48	1,403	1,451
Income	5,953	-	5,953	5,133	-	5,133
Management fees	(480)	(1,439)	(1,919)	(378)	(1,136)	(1,514)
Other expenses	(467)	(7)	(474)	(372)	(11)	(383)
Net return before finance costs and taxation	5,002	57,966	62,968	4,431	102,779	107,210
Finance costs	(190)	(571)	(761)	(222)	(665)	(887)
Net return on ordinary activities before taxation	4,812	57,395	62,207	4,209	102,114	106,323
Taxation on ordinary activities	(400)	-	(400)	(329)	-	(329)
Net return attributable to shareholders	4,412	57,395	61,807	3,880	102,114	105,994
Return per share (basic) - pence	7.64	99.34	106.98	6.97	183.42	190.39
Return per share (diluted) - pence	7.51	94.58	102.09	6.86	172.03	178.89

The total column of this statement is the profit and loss account of the Company.

All revenue and capital items in the above statement derive from continuing operations.

 

Unaudited Condensed Statement of Changes in Equity

Half-year ended 31 October 2017	Called- up	Share	Capital	Equity			Total
	share	premium	redemption	component	Capital	Revenue	shareholders'
	capital	account	reserve	of CULS	reserves	reserve	funds
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Balance at 30 April 2017	14,284	160,243	16,158	1,169	527,523	13,905	733,282
Movements during the half-year ended 31 October 2017
Dividends paid Conversion of Convertible Unsecured Loan Stock ("CULS")	- 71	- 2,731	- -	- (91)	- -	(4,751) -	(4,751) 2,711
Shares issued	232	12,017	-	-	-	-	12,249
Net return attributable to equity shareholders	-	-	-	-	57,395	4,412	61,807
Balance at 31 October 2017	14,587	174,991	16,158	1,078	584,918	13,566	805,298

Half-year ended 31 October 2016	Called-up	Share	Capital	Equity			Total
	share	premium	redemption	component	Capital	Revenue	shareholders'
	capital	account	reserve	of CULS	reserves	reserve	funds
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Balance at 30 April 2016	13,853	141,046	16,158	1,307	368,185	12,643	553,192
Movements during the half-year ended 31 October 2016
Dividends paid Conversion of Convertible Unsecured Loan Stock ("CULS")	- 1	- 47	- -	- (1)	- -	(4,334) -	(4,334) 47
Shares issued	117	4,955	-	-	-	-	5,072
Net return attributable to equity shareholders	-	-	-	-	102,114	3,880	105,994
Balance at 31 October 2016	13,971	146,048	16,158	1,306	470,299	12,189	659,971

Year ended 30 April 2017	Called-up	Share	Capital	Equity			Total
	share	premium	redemption	component	Capital	Revenue	shareholders'
	capital	account	reserve	of CULS	reserves	reserve	funds
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Balance at 30 April 2016	13,853	141,046	16,158	1,307	368,185	12,643	553,192
Movements during the year ended 30 April 2017
Dividends paid	-	-	-	-	-	(6,577)	(6,577)
Conversion of Convertible Unsecured Loan Stock ("CULS")	108	4,118	-	(138)	-	-	4,088
Shares issued	323	15,079	-	-	-	-	15,402
Net return attributable to equity shareholders	-	-	-	-	159,338	7,839	167,177
Balance at 30 April 2017	14,284	160,243	16,158	1,169	527,523	13,905	733,282

 

Unaudited Condensed Balance Sheet

	31 October 2017	31 October 2016	30 April 2017
	£'000s	£'000s	£'000s
Fixed assets
Investments	844,926	688,877	761,269
Current assets
Debtors	1,150	3,792	4,462
Cash at bank and short-term deposits	10,779	12,410	10,061
	11,929	16,202	14,523
Creditors: amounts falling due within one year
Loans	(12,000)	-	-
Creditors	(7,382)	(6,556)	(7,813)
	(19,382)	(6,556)	(7,813)
Net current (liabilities)/assets	(7,453)	9,646	6,710
Total assets less current liabilities	837,473	698,523	767,979
Creditors: amounts falling due after more than one year
Convertible Unsecured Loan Stock ("CULS")	(32,175)	(38,552)	(34,697)
Net assets	805,298	659,971	733,282
Capital and reserves
Called-up share capital	14,587	13,971	14,284
Share premium account	174,991	146,048	160,243
Capital redemption reserve	16,158	16,158	16,158
Equity component of CULS	1,078	1,306	1,169
Capital reserves	584,918	470,299	527,523
Revenue reserve	13,566	12,189	13,905
Total shareholders' funds	805,298	659,971	733,282
Net asset value per share (basic) - pence	1,380.16	1,180.96	1,283.42
Net asset value per share (diluted) - pence	1,357.10	1,165.08	1,263.52

 

Unaudited Condensed Statement of Cash Flows

	Half-year ended	Half-year ended
	31 October 2017	31 October 2016
	£'000s	£'000s
Cash flows from operating activities before dividends received and interest paid	(2,630)	(2,981)
Dividends received	6,196	5,649
Interest paid	(813)	(887)
Cash flows from operating activities	2,753	1,781
Investing activities
Purchases of investments	(112,245)	(101,464)
Sales of investments	90,733	97,666
Other capital charges	(12)	(11)
Cash flows from investing activities	(21,524)	(3,809)
Cash flows before financing activities	(18,771)	(2,028)
Financing activities
Ordinary dividends paid	(4,751)	(4,334)
Proceeds from issue of shares	12,249	5,072
Movement on loans	12,000	-
Cash flows from financing activities	19,498	738
Net movement in cash and cash equivalents	727	(1,290)
Cash and cash equivalents at the beginning of the period	10,061	12,249
Effect of movement in foreign exchange	(9)	1,451
Cash and cash equivalents at the end of the period	10,779	12,410
Represented by:
Cash at bank and short-term deposits	10,779	12,410

 

Unaudited Notes on the Condensed Accounts

1    Significant accounting policies

These condensed financial statements have been prepared on a going concern basis in accordance with the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority, FRS102, Interim Financial Reporting (FRS104) issued by the FRC in March 2015 and the revised Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" (SORP) issued by the AIC in November 2014 and updated in January 2017.

The accounting policies applied for the condensed set of financial statements are set out in the Company's annual report for the year ended 30 April 2017.

2    Dividend

The Directors have declared an interim dividend in respect of the year ended 30 April 2018 of 4.4p per share, payable on 31 January 2018 to all shareholders on the register at close of business on 5 January 2018. The amount of this dividend will be £2,577,000 based on 58,573,326 shares in issue at 11 December 2017. This amount has not been accrued in the results for the half-year ended 31 October 2017.

3    Results

The results for the half-year ended 31 October 2017 and 31 October 2016, which are unaudited and which have not been reviewed by the Company's auditors pursuant to the Auditing Practices Board guidance on 'Review of Interim Financial Information', constitute non-statutory accounts within the meaning of Section 434 of the Companies Act 2006. The latest published accounts which have been delivered to the Registrar of Companies are for the year ended 30 April 2017; the report of the auditors thereon was unqualified and did not contain a statement under Section 498 of the Companies Act 2006. The condensed financial statements shown above for the year ended 30 April 2017 are an extract from those accounts.

The report and accounts for the half-year ended 31 October 2017 will be posted to shareholders and made available on the website www.fandcglobalsmallers.com shortly. Copies may also be obtained from the Company's registered office, Exchange House, Primrose Street, London EC2A 2NY.

Legal Entity Identifier: 2138008RRULYQP8VP386

By order of the Board

F&C Investment Business Limited, Secretary

Exchange House, Primrose Street, London EC2A 2NY

13 December 2017

 

Directors' Statement of Principal Risks and Uncertainties

Most of the Company's principal risks and uncertainties are market related and no different from those of other investment trusts investing primarily in listed equities. They are described in more detail under the heading "Principal risks and future prospects" within the strategic report in the Company's annual report for the year ended 30 April 2017. They have not changed materially since the date of that report and are not expected to change materially for the remainder of the Company's financial year.

The risks include having an inappropriate strategy in relation to investor needs; failure on the part of the Manager to continue to operate effectively; unfavourable markets or inappropriate asset allocation, sector and stock selection and currency exposure leading to investment underperformance and its effect on share price discount/premium and dividends.  Also included are risks in relation to errors, fraud or control failures at service providers, or loss of data through cyber-threats or business continuity failure. 

Statement of Directors' Responsibilities in Respect of the Half-Yearly Financial Report

In accordance with Chapter 4 of the Disclosure Guidance and Transparency Rules the Directors confirm that to the best of their knowledge:

·       the condensed set of financial statements has been prepared in accordance with applicable UK Accounting Standards on a going concern basis, and gives a true and fair view of the assets, liabilities, financial position and net return of the Company;

·       the half-yearly report includes a fair review of the development and performance of the Company and important events that have occurred during the first six months of the financial year and their impact on the financial statements;

·       the Directors' Statement of Principal Risks and Uncertainties shown above is a fair review of the principal risks and uncertainties for the remainder of the financial year;

·       the half-yearly report includes details on related party transactions that have taken place in the first six months of the financial year; and

On behalf of the Board

Anthony Townsend

Chairman

13 December 2017

 

END

 

 

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