Final Results
Aberforth Split Level Income Trust plc
Audited Annual Results for the year to 30 June 2019
The following is an extract from the Company's Annual Report and Financial Statements for the year to 30 June 2019. The Annual Report is expected to be posted to shareholders on or before 5 August 2019. Members of the public may obtain copies from Aberforth Partners LLP, 14 Melville Street, Edinburgh EH3 7NS or from its website: www.aberforth.co.uk. A copy will also shortly be available for inspection at the National Storage Mechanism at: www.morningstar.co.uk/uk/NSM.
FINANCIAL HIGHLIGHTS
| Performance (Total Return) | Year to 30 June 2019 | |
| ------------ | ||
| Total Assets | -9.7% | |
| Ordinary Share NAV | -13.1% | |
| Ordinary Share Price | -18.4% | |
| ZDP Share NAV | +3.6% | |
| ZDP Share Price | +4.7% | |
| Dividends Declared | ||
| Second Interim Dividend | 2.71p | |
| Special Dividend | 0.19p | |
| The second interim dividend and the special dividend have an ex-dividend date of 8 August 2019, record date of 9 August 2019 and pay date of 30 August 2019. | ||
The investment objective of Aberforth Split Level Income Trust plc (ASLIT) is to provide Ordinary Shareholders with a high level of income, with the potential for income and capital growth, and to provide Zero Dividend Preference (ZDP) Shareholders with a pre-determined final capital entitlement of 127.25p on the planned winding-up date of 1 July 2024. ASLIT is managed by Aberforth Partners LLP.
CHAIRMAN’S STATEMENT
Introduction
I present the second annual report of Aberforth Split Level Income Trust plc (“ASLIT†or “the Companyâ€) for the year to 30 June 2019.
The global macro challenges highlighted in the Half Yearly Report continue to cloud investor sentiment and equity returns. Expectations for monetary policy have shifted, with interest rate increases now much less likely in the medium term in both the US and Europe. Stockmarkets have taken this latter development well, though it has presented an unfavourable backdrop for the Managers’ value investment style.
The situation closer to home offers no respite. The uncertainty of Brexit persists, with the 29 March 2019 exit date extended to 31 October 2019. A change in Conservative Party leadership, and therefore prime minister, alongside a poor showing from the two traditionally dominant political parties in the recent European Parliament elections, provides further uncertainty.
Performance
Against this background, the FTSE All-Share Index, which is representative of larger UK listed companies, recorded a total return of +0.6% in the year to 30 June 2019. The Numis Smaller Companies Index (excluding Investment Companies) (“NSCI (XIC)â€), which defines ASLIT’s opportunity base of small UK quoted companies, generated a total return of -5.4% over the same period.
Influenced by the continued challenges to the value investment style and a portfolio emphasis on smaller companies, ASLIT’s total assets total return, which captures the Company’s ungeared portfolio performance, was -9.7% during the year. The scale of the under-performance is at odds with the fundamental progress of the investee companies, which points to steady progress overall. Geared by the Zero Dividend Preference (ZDP) Shares, the NAV total return of the Ordinary Shares was -13.1%. This encapsulates the return attributable to equity shareholders of -13.4p per Ordinary Share in the year to 30 June 2019, together with the effect of the reinvestment of previously declared dividends.
Despite the decline in the portfolio value, the projected final cumulative cover of the ZDP shares was 3.1 times at the end of the reporting period.
Further detail on portfolio performance is provided in the Managers’ Report.
Earnings and Dividends
ASLIT generated a Revenue Return per Ordinary share of 5.14p for the year to 30 June 2019. As discussed in the Managers’ Report, dividend growth from small UK quoted companies has been strong since the financial crisis, but there is evidence that the rate of growth is reverting to more historical norms. This slowdown is unsurprising given the length of the current cycle, Brexit uncertainty and the more challenging economic backdrop. It is too early to conclude whether this heralds a more meaningful trend or is a temporary blip.
The Company’s policy is to distribute a significant proportion of its net revenue in the form of dividends to Ordinary Shareholders. Consistent with this, the Board has declared a second interim dividend of 2.71p per Ordinary Share for the year to 30 June 2019. Together with the first interim dividend of 1.45p paid on 7 March 2019, the total underlying dividend with respect to the year is 4.16p per Ordinary Share, 4% higher than last year.
In addition, the Board has declared a special dividend of 0.19p per Ordinary Share for the year to 30 June 2019. This reflects the special income contribution from investee companies, not all of which may be expected to recur, and the requirement to retain no more than 15% of total income in order to retain the benefits of investment trust status.
After accounting for the second interim dividend and the special dividend, retained revenues were approximately 1.6p per Ordinary Share at 30 June 2019. At this stage in the Company’s planned life, the Board believes that this is a prudent level of retention given the continuing volatility of markets and on-going economic uncertainties. The ability to retain revenue reserves is one of the main structural advantages of investment trusts when compared with open-ended funds.
The second interim dividend of 2.71p per Ordinary Share and the special dividend of 0.19p per Ordinary Share will be paid on 30 August 2019 to Ordinary Shareholders on the register on 9 August 2019. The ex dividend date is 8 August 2019.
Your Company operates a Dividend Reinvestment Plan. Details of the plan, including the Form of Election, are available from Aberforth Partners LLP or on the website, www.aberforth.co.uk.
Board changes
As announced on 24 April 2019, the Board is delighted to welcome Lesley Jackson as a Director. Lesley is a chartered accountant with significant financial and commercial experience, which the Board looks forward to benefiting from in the coming years.
Separately, I have informed my colleagues of my decision not to stand for re-election at the forthcoming Annual General Meeting. I was initially appointed as Chairman of the Company’s predecessor trust, Aberforth Geared Income Trust plc, on 30 March 2010 and it has been my privilege to serve the Shareholders of both companies.
Subject to his re-election, it is intended that Angus Gordon Lennox will become Chairman at the closure of the Annual General Meeting on 24 October 2019. Angus has been a Director of the Company since April 2017 and has a wealth of knowledge of the investment industry, particularly investment companies.
I am confident that Shareholders’ interests will continue to be well served by the strong and independent board led by Angus following my retirement.
Annual General Meeting
The AGM for the Company will be held on 24 October 2019 at 11.00 a.m. at 14 Melville Street, Edinburgh EH3 7NS. Details of the resolutions to be considered by Shareholders are set out in the Notice of the Meeting.
Outlook
The last twelve months have demonstrated how volatile equity returns can be, not least from a portfolio of small UK quoted companies. This serves as a reminder of the long-term approach required for equity investment, particularly in small quoted companies, and of the advantages of investment companies’ closed-ended structure.
The continued uncertainty of Brexit has brought the UK its third prime minister in just over three years and has heightened uncertainty for those considering investing in the UK. It is impossible to say when the clouds will lift, but evidence suggests that small UK quoted companies offer attractive value for those prepared to take more than a short term view. The Company has been in existence for only two years, but the Managers run other funds that have histories extending back to 1990 and that have a significant overlap with the Company’s portfolio. The historical price earnings ratios of those funds’ portfolios at 30 June 2019 had never been lower relative to the NSCI (XIC).
This cheapness comes with the Company’s investment strategy, which is based on the Managers’ commitment to a value investment philosophy. Value as an investment style will continue to influence portfolio returns but can be out of favour for prolonged periods, such as the decade since the financial crisis. However, it has provided superior returns compared with those of the NSCI (XIC) over the longer term. Consequently, in monitoring the Company’s progress, the Board considers it important that the portfolio remains invested in accordance with the value style. This would seem particularly relevant today when so large a majority of small company investment trusts and open-ended funds follow the currently fashionable growth investment style. While acknowledging the challenge that currently accompanies the Company’s investment strategy, the Board is also conscious that some of the most attractive opportunities in equity markets require a contrarian approach and so looks to the future with optimism.
Jonathan Cartwright
Chairman
29 July 2019
jonathan.cartwright@aberforth.co.uk
MANAGERS’ REPORT
Introduction
Over the twelve months to 30 June 2019 the FTSE All-Share’s total return was a lacklustre +0.6%. This, though, compared well with the result for small companies, with the NSCI (XIC) down by 5.4% in total return terms. ASLIT’s total asset total return was -9.7%. The Investment Performance section of this report provides detail on specific factors that affected the trust’s performance.
At a more general level, UK equities fared very differently in the first six months of ASLIT’s financial year from the second six months. The first half saw share prices fall, with the FTSE All-Share down by 11.0% and the NSCI (XIC) by 14.4%. In this period, financial markets were bedevilled by concerns about slowing global growth, as the trade war between the US and China escalated and as the Federal Reserve, despite pressure from the US president, seemed committed to tighter monetary policy.
In contrast, the second half of ASLIT’s financial year witnessed a robust recovery: the FTSE All-Share and the NSCI (XIC) generated total returns of 13.0% and 10.5% respectively. An important influence on these numbers was, of course, the depressed starting point. However, economic and political developments also turned more positive. Sentiment improved as planned tariff increases were postponed, followed in January by a dovish shift by Jay Powell, chairman of the Federal Reserve, who averred patience and sensitivity to “economic and financial developmentsâ€. With the “Powell Put†born, equities and other risk assets around the world commenced their rally.
The second half’s mood of optimism was not without challenge. In May, Donald Trump’s tweets brought trade wars back to the forefront of investors’ minds. Tariff increases were accompanied by a more aggressive line on Huawei and by a mooted extension of sanctions to encompass another $325bn of goods imported from China. With collateral damage to the export-oriented economies of Europe and the emerging markets, these developments reawakened concerns about growth around the world. The period drew to a close with a G20 summit in Japan, in which President Trump appeared to moderate his stance with regard to China and thus to raise hopes of a trade deal.
While equities gyrated over the twelve months in response to macro-economic developments, government bonds were more consistently strong. From the end of September 2018, yields started to decline. In the UK, the ten year gilt yield slipped back below 1%, while the German equivalent is once again negative. In the US, the ten year treasury yield fell from 3.2% to 2.1% at the end of June. This move took the US yield curve – longer term yields less shorter term yields – into negative territory on some definitions. With yield curve inversion a historically useful indicator of recession, such developments would seem to portend a gloomy outlook for the global economy.
The UK meanwhile continues to contend with the additional complexity of Brexit. As deep uncertainty lingers and both ends of the political spectrum give cause for concern, sterling has weakened again. This has hampered the performance of the domestically oriented NSCI (XIC) in relation to the much more international large company indices. More fundamentally, the saga is also affecting economic activity: recent manufacturing surveys have been weak, which must reflect the unwinding of inventories that were built up in anticipation that the UK would leave the EU as planned on 29 March. Nevertheless, macro economic data, on balance, point to an economy that is making steady if unspectacular progress. This view is backed up by the results reported by small UK quoted companies.
In the first quarter of 2019, 115 non resources companies that are tracked closely by the Managers reported their final results to 31 December 2018. Sales and profits of these companies rose by roughly 6%, while the ratio of capital expenditure to depreciation – a measure of how actively businesses are investing – was 1.7x, a level that continues to suggest that companies are investing for future growth. The Managers estimate that sales and profits will grow by 5% in 2019 and that the investment ratio will be a healthy 1.4x, though some of the capital will be deployed in companies’ operations outside the UK. These estimates, which do assume that a “hard Brexit†is avoided, point to an acceptable outlook for a useful cross-section of the universe of small quoted companies and belie the depressed valuation ratios for the portfolio and asset class described later in this report.
Investment Performance
Over the twelve months to 30 June 2019, ASLIT’s total assets total return was -9.7%. The opportunity base of the NSCI (XIC) produced a total return of -5.4%. The following paragraphs provide detail on the important influences on ASLIT’s performance.
Style
The relapse in government bond yields described in the introduction represented an unfavourable backdrop for the value style: all else being equal, lower risk free rates imply lower discount rates for valuing equities, which favours those stocks whose cash flows are biased to the more distant future. Such stocks are growth stocks, which have benefited from the extraordinary monetary policies that have persisted since the global financial crisis of 2007 and 2008. The period under review was particularly hostile for value: in the 64 year history of the NSCI (XIC), there are only three instances of the twelve months from 1 July to 30 June being more difficult for the style. Though not insurmountable, such conditions are a challenge to the relative performance of the portfolio. The Managers believe that it is important to remain true to the value investment philosophy. The number of UK small company investment trusts and funds following such an approach has dwindled as the growth style has prospered – the resultant skew is intriguing, at least for those with a degree of contrarian spirit. History supports mean reversion and suggests that it is rarely “different this timeâ€.
Size
| Market capitalisation range: | <£101m | £101m-£350m | £351m-£600m | £601m-£1,000m | >£1,000m |
| ------------ | ------------ | ------------ | ------------ | ------------ | |
| ASLIT distribution | 4% | 28% | 28% | 24% | 16% |
| Tracked universe distribution | 1% | 13% | 20% | 27% | 38% |
| Tracked universe 2019 EV/EBITA | 8.0x | 8.1x | 11.0x | 12.1x | 13.6x |
As the table shows, the portfolio retains its bias to the smaller small companies within the “tracked universeâ€, which represents the 276 small caps that the Managers follow closely and which accounts for 98% by value of the entire NSCI (XIC). Those small companies with market capitalisations of £601m or more (the two columns to the right) represent the overlap with the FTSE 250. The relative performance of the FTSE SmallCap against the FTSE 250 is therefore a useful gauge of whether ASLIT’s size positioning has been beneficial. In the twelve months under review, mid caps performed better than the smaller small companies, which, all else being equal, was a drag on the portfolio’s returns. The underperformance of the smaller smalls was particularly severe in June. Beyond the usual ups and downs of individual stocks, it would seem likely that the well-publicised problems of a high profile portfolio management house’s open-ended funds intensified the aversion to less liquid asset classes.
As the final row in the table demonstrates, the positioning is a function of the Managers’ value investment style: smaller small companies are much more modestly rated than larger small companies. The size discount has been particularly pronounced since the financial crisis as investors in general run shy of less liquid stocks. Concerns about illiquidity have trumped fundamentals: profits growth over the next couple of years from the smaller small companies (those with market capitalisations below £601m) is estimated to be no lower than that from larger small companies. With its closed-ended structure, ASLIT would seem well placed to benefit from any narrowing of the size discount.
Sector
The Brexit process created a sector opportunity within the NSCI (XIC). As sterling weakened in the aftermath of the referendum, overseas facing sectors substantially out-performed those parts of the stockmarket that are more reliant on the domestic economy. The resultant valuation gap encouraged a bias in the portfolio towards domestically oriented companies. That positioning remained in place at the end of June 2019: 63% of the underlying revenues of the portfolio’s holdings were generated in the domestic economy, compared with 60% for the NSCI (XIC). This shift benefited the portfolio’s relative performance: the domestics, while still relatively weak since the referendum, have out-performed the overseas companies since August 2018. Resilient results, consistent with the analysis in the Introduction, have helped, though, with Brexit still unresolved, there is inevitably scope for further volatility.
Balance sheets
| Based on 2019 estimates | Net cash | Net debt/EBITDA < 2x | Net debt/EBITDA > 2x | Loss makers |
| ------------ | ------------ | ------------ | ------------ | |
| ASLIT | 22% | 60% | 18% | 0% |
| Tracked universe | 29% | 39% | 27% | 5% |
While balance sheets remain strong across the NSCI (XIC), the past five years or so have seen leverage ratios rise. For example, since 2013 the proportion of the tracked universe with net cash on the balance sheet has fallen from 33% to 29%. These moves can be interpreted in two ways. More positively, they display a confidence on the part of boards to invest for future growth; more negatively, they would leave the companies more vulnerable to the next economic downturn. While circumstances inevitably change, the Managers are comfortable that current funding structures are on the whole appropriate to the underlying businesses. It is noteworthy, however, that lending standards and credit conditions continue to tighten in sectors such as retail, construction and property.
Income
| Down | No change | Increase | Other |
| ------------ | ------------ | ------------ | ------------ |
| 11 | 19 | 33 | 2 |
The table above splits ASLIT’s holdings into categories that are determined by each company’s most recent dividend announcement; it excludes special dividends. In comparison with the corresponding analysis in ASLIT’s Half Yearly Report as at 31 December 2018, the notable change is an increase, from six to eleven, in the number of “cuttersâ€. This development is consistent with the suggestion in the report that 2018 witnessed the start of a deceleration in the rate of dividend growth that the NSCI (XIC) has enjoyed in recent years. While abundant special dividends and near double-digit dividend growth might have passed, the overall picture for the portfolio, and indeed the investment universe, remains encouraging. In comparison with the FTSE 100, income within the NSCI (XIC) remains much less concentrated and dividend cover – at 2.1x for the portfolio, 2.2x for the NSCI (XIC) and 1.6x for the FTSE All-Share – is considerably higher.
Corporate activity
It is likely that uncertainties related to Brexit have affected corporate activity within the UK, with sterling’s volatility an understandable distraction for overseas buyers. In calendar 2018, only 14 bids for constituents of the NSCI (XIC) were completed or outstanding at 31 December, down from 17 in 2017 and 33 two years before that. In the first six months of 2019, there are signs of a pick-up, with nine bids announced. One of those was a holding in ASLIT’s portfolio. With vast sums of cash in the hands of private equity, it is likely that Brexit resolution would reduce uncertainty about sterling and bring about an increase in the frequency of M&A. A similar argument might be applied to the IPO market, which remains becalmed: 6 were completed in the first six months of 2019, none of which were of interest to ASLIT.
Turnover
Portfolio turnover through the twelve months to 30 June 2019 was low, at 12%. The longer term average for portfolios run by the Managers is 33%. The depressed activity is influenced by the style dynamics previously described: with the value style out of favour, few holdings were re-rated close to their price targets and there was consequently little incentive to reduce the positions. The Managers are careful not to mix up cause and effect, but history suggests that better relative performance tends to be associated with higher rates of portfolio turnover.
Active share
Active share is a measure of how different a portfolio is from an index. It is calculated as half of the sum of the absolute differences between each stock’s weighting in an index and its weighting in the portfolio. A higher active share would indicate that a portfolio has a higher chance of performing differently from the index, for better or worse. The Managers target a ratio of at least 70% for ASLIT in relation to the NSCI (XIC) and at 30 June 2019 the ratio was 80%.
Valuations
| Portfolio Characteristics | 30 June 2019 | 30 June 2018 | ||
| ASLIT | NSCI (XIC) | ASLIT | NSCI (XIC) | |
| ----------- | ------------ | ------------ | ------------ | |
| Number of companies | 65 | 349 | 69 | 344 |
| Weighted average market capitalisation | £605m | £883m | £655m | £889m |
| Price earnings ratio or PE (historic) | 9.6x | 13.8x | 11.3x | 13.9x |
| Dividend yield (historic) | 5.0% | 3.2% | 4.4% | 2.9% |
| Dividend cover | 2.1x | 2.2x | 2.0x | 2.5x |
The table above shows a reduction in valuations as a result of the weakness of equity markets over the past twelve months. Over a slightly longer timeframe, the de-rating has been more severe: at the end of June 2015, the year before the EU referendum, the NSCI (XIC)’s historical PE was 15.7x. To provide some historical perspective on ASLIT’s valuation, it is worth referring to funds run by the Managers since 1990. These have a high degree of overlap with ASLIT and, indeed, the same historical PE of 9.6x at 30 June 2019. The average PE of these funds since 1990 has been 11.9x. The current 20% discount to that average is wide and has typically only been exceeded in times of recession. In comparison with the NSCI (XIC)’s PE, the funds are presently on a 30% discount. This is the widest in their history and compares with an average over the 29 years of 11%. Such a divergence is consistent with the recent struggles of the value investment style in comparison with growth and highlights the opportunities within the small cap world for those prepared to embrace smaller small companies and to look beyond Brexit.
The following table focuses on prospective valuations, using the Managers’ preferred metric, the ratio of enterprise value to earnings before interest, tax and amortisation (EV/EBITA). Again, the portfolio’s valuation advantage is obvious against the index, here represented by the tracked universe. Also shown are the EV/EBITA ratios for a collection of 47 growth stocks, none of which are currently held in the portfolio but several of which have been holdings in the past. These stocks have performed strongly over the past six months and, on the basis of estimates for 2019, are on a 98% premium to ASLIT’s portfolio.
| EV/EBITA | 2018 | 2019 | 2020 |
| ----------- | ----------- | ----------- | |
| ASLIT | 9.8x | 9.3x | 8.4x |
| Tracked universe (276 stocks) | 12.2x | 11.6x | 10.6x |
| - 47 growth stocks | 19.9x | 18.3x | 16.5x |
| - 229 other stocks | 11.1x | 10.5x | 9.7x |
Conclusion & outlook
In explaining investment returns since the financial crisis, the Managers’ reports have made frequent reference to the hostile climate for the value investment style. As explained in the Style section above, the Managers are inclined to view value’s struggles as a function of financial conditions, specifically the extraordinary monetary policies deployed by many central banks. By extension, one means by which today’s style headwinds might turn to tailwinds would be for an improvement in the outlook for real economic growth, in which context a resolution to the trade wars and Brexit would undoubtedly be helpful. Alternatively, a bit less complacency about inflation could also prove the catalyst. The risk of higher inflation might lurk in the prospect of interest rate cuts for a US economy close to full employment, but the timing of a turn in sentiment is difficult to pinpoint. What is clear is that when the stockmarket’s mood changes it does so abruptly: within the NSCI (XIC), value has out-performed growth by an average of 3.6% per annum since 1955; in that 768 month period, the value premium would have been forgone had just the best 39 months for the style been missed.
In the meantime, the Managers continue to focus on bottom-up stock selection in seeking to achieve the investment objective. This is conducted through an investment process that has been tried and tested for almost 30 years and that is based on the thorough fundamental analysis of individual companies, team-based decision scrutiny of each buy and sell decision and discreet engagement with investee companies.
At the current time, the process is being applied to a universe of small companies in which valuation anomalies abound: opportunities result from concerns about domestic exposure in the wake of the EU referendum and from the deep aversion to smaller small companies since the financial crisis. In view of recent unfortunate events in the open-ended fund world, this latter factor might become even more pertinent, but ASLIT’s closed-ended structure is better suited to exploiting the illiquidity premium. Another influence on today’s stockmarket valuations is the fascination for “disruptive business modelsâ€. This does not only represent risk to the value investor. The narrow focus on disruption, which benefits the valuations of the growth stocks in the table above, entails that resilient “old economy†franchises are overlooked and languish on attractive valuations.
Within the portfolio there are some holdings whose investment cases are off track, but that has been the case whether the value style is in the doldrums or the ascendancy over the Managers’ past 29 years. However, across the portfolio as a whole, profit growth compares well with that of the NSCI (XIC) on the basis of current estimates. While risks clearly remain, not least to economic activity from a badly handled Brexit, the stockmarket is currently configured to allow the value investor to benefit from a pronounced valuation advantage without sacrifice in terms of fundamental prospects. These conditions offer the prospect of attractive returns over the coming years.
Aberforth Partners LLP
Managers
29 July 2019
TOTAL RETURN PERFORMANCE
| Ordinary Shares | ZDP Shares | ||||
| Total Assets1 | NAV2 | Share Price3 | NAV4 | Share Price5 | |
| ------------ | ------------ | ------------ | ------------ | ------------ | |
| Year to 30 June 2019 | -9.7% | -13.1% | -18.4% | 3.6% | 4.7% |
| Annualised: - since inception |
-2.4% |
-3.9% |
-9.3% |
3.3% |
5.6% |
| Cumulative: - since inception |
-4.7% |
-7.7% |
-17.9% |
6.6% |
11.5% |
ORDINARY SHARE
| Net Asset Value per Share | Share Price |
Discount / (Premium) |
Ordinary Dividends per Share | Special Dividends per Share |
Ongoing Charges6 |
Gearing7 |
|
| ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | |
| 30 June 2019 | 86.7p | 77.0p | 11.2% | 4.16p | 0.19p | 1.2% | 30.7% |
| 30 June 2018 | 104.7p | 99.2p | 5.3% | 4.00p | 0.60p | 1.1% | 24.6% |
At inception an Ordinary Share had a NAV of 100p and a gearing7 level of 25%.
ZERO DIVIDEND PREFERENCE SHARE (ZDP SHARE)
| Net Asset Value per Share | Share Price |
Discount / (Premium) |
Return per Share |
Projected Final Cumulative Cover8 | Redemption Yield9 |
|
| ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | |
| 30 June 2019 | 106.6p | 111.5p | (4.6%) | 3.7p | 3.1x | 2.7% |
| 30 June 2018 | 102.9p | 106.5p | (3.5%) | 3.6p | 3.5x | 3.0% |
At inception a ZDP Share had a NAV of 100p, a Projected Final Cumulative Cover8 of 3.4x, and a Redemption Yield9 of 3.5%.
HURDLE RATES10
| Ordinary Shares Hurdle Rates to return |
ZDP Shares Hurdle Rates to return |
||||
| 100p | Share Price | Zero Value | 127.25p | Zero Value | |
| ------------ | ------------ | ------------ | ------------ | ------------ | |
| 30 June 2019 | 4.5% | 0.6% | -21.2% | -21.2% | -69.8% |
| 30 June 2018 | 1.2% | 1.1% | -20.0% | -20.0% | -64.0% |
| Inception | 1.5% | n/a | -17.0% | -17.0% | -57.2% |
REDEMPTION YIELDS & TERMINAL NAV’s (ORDINARY SHARES)
As at 30 June 2019
| Ordinary Share Redemption Yields11 Dividend Growth (per annum) |
|||||
| Capital Growth (per annum) | 0.0% | +2.5% | +5.0% | +7.5% | Terminal NAV12 |
| ------------ | ------------ | ------------ | ------------ | ------------ | |
| 0% | 5.6% | 6.0% | 6.5% | 7.0% | 74.0p |
| +2.5% | 8.8% | 9.2% | 9.6% | 10.0% | 88.0p |
| +5.0% | 11.9% | 12.2% | 12.6% | 13.0% | 103.4p |
| +7.5% | 14.9% | 15.2% | 15.6% | 16.0% | 120.4p |
The valuation statistics in the tables above are projected, illustrative and do not represent profit forecasts. There is no guarantee these returns will be achieved.
1-12 Refer to Glossary
DIRECTORS’ RESPONSIBILITY STATEMENT
The Directors who were in office at the date of approving the financial statements confirm to the best of their knowledge that:
(a) the financial statements, which have been prepared in accordance with applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit/loss of the Company;
(b) the Strategic Report includes a fair review of the development and performance of the business and financial position of the Company, together with a description of the principal risks and uncertainties that it faces; and
(c) the Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for Shareholders to assess the Company’s performance, business model and strategy.
On behalf of the Board
Jonathan Cartwright
Chairman
29 July 2019
PRINCIPAL RISKS AND RISK MANAGEMENT
The Board has established an on-going process for identifying, evaluating and managing the principal risks faced by the Company. This process was in operation during the year and continues in place up to the date of this report.
Investment in small companies is generally perceived to carry more risk than investment in large companies. While this is reasonable when comparing individual companies, it is much less so when comparing the risks inherent in diversified portfolios of small and large companies. In addition, the Company has a simple capital structure and outsources all the main operational activities to recognised, well-established firms.
The principal risks faced by the Company, together with the approach taken by the Board towards them, have been summarised below.
(i) Investment policy/performance risk
The investment portfolio is exposed to share price movements owing to the nature of the Company’s investment policy and strategy. The performance of the investment portfolio will be influenced by market related risks including market price and liquidity. The Board’s aim is to achieve the investment objective by ensuring the investment portfolio is managed in accordance with the policy and strategy. The Board has outsourced portfolio management to experienced Managers with a clearly defined investment philosophy and investment process. The Board receives regular and detailed reports on investment performance. Senior representatives of the Managers attend each Board meeting. Peer group performance is also regularly monitored by the Board.
(ii) Structural conflicts of interest
The different rights and expectations of the holders of Ordinary Shares and the holders of ZDP Shares may give rise to conflicts of interest between them. While the Company’s investment objective and policy seeks to strike a balance between the interest of both classes of Shareholder, there can be no guarantee that such a balance will be achieved and maintained during the life of the Company.
(iii) Significant fall in investment income
A significant fall in investment income could lead to the inability to provide a high level of income and income growth. The Board receives regular and detailed reports from the Managers on income performance together with income forecasts.
(iv) Loss of key investment personnel
The Board believes that a risk exists in the loss of key investment personnel at the Managers. The Board recognises that the collegiate approach employed by the Managers mitigates this risk. Board members are in regular contact with the partners and staff of the Managers and monitor personnel changes.
(v) Regulatory risk
Breach of regulatory rules could lead to suspension of the Company’s share price listings, financial penalties or a qualified audit report. Breach of Section 1158 of the Corporation Tax Act 2010 could lead to the Company losing investment trust status and, as a consequence, any capital gains would then be subject to capital gains tax. The Board reviews regular reports from the Secretaries to monitor compliance with regulations.
The Income Statement, Reconciliation of Movements in Shareholders’ Funds, Balance Sheet and Cash Flow Statement are set out below:-
INCOME STATEMENT
Year to 30 June 2019
(audited)
| Year to | Period to | |||||
| 30 June 2019 | 30 June 2018 | |||||
| Revenue | Capital | Total | Revenue | Capital | Total | |
| £000 | £000 | £000 | £000 | £000 | £000 | |
| Net (losses)/gains on investments | - | (31,970) | (31,970) | - | 6,430 | 6,430 |
| Investment income | 10,639 | - | 10,639 | 11,238 | 751 | 11,989 |
| Investment management fee | (507) | (1,183) | (1,690) | (539) | (1,258) | (1,797) |
| Portfolio transaction costs | - | (274) | (274) | - | (1,5941) | (1,594) |
| Other expenses | (357) | - | (357) | (356) | - | (356) |
| -------- | -------- | -------- | -------- | -------- | -------- | |
| Net return before finance costs and tax | 9,775 | (33,427) | (23,652) | 10,343 | 4,329 | 14,672 |
| Finance costs: | ||||||
| Appropriation to ZDP Shares | - | (1,764) | (1,764) | - | (1,704) | (1,704) |
| Interest expense and overdraft fee | (5) | (11) | (16) | (6) | (15) | (21) |
| -------- | -------- | -------- | -------- | -------- | -------- | |
| Return on ordinary activities before tax | 9,770 | (35,202) | (25,432) | 10,337 | 2,610 | 12,947 |
| Tax on ordinary activities | - | - | - | - | - | - |
| -------- | -------- | -------- | -------- | -------- | -------- | |
| Return attributable to Equity Shareholders | 9,770 | (35,202) | (25,432) | 10,337 | 2,610 | 12,947 |
| ====== | ======= | ======= | ====== | ======= | ======= | |
| Returns per Ordinary Share | 5.14p | (18.50)p | (13.36)p | 5.43p | 1.37p | 6.80p |
1 Includes £1,133,000 in respect of stamp duty incurred on the transfer of securities from Aberforth Geared Income Trust plc to ASLIT.
The Board declared on 29 July 2019 a second interim dividend of 2.71p per Ordinary Share and a special dividend of 0.19p per Ordinary Share. The Board also declared on 24 January 2019 an interim dividend of 1.45p per Ordinary Share.
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. No operations were acquired or discontinued in the period. A Statement of Comprehensive Income is not required as all gains and losses of the Company have been reflected in the above statement.
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS’ FUNDS
Year to 30 June 2019
(audited)
| Share | Share | Special | Capital | Revenue | ||
| capital | premium | reserve | reserve | reserve | Total | |
| £000 | £000 | £000 | £000 | £000 | £000 | |
| Balance as at 30 June 2018 | 1,902 | - | 187,035 | 2,610 | 7,673 | 199,220 |
| Return on ordinary activities after tax | - | - | - | (35,202) | 9,770 | (25,432) |
| Equity dividends paid | - | - | - | - | (8,847) | (8,847) |
| -------- | -------- | -------- | -------- | -------- | -------- | |
| Balance as at 30 June 2019 | 1,902 | - | 187,035 | (32,592) | 8,596 | 164,941 |
| ====== | ====== | ====== | ====== | ====== | ====== |
| Period from 19 April 2017 to 30 June 2018 | ||||||
| Share | Share | Special | Capital | Revenue | ||
| capital | premium | reserve | reserve | reserve | Total | |
| £000 | £000 | £000 | £000 | £000 | £000 | |
| Balance as at 19 April 2017 | - | - | - | - | - | - |
| Return on ordinary activities after tax | - | - | - | 2,610 | 10,337 | 12,947 |
| Equity dividends paid | - | - | - | - | (2,664) | (2,664) |
| Issue of Ordinary Shares | 1,902 | 188,348 | - | - | - | 190,250 |
| Ordinary Share issue costs | - | (1,275) | - | - | - | (1,275) |
| Share Premium cancellation | - | (187,035) | 187,035 | - | - | - |
| Cost of Share Premium cancellation | - | (38) | - | - | - | (38) |
| Issue of redeemable Shares | 50 | - | - | - | - | 50 |
| Redemption of redeemable Shares | (50) | - | - | - | - | (50) |
| -------- | -------- | -------- | -------- | -------- | -------- | |
| Balance as at 30 June 2018 | 1,902 | - | 187,035 | 2,610 | 7,673 | 199,220 |
| ====== | ====== | ====== | ====== | ====== | ====== |
BALANCE SHEET
As at 30 June 2019
(audited)
| 30 June 2019 | 30 June 2018 | |
| £000 | £000 | |
| Fixed assets | ||
| Investments at fair value through profit or loss | 213,581 | 242,967 |
| ---------- | ---------- | |
| Current assets | ||
| Debtors | 1,067 | 1,387 |
| Cash at bank | 1,062 | 3,876 |
| ---------- | ---------- | |
| 2,129 | 5,263 | |
| Creditors (amounts falling due within one year) | (51) | (56) |
| ---------- | ---------- | |
| Net current assets | 2,078 | 5,207 |
| ---------- | ---------- | |
| Total Assets less Current Liabilities | 215,659 | 248,174 |
| Creditors (amounts falling due after more than one year) | ||
| ZDP Shares | (50,718) | (48,954) |
| ---------- | ---------- | |
| TOTAL NET ASSETS | 164,941 | 199,220 |
| ======= | ======= | |
| Capital and Reserves: Equity Interests | ||
| Share Capital: | ||
| Ordinary Shares | 1,902 | 1,902 |
| Reserves: | ||
| Special reserve | 187,035 | 187,035 |
| Capital reserve | (32,592) | 2,610 |
| Revenue reserve | 8,596 | 7,673 |
| ---------- | ---------- | |
| TOTAL SHAREHOLDERS’ FUNDS | 164,941 | 199,220 |
| ======= | ======= | |
| Net Asset Value per Ordinary Share | 86.70p | 104.71p |
| Net Asset Value per ZDP Share | 106.63p | 102.93p |
CASH FLOW STATEMENT
For the year to 30 June 2019
(audited)
| Year to 30 June 2019 | Period to 30 June 2018 |
||
| £000 | £000 | ||
| Operating activities | |||
| Net revenue before finance costs and tax | 9,775 | 10,343 | |
| Tax recovered/(withheld) from income | 110 | (112) | |
| Receipt of special dividends taken to capital | - | 751 | |
| Investment management fee charged to capital | (1,183) | (1,258) | |
| Decrease/(increase) in debtors | 210 | (1,275) | |
| (Decrease)/increase in creditors | (5) | 56 | |
| -------- | -------- | ||
| Cash inflow from operating activities | 8,907 | 8,505 | |
| ===== | ===== | ||
| Investment activities | |||
| Purchases of investments | (32,100) | (87,766) | |
| Sales of investments | 29,242 | 50,027 | |
| -------- | -------- | ||
| Cash outflow from investing activities | (2,858) | (37,739) | |
| ===== | ===== | ||
| Financing activities | |||
| Proceeds from issue of Ordinary Shares | - | 22,904 | |
| Issue costs of Ordinary Shares | - | (1,275) | |
| Proceeds from issue of ZDP Shares | - | 14,516 | |
| Issue costs of ZDP Shares | - | (312) | |
| Share premium cancellation costs paid | - | (38) | |
| Equity dividends paid | (8,847) | (2,664) | |
| Interest and fees paid | (16) | (21) | |
| -------- | -------- | ||
| Cash (outflow)/inflow from financing activities | (8,863) | 33,110 | |
| ===== | ===== | ||
| Change in cash during the period | (2,814) | 3,876 | |
| ===== | ===== | ||
| Cash at the start of the period | 3,876 | - | |
| Cash at the end of the period | 1,062 | 3,876 | |
| ====== | ====== | ||
SUMMARY NOTES TO THE FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Company has presented its financial statements under Financial Reporting Standard 102 (FRS 102) and the AIC’s Statement of Recommended Practice “Financial Statements of Investment Trust Companies and Venture Capital Trusts†(SORP) issued in 2014, updated in February 2018. The principal accounting policies have been consistently applied throughout the period. The financial statements have been prepared on a going concern basis under the historical cost convention, modified to include the revaluation of the Company’s investments as permitted by FRS 102. The functional and presentation currency is pounds sterling, which is the currency of the environment in which the Company operates.
2. DIVIDENDS PAID
| Amounts recognised as distributions to equity holders: | Year to 30 June 2019 £000 |
Period to 30 June 2018 £000 |
| In respect of the period to 30 June 2018: | ||
| First interim dividend of 1.4p (paid on 6 March 2018) | - | 2,664 |
| Second interim dividend of 2.6p (paid on 31 August 2018) | 4,946 | - |
| Special dividend of 0.6p (paid on 31 August 2018) | 1,142 | - |
| In respect of the year to 30 June 2019: | ||
| First interim dividend of 1.45p (paid on 7 March 2019) | 2,759 | - |
| ------------ | ------------ | |
| Total | 8,847 | 2,664 |
| ------------ | ------------ |
The second interim dividend of 2.71p and the special dividend of 0.19p, both in respect of the year to 30 June 2019, are payable on 30 August 2019 and have not been recognised in the financial statements as at 30 June 2019.
3. RETURNS PER SHARE
| Year to 30 June 2019 |
Period to 30 June 2018 |
|
| Ordinary Shares | ||
| Net return for the period | £(25,432,000) | £12,947,000 |
| Weighted average Ordinary Shares in issue during the period | 190,250,000 | 190,250,000 |
| Return per Ordinary Share | (13.36)p | 6.80p |
| ZDP Shares | ||
| Appropriation to ZDP Shares for the period | £1,764,000 | £1,704,000 |
| Weighted average ZDP Shares in issue during the period | 47,562,500 | 47,562,500 |
| Return per ZDP Share | 3.71p | 3.58p |
There are no dilutive or potentially dilutive shares in issue.
4. INVESTMENTS HELD AT FAIR VALUE THROUGH PROFIT OR LOSS
| Year to 30 June 2019 £000 |
Period to 30 June 2018 £000 |
|
| Investments at fair value through profit or loss | ||
| Opening fair value | 242,967 | - |
| Opening fair value adjustment | 2,579 | - |
| ------------ | ------------ | |
| Opening book cost | 245,546 | - |
| Purchases at cost | 31,892 | 286,3921 |
| Sale proceeds | (29,308) | (50,111) |
| Realised gains on sales | 474 | 9,265 |
| ------------ | ------------ | |
| Closing book cost | 248,604 | 245,546 |
| Closing fair value adjustment | (35,023) | (2,579) |
| ------------ | ------------ | |
| Closing fair value | 213,581 | 242,967 |
| ------------ | ------------ |
1 Includes £200.1m in respect of an “in specie†transfer of securities from Aberforth Geared Income Trust plc.
All investments are in ordinary shares listed on the London Stock Exchange.
| Year to 30 June 2019 £000 |
Period to 30 June 2018 £000 |
|
| Gains/(losses) on investments: | ||
| Net realised gains on sales | 474 | 9,265 |
| Loss on sales in period from 23 June 2017 to 29 June 2017 | - | (256) |
| Movement in fair value adjustment | (32,444) | (2,579) |
| ------------ | ------------ | |
| Net (losses)/gains on investments | (31,970) | 6,430 |
| ------------ | ------------ |
In accordance with FRS 102 fair value measurements have been classified using the fair value hierarchy:
Level 1 - using unadjusted quoted prices for identical instruments in an active market;
Level 2 - using inputs, other than quoted prices included within Level 1, that are directly or indirectly observable (based on market data); and
Level 3 - using inputs that are unobservable (for which market data is unavailable).
All investments are held at fair value through profit or loss, have been classified as Level 1 and are traded on a recognised stock exchange.
5. NET ASSET VALUE (“NAVâ€) PER SHARE
The Net Assets and the Net Asset Value per share attributable to the Ordinary Shares and ZDP Shares are as follows:
| 30 June 2019 | 30 June 2018 | |||||
| Ordinary Shares |
ZDP Shares |
Total |
Ordinary Shares |
ZDP Shares |
Total |
|
| Net assets attributable | £164,941,000 | £50,718,000 | £215,659,000 | £199,220,000 | £48,954,000 | £248,174,000 |
| Number of Shares at the reporting date | 190,250,000 | 47,562,500 | 237,812,500 | 190,250,000 | 47,562,500 | 237,812,500 |
| ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | |
| NAV per Share (a) | 86.70p | 106.63p | 90.68p | 104.71p | 102.93p | 104.36p |
| Dividend reinvestment factor13 (b) | 1.064779 | - | 1.050686 | 1.014602 | - | 1.011545 |
| ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | |
| NAV per Share on a total return basis at the end of the period (c) = (a) x (b) | 92.31p | 106.63p | 95.28p | 106.24p | 102.93p | 105.56p |
| ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | |
| NAV per Share on a total return basis at the start of the period (d) | 106.24p | 102.93p | 105.56p | 100.00p | 100.00p | 100.00p |
| ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | |
| Total Return performance (c) / (d) - 1 | -13.1% | 3.6% | -9.7% | 6.2% | 2.9% | 5.6% |
| ------------ | ------------ | ------------ | ------------ | ------------ | ------------ |
13 Refer to Glossary
6. RELATED PARTY TRANSACTIONS
Under UK GAAP, the Directors have been identified as related parties and their fees and interests have been disclosed in the Directors’ Remuneration Report contained in the Annual Report. During the period no Director or entity controlled by a Director was interested in any contract or other matter requiring disclosure under s412 of the Companies Act 2006.
7. FURTHER INFORMATION
The foregoing do not constitute statutory accounts (as defined in section 434(3) of the Companies Act 2006) of the Company. The statutory accounts for the period ended 30 June 2018, which contained an unqualified Report of the Auditors, have been lodged with the Registrar of Companies and did not contain a statement required under section 498(2) or (3) of the Companies Act 2006.
Certain statements in this announcement are forward looking statements. By their nature, forward looking statements involve a number of risks, uncertainties or assumptions that could cause actual results or events to differ materially from those expressed or implied by those statements. Forward looking statements regarding past trends or activities should not be taken as representation that such trends or activities will continue in the future. Accordingly, undue reliance should not be placed on forward looking statements.
The Annual Report is expected to be posted to shareholders by 5 August 2019. Members of the public may obtain copies from Aberforth Partners LLP, 14 Melville Street, Edinburgh EH3 7NS or from its website: www.aberforth.co.uk.
GLOSSARY:
1 Total Assets Total Return - the return of the combined funds of the Ordinary Shareholders and ZDP Shareholders assuming that dividends paid to Ordinary Shareholders were reinvested at the NAV per Ordinary Share at the close of business on the day the Ordinary Shares were quoted ex dividend.
2 Ordinary Share NAV Total Return – the theoretical return on the NAV per Ordinary Share assuming that dividends paid to Ordinary Shareholders were reinvested at the NAV per Ordinary Share at the close of business on the day the Ordinary Shares were quoted ex dividend.
3 Ordinary Share Price Total Return – the theoretical return to an Ordinary Shareholder, on a closing market price basis, assuming that all dividends received were reinvested, without transaction costs, into the Ordinary Shares at the close of business on the day the shares were quoted ex dividend.
4 ZDP Share NAV Total Return – the return on the entitlement value of a ZDP Share.
5 ZDP Share Price Total Return – the theoretical return to a ZDP Shareholder, on a closing market price basis.
6 Ongoing Charges – represents the percentage per annum of investment management fees and other operating expenses to the average published Ordinary Shareholders’ NAV over the period.
7 Gearing – calculated by dividing the asset value attributable to the ZDP Shares by the asset value attributable to the Ordinary Shares.
8 Projected Final Cumulative Cover – the ratio of the total assets of the Company as at the calculation date, to the sum of the assets required to pay the final capital entitlement of 127.25p per ZDP Share on the planned winding-up date plus future estimated management fees charged to capital and estimated winding-up costs.
9 Redemption Yield (ZDP Share) – the annualised rate at which the total discounted value of the planned future payment of capital equates to its share price at the date of calculation.
10 Hurdle Rate - the rate of capital growth per annum in the Company’s investment portfolio to return a stated amount per Share at the planned winding-up date.
11 Redemption Yield (Ordinary Share) - The annualised rate at which projected future income and capital cash flows (based on assumed future capital/dividend growth rates) is discounted to produce an amount equal to the share price at the date of calculation.
12 Terminal NAV (Ordinary Share)- The projected NAV per Ordinary Share at the planned winding-up date at a stated rate of capital growth in the Company’s investment portfolio after taking into account the final capital entitlement of the ZDP Shares, future estimated costs charged to capital and estimated winding-up costs.
13 Dividend reinvestment factor - is calculated on the assumption that dividends paid by the Company were reinvested into Ordinary Shares of the Company at the NAV per Ordinary Share/ share price, as appropriate, on the day the Ordinary Shares are quoted ex dividend.
CONTACT:
Euan Macdonald / Christopher Watt - Aberforth Partners LLP - 0131 220 0733
Aberforth Partners LLP
Secretaries
29 July 2019
ANNOUNCEMENT ENDS
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