Interim Results

ABERFORTH SMALLER COMPANIES TRUST plc INTERIM RESULTS For the Six Months to 30 June 2006 FEATURES Net Asset Value Total Return +4.8% Benchmark Index Total Return +6.8% Increase in Interim Dividend per Ordinary Share +6.3% Aberforth Smaller Companies Trust plc (ASCoT) invests only in small UK quoted companies and is managed by Aberforth Partners LLP. CHAIRMAN'S STATEMENT For the six months to 30 June 2006, Aberforth Smaller Companies Trust plc (ASCoT) achieved a net asset value total return of 4.8%, which compares with a total return of 6.8% from the Hoare Govett Smaller Companies Index (Excluding Investment Companies) (HGSC (XIC)), your Company's investment benchmark. Larger companies, as represented by the FTSE All-Share Index, registered a total return of 6.1%. ASCoT, therefore, underperformed its benchmark during a period when smaller companies slightly outperformed larger companies. These bald performance numbers mask a period comprising radically different stockmarket conditions. Indeed, for the first four months of the year, the HGSC (XIC) produced a total return of 11.6% whereas ASCoT's total return was 9.2%. In contrast, the final two months' respective figures were a negative return of 4.3% from the HGSC (XIC) and a negative of return of 4.1% from ASCoT. Evidently, in early May, investor sentiment and attitudes changed from "ebullient" to "concerned". As has been the case before, your Managers' "value" investment style fared less well during the "ebullient" stockmarket conditions that prevailed for most of the six month period. Consistent application of any investment style inevitably leads to periods of underperformance. This is not a concern to your Board as your Managers' approach has generated excellent absolute and relative performance for ASCoT over the medium and long term. Your Board is pleased to announce an interim dividend of 4.25p per share, which represents an increase of 6.3% compared with the equivalent period last year. This rate of increase broadly reflects the underlying growth in dividends from ASCoT's portfolio which has been encouraging. Dividend growth is a key contributor to your Company's performance over time. The interim dividend will be paid on 1 September 2006 to Shareholders on the register on 4 August 2006. Shareholders will recall ASCoT adopted a number of new accounting standards in the 2005 Annual Report and consistent with one of those, FRS 21, the interim dividend has not been reflected in these financial statements but rather will be accounted for on its payment date. ASCoT operates a Dividend Reinvestment Plan; the relevant documentation is available from Aberforth on request, or from their website www.aberforth.co.uk, for those Shareholders who wish to participate in the plan and are not already doing so. At the Annual General Meeting, Shareholders renewed the authority for your Company to buy in up to 14.99% of its Ordinary Shares. Your Board has established, and keeps under careful review, the circumstances under which such authority will be utilised. Should these circumstances arise, your Company will seek to purchase Ordinary Shares. Any Ordinary Shares bought back would be cancelled rather than held in treasury. David R Shaw Chairman 20 July 2006 MANAGERS' REPORT INVESTMENT BACKGROUND What a difference a few weeks can make! The stockmarket exuberance that characterised 2005 held sway for much of the first half of 2006. Indeed, by close on 9 May 2006, the HGSC (XIC) had risen by 14% from its level at the start of the year, implying a remarkable annualised return of 45%, somewhat higher than the 5-7% real rates of return that your Managers have indicated as likely over the longer term. Subsequently, however, the benchmark fell back sharply to produce a more modest 6.8% total return over the first half as a whole. This pattern was not confined to small UK quoted companies. Displaying higher correlation than might usually be expected, the world's major stockmarkets, emerging market equities and commodities experienced pronounced declines at roughly the same time. The finger of blame was pointed at worse than anticipated inflation news in the US, with the release in May showing headline CPI up by 4.2% year on year. However, the curious behaviour of gold, which is traditionally considered an inflation hedge but which shared in the pervading gloom, suggested that other concerns were at play. Indeed, underlying inflationary pressures, not least from commodities, have been evident for some time and have presumably been an influence on US monetary policy, which saw interest rates rise further, to 5.25%, in the first half. The Fed was joined in tightening by other central banks, most notably in Japan, where the strategy of "quantitative easing" was brought to an end and the possibility of interest rate rises was actually mooted. However, interest rates in much of the world remain at low levels, especially in real terms. Accordingly, notwithstanding the imbalances that still characterise the global economy, economic activity has thus far continued buoyant and businesses have found trading conditions generally favourable. Further interest rate rises, or perhaps merely anticipation of them, should eventually bring about a slowdown in the rate of growth. In the shorter term, however, the impact of tighter monetary conditions may have been simply to calm the increasing ebullience displayed by many financial markets over the last year. The threat of less freely available money would naturally complicate those investment strategies that have relied upon cheap debt financing. Thus, it is possible to interpret the recent stockmarket declines as essentially a financial market phenomenon, born of over-confidence and weaned on leverage. INVESTMENT PERFORMANCE These gyrations set the scene for the swings in ASCoT's fortunes as described by the Chairman. As was the case in the second half of 2005, your Managers' value investment style fared less well in the upbeat stockmarket conditions of the first four months of 2006. This was again a period in which growth, and particularly momentum oriented investment styles, ruled supreme. Conversely, those businesses with less demanding valuations tended to fare rather better as the appetite for risk waned from the beginning of May. While the impact of stock selection on ASCoT's relative performance was positive, it was dwarfed by the negative contribution from sector contribution. Four sectors - Oil & Gas Producers, Mining, Real Estate and General Financials - accounted for 45% of the benchmark's rise in the first half;however, ASCoT's weighting in them was 10.6% percentage points less than the HGSC (XIC)'s 19.6% at the start of the year. The performance of these sectors in 2005 had already taken their constituent companies to valuations that your Managers found difficult to rationalise. Accordingly, their sustained momentum in 2006 precipitated further sales, to the extent that the portfolio stood 12.9 percentage points underweight at the end of June. Ironically, but driven by the availability of several attractively valued businesses, the portfolio is now 7.1 percentage points above the benchmark's 10.7% weighting in TMT. These were the very sectors that drove the last bull market in such a concentrated fashion at the turn of the millennium, a period when ASCoT's relative performance was similarly challenged. Corporate activity continued. Interest rates, though rising, remained low in the longer term context and, with lower equity valuations, continued to fuel the de-equitisation trend. Of the benchmark's 583 constituents, 22 were acquired in the six months, with deals taking place even after the turmoil in financial markets commenced. On the other hand, IPOs did suffer: several were abandoned towards the end of the period, though seven were completed, to two of which ASCoT subscribed. The 115 stock portfolio saw five bids completed, with another three outstanding at 30 June, and thus enjoyed a hit-rate superior to the benchmark's. It would not, however, be surprising if some of the fervour for corporate activity was to diminish in response to still higher interest rates and a general erosion in confidence. To remedy some of the confusion frequently engendered by the financial markets, it might be helpful to focus on the performance of the underlying businesses in ASCoT's portfolio and, in particular, on the dividend experience. Of the 115 holdings, it was the policy of 22 not to pay a dividend. Another eight had been listed for less than two years, preventing dividend growth calculations. Of the remaining 85, two cut their dividends, 14 left them unchanged and 69 reported increases. The median company of the 69 raised its dividend by 8.5%. Although this median does not necessarily reflect ASCoT's actual receipts, since the portfolio is actively managed and a specific rate of dividend growth is not targeted, it does suggest that underlying trading conditions remained generally supportive. INVESTMENT OUTLOOK The threat of further interest rates rises would appear to have affected equity markets in two ways. First, it might be reasonable to anticipate lower than previously expected demand for the goods and services supplied by companies. Second, with the logic of leveraged investment in the shares of these companies appearing less sound, certain speculative positions may have been unwound rather quickly. It feels plausible that this latter effect might explain the particular severity of recent stockmarket declines. This is not, however, to underplay the potential impact on actual economic activity. In both the UK and US, long bond yields are the same as or lower than short term yields. This inversion of the yield curve is conventionally interpreted as heralding economic slowdown or even recession. Moreover, the risk that monetary authorities may over- react in their rediscovered enthusiasm to stifle inflation is heightened by the high levels of debt that permeate the consumer sectors on both sides of the Atlantic. This has led some to talk not just of a deceleration in economic growth but of possible recession or stagflation. From your Managers' point of view, these risks have been apparent for some time but were increasingly overlooked by a bullish stockmarket as it moved higher until the start of May. The subsequent retrenchment has not been too dispiriting: benchmark returns of 6.8%, though less spectacular than looked likely in April, are nevertheless excellent for a six month period in the longer term context of the UK stockmarket. Moreover, the increased volatility has served to throw up additional investment opportunities as fundamentally good businesses have found themselves caught up in the atmosphere of worry. 30 June 2006 30 June 2005 Characteristics ASCoT Benchmark ASCoT Benchmark Number of Companies 115 560 114 627 Weighted Average Market Capitalisation £381m £539m £364m £409m Price Earnings Ratio (Historic) 16.6x 16.9x 14.9x 16.4x Net Dividend Yield (Historic) 2.5% 2.2% 2.6% 2.3% Dividend Cover (Historic) 2.4x 2.7x 2.5x 2.6x As the table demonstrates, the tremendous returns afforded by small UK quoted companies over the last 12 months have resulted in higher valuations. As was the case at the start of the year, the HGSC (XIC) is more highly rated than larger companies: at the end of June the FTSE All-Share Index had a PE of 13.6x and a yield of 3.2%. Your Managers have offset some of the revaluation of the asset class by progressively taking money out of those areas of the market that they perceive to be over-valued. Therefore, although the portfolio is more highly rated than 12 months ago, it might be hoped that ASCoT will fare relatively well should the recent pessimism persist. Aberforth Partners LLP Managers 20 July 2006 The Income Statement, Reconciliation of Movements in Shareholders' Funds, Balance Sheet and the Cash Flow Statement are set out below:- INCOME STATEMENT For the six months ended 30 June 2006 (unaudited) 6 months to 6 months to 30 June 2006 30 June 2005 (Restated) Revenue Capital Total Revenue Capital Total £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 Realised net gains on - 51,897 51,897 - 33,142 33,142 sales Unrealised (losses)/gains - (25,342) (25,342) - 16,415 16,415 ------ ------ ------ ------ ------ ------ Net gains on investments - 26,555 26,555 - 49,557 49,557 Dividend income 9,597 1,102 10,699 9,070 3,104 12,174 Interest income 360 - 360 260 - 260 Other income 11 - 11 47 - 47 Investment management fee (1,231) (2,052) (3,283) (996) (1,660) (2,656) Transaction costs - (1,763) (1,763) - (1,276) (1,276) Other expenses (203) - (203) (187) - (187) ------ ------ ------ ------ ------ ------ Return on ordinary 8,534 23,842 32,376 8,194 49,725 57,919 activities before finance costs and tax Finance costs - - - - - - ------ ------ ------ ------ ------ ------ Return on ordinary 8,534 23,842 32,376 8,194 49,725 57,919 activities before tax Tax on ordinary activities - - - - - - ------ ------ ------ ------ ------ ------ Return attributable to equity shareholders 8,534 23,842 32,376 8,194 49,725 57,919 ====== ====== ====== ====== ====== ====== Returns per Ordinary Share 8.64p 24.13p 32.77p 8.29p 59.33p 58.62p DIVIDENDS The Board declared on 20 July 2006 an interim dividend of 4.25p per Ordinary Share (30 June 2005 - 4p) and the total amount payable will be £4,199,000 (30 June 2005 - £3,952,000). The Board alsodeclared on 19 January 2006 the final dividend in respect of the year ended 31 December 2005 of 7.85p per Ordinary Share (30 June 2005 - 7.25p) and the total paid amounted to £7,757,000 (30 June 2005 - £7,164,000). RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS (unaudited) For the six months ended 30 June 2006 Capital Capital Share Special reserve- reserve- Revenue capital reserve realised unrealised reserve TOTAL £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 Balance as at 31 December 2005 988 197,305 286,488 162,442 23,951 671,174 Return on ordinary activities after taxation - - 49,184 (25,342) 8,534 32,376 ----- ------- ------- ------- ------ ------- Balance as at 30 June 2006 988 197,305 335,672 137,100 24,728 695,793 ===== ======= ======= ======= ====== ======= For the six months ended 30 June 2005 Capital Capital Share Special reserve- reserve- Revenue capital reserve realised unrealised reserve TOTAL £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 Balance as at 31 December 2004 988 197,305 216,436 111,684 20,742 547,155 Return on ordinary acticities after taxation - - 33,310 16,415 8,194 57,919 ----- ------ ------- ------- ------ ------- Balance as at 30 June 2006 988 197,305 249,746 128,099 21,772 597,910 ===== ======= ======= ======= ====== ======= BALANCE SHEET As at 30 June 2006 (unaudited) 30 June 31 December 30 June 2006 2005 2005 £ 000 £ 000 £ 000 Fixed assets: investments Investments at fair value 680,690 659,560 580,913 through profit or loss -------- -------- ------- Current assets Debtors 4,441 1,408 3,179 Cash at bank 13,702 10,267 14,301 -------- -------- ------- 18,143 11,675 17,480 Creditors (amounts falling (3,040) (61) (483) due within one year) -------- -------- ------- Net current assets 15,103 11,614 16,997 -------- -------- ------- Total assets less liabilities 695,793 671,174 597,910 ======== ======== ======= Capital and reserves: equity interests Called up share capital 988 988 988 (Ordinary Shares) Reserves: Special reserve 197,305 197,305 197,305 Capital reserve - realised 335,672 286,488 249,746 Capital reserve - unrealised 137,100 162,442 128,099 Revenue reserve 24,728 23,951 21,772 -------- -------- ------- 695,793 671,174 597,910 ======== ======== ======= Net Asset Value per Ordinary Share 704.17p 679.26p 605.11p CASH FLOW STATEMENT For the six months ended 30 June 2006 (unaudited) 6 months to 6 months to 30 June 2006 30 June 2005 £ 000 £ 000 £ 000 £ 000 Net cash inflow from operating activities 6,522 8,155 Returns on investment and - - servicing of finance Capital expenditure and financial investment Payments to acquire investments (135,374) (98,239) Receipts from sales of investments 140,044 97,171 ------- ------- Net cash inflow/(outflow) from capital expenditure and financial investment 4,670 (1,068) ------ ------ 11,192 7,087 Equity dividends paid (7,757) (7,164) ------ ------ 3,435 (77) Financing - - ------ ------ Increase/(decrease) in cash 3,435 (77) ====== ====== Reconciliation of net return before finance costs and taxation to net cash inflow from operating activities Net return before finance costs 32,376 57,919 and taxation Gains on investments (26,555) (49,557) Transaction costs 1,763 1,276 Increase in debtors (1,040) (1,465) Decrease in creditors (22) (18) ------ ------ Net cash inflow from operating activities 6,522 8,155 ====== ====== NOTES TO THE FINANCIAL STATEMENTS 1. ACCOUNTING STANDARDS The financial statements have been prepared under historical cost convention, as modified to include the revaluation of investments and in accordance with applicable accounting standards and the AITC's Statement of Recommended Practice "Financial Statements of Investment Trust Companies" issued in 2005. As a consequence we now present an Income Statement and whilst it still shows supplementary information on the capital and revenue returns, it is the total column which is the profit and loss account of the Company. All revenue and capital items in the Income Statement are derived from continuing operations. No operations were acquired or discontinued in the period. The same accounting policies used for the year ended 31 December 2005 have been applied. However, the financial statements for the six months ended 30 June 2005 have been restated as a result of restating the Company's position as at 31 December 2004. The financial statements for the six months ended 30 June 2005 also reflect the revised treatment of transaction costs. The effect of the restatements has been summarised in Note 5. 2.DIVIDENDS Six months Six months ended 30 June ended 30 June 2006 2005 £'000 £'000 Amounts recognised as distributions to equity equity holders in the period: Final Dividend of 7.85p paid on 7 March 2006 (2005 - 7.25p paid on 4 March 2005) 7,757 7,164 ------ ------ An interim dividend of 4.25p (2005 - 4.00p) will be paid on 1 September 2006 to shareholders on the register on 4 August 2006. 3. RETURNS PER ORDINARY SHARE The calculations of the revenue return per Ordinary Share are based on net revenue of £8,534,000 (30 June 2005 - £8,194,000) and on Ordinary Shares of 98,809,788. The calculations of the capital return per Ordinary Share are based on net gains of £23,842,000 (30 June 2005 - £49,725,000) and on Ordinary Shares of 98,809,788. 4. NET ASSET VALUES The net asset value per share and the net assets attributable to the Ordinary Shares at each period end are calculated in accordance with their entitlements in the Articles of Association and were as follows: 30 June 31 December 30 June 2006 2005 2005 Pence Pence Pence Net asset value attributable per Ordinary Share 704.17 679.26 605.11 £000 £000 £000 Net assets attributable 695,793 671,174 597,910 As at 30 June 2006, the Company had 98,809,788 Ordinary Shares in issue (31 December 2005 and 30 June 2005 - same). 5. EXPLANATION OF PRIOR YEAR ADJUSTMENTS Reconciliation of the Income Statement for the six months ended 30 June 2005 As previously Effect of As reported change in restated INCOME STATEMENT Total policy Total £000 £000 £000 Net gains on investments 43,673 5,884 49,557 Dividend income 12,174 - 12,174 Interest income 260 - 260 Other income 47 - 47 Imvestment management fee (2,656) - (2,656) Transaction costs - (1,276) (1,276) Other expenses (187) - (187) ------- ------- ------- Net return before finance costs and tax 53,311 4,608 57,919 Finance costs - - - ------- ------- ------- Net return on ordinary activities before tax 53,311 4,608 57,919 Tax on ordinary activities - - - ------- ------- ------- Return attributable to equity shareholders 53,311 4,608 57,919 ------- ------- ------- Returns per Ordinary Share 53.95p 4.67p 58.62p Gains on Investments The adption of FRS 26 resulted in a change to the basis if valuation of investments. Under FRS 26, the Company's investments have been categorised as "financial assets at fair value through profit or loss". Therefore quoted investments are now valued at bid prices. Previously quoted investments were quoted at middle market prices. The change in accounting policy has increased the return attributable to Shareholders for the six months ended 30 June 2005 by £4,608,000 and is included within the £5,884,000 increase in net gains on investments. The difference between the two figures reflects the impact of transaction costs on gains on investments. Expenses incurred in acquiring or disposing of Investments As a further consequence of investments being categorised as "financial assets at fair value through profit or loss", transaction costs incidental to the acquisition or disposal of investments amounting to £1,276,000 for the six months ended 30 June 2005 are now treated as a capital expense and included within expenses under the capital column of the Income Statement. This change in accounting policy has no overall effect on the return attributable to Shareholders and appears on the Income Statement as offsetting increases of £1,276,000 in transaction costs and within gains on investments. Previously such transaction costs were included within book cost of investments and proceeds from sales. 6. FURTHER INFORMATION The foregoing do not comprise statutory accounts (as defined in section 240(5) of the Companies Act 1985) of the Company. The statutory accounts for the year ended 31 December 2005, 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 237(2) or (3) of the Companies Act 1985. The Interim Report is expected to be posted to shareholders on 24 July 2006. Members of the public may obtain copies from Aberforth Partners LLP, 14 Melville Street, Edinburgh EH3 7NS or from its website at www.aberforth.co.uk. CONTACT: David Warnock, Aberforth Partners LLP, 0131 220 0733 Aberforth Partners LLP, Secretaries - 20 July 2006 ANNOUNCEMENT ENDS
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