Half Yearly Report

RNS Number : 1807Y

Shires Smaller Companies PLC

28 August 2009

 



28 August 2009

Shires Smaller Companies plc

Interim Results for the

Six months to 30 June 2009

Shires Smaller Companies plc aims to provide a high and growing dividend and capital growth from a portfolio invested principally in the ordinary shares of smaller UK companies and UK fixed income securities.

	30 June 2009	31 December 2008	% change
Equity Shareholders' funds (£'000)	18,623	19,375	-3.9
Net asset value per share	84.23p	87.63p	-3.9
Share price (mid-market)	76.00p	56.00p	+35.7
Discount to net asset value A	7.9%	32.3%
Dividend yield	9.2%	27.0%
A Based on IFRS net asset value excluding dividend adjustment of 1.75p (31 December 2008 - 4.90p).

For further information, please contact:-
Kenneth Harper
Manager, Investment Trust Investor Relations

Aberdeen Asset Management Limited

Telephone [phone]

INTERIM BOARD REPORT

Background

Markets entered 2009 under a cloud of financial uncertainty which, coupled with concerns over the upcoming reporting season, resulted in a weak first quarter. In that first quarter the FTSE All Share index declined by 10.2% and the FTSE Small Cap index fell by 5.3%. Investor sentiment, however, turned as government and central banks embarked on a unilateral programme of improving liquidity through a reduction in bank base rates, and in the UK, a £125bn Quantitative Easing programme. These developments, along with some stabilisation in economic trends, stimulated investor risk appetite. Fear of default diminished and a plethora of rights issues recapitalised balance sheets. In the second quarter of 2009, equities recovered strongly although there was considerable divergence in returns with the FTSE All Share index up 9.5% while smaller companies were up 31%.

During the six months up to 30 June 2009, the FTSE Small Cap (ex IT) index rose by 26.4% although the FTSE All Share index rose by only 0.8% (both total return). Over the same period, UK corporate bonds, as measured by the iBoxx £ Non Gilts 1-15yrs index, reported a total return of 1%. The return from cash was only 0.4%. The divergence in returns between small and large companies was the reverse of last year's trend when the FTSE Small Cap(ex IT) index fell 37.5% in the second half of 2008. Smaller companies are leading the stock market recovery this year compared to last year when they significantly underperformed in the downturn.

Distribution of Assets and Gearing

The Company aims to invest 100% of its net assets in smaller companies while using gearing to invest in corporate bonds for higher yield. As markets fell we sought to raise cash, both to reduce gearing, and to meet the unexpected changes to the collateral conditions relating to our financing. To do this more cash was raised from equities than bonds, as the latter proved harder to liquidate in an environment where credit markets had virtually closed down. As part of this de-gearing, during the period under review, the Board repaid £5.36m of Zero Coupon Finance and £3m of the term loan. This had the desired effect of reducing the level of outstanding debt from £20.5m to £12m. 

After the debt reduction was complete, the Manager began rebuilding the equity exposure by adding to existing holdings and introducing new companies such as Dignity, Greggs and Keller. At the beginning of the year, equities accounted for 70% of net assets but by the end of June, this had risen to almost 90%.The performance of the Company is therefore expected to improve as the balance invested in equities is restored. The table below shows how the distribution of assets changed over the last eighteen months and the re-balancing towards equities which has taken place this year.

	31.12.07	30.06.08	31.12.08	30.06.09
EquitiesA	64.5%	54.9%	46.1%	58.1%
Corp bonds & prefsA	35.5%	45.1%	53.9%	41.9%
EquitiesB	107.8%	96.1%	70.1%	87.1%
A Figures above expressed as a percentage of gross assets
B Figures above expressed as a percentage of net assets

Investment Returns 

In the six months to end June 2009, the total return on net assets was 4.1%. As mentioned above the FTSE Small Cap (ex IT) rose by 26.4% on the same basis. The Company's portfolio is invested in a mixture of equities, corporate bonds and preference shares. The Company's equity portfolio produced a total return of 15.1%, a reasonable market return in most conditions but behind the index, whose performance was led by sharp recoveries, often on very thin volumes, in the worst afflicted share prices.

Corporate bonds and preference shares, as mentioned already, posted weaker returns during the period, with the Company's investments in these two areas returning -4.1% and -2.2% respectively during the period. Shareholders will be aware, however, that the fixed interest securities are an important source of income and generate additional high yield for investors. Towards the end of the period end, and since then, we have seen a relatively sharp recovery in the prices of a number of these holdings.

It is however pleasing to report a strong recovery in the share price. In the six months under review, the share price total return was 50.7% due to the significant narrowing in the discount from 32.3% to 7.9% over the period. The stockmarket recognised that the structure had been stabilised and that the Company would be able to offer a good, albeit lower, yield together with the prospect for capital growth.

Earnings and Dividends

In line with the statement made in March 2009 with the final results, the Company has declared and paid its first two interims dividends of 1.75p each. The Board anticipates paying the third and fourth interim dividends of 1.75p per share each, giving a total of 7.0p per share for the year to 31 December 2009. The dividend yield on the current share price of 92.5p is 7.6%. 

The Manager continues to monitor revenue closely and we believe that 2009 will represent the worst period for dividend cuts in the cycle with stabilisation in 2010 and the possibility of modest dividend growth resuming in 2011. The Company has the benefit of revenue reserves of £1.5 million (equivalent to 7p per share) which can be used in the current year to support the dividend policy. However, beyond 2009, dividend policy will depend to some extent on how the zero coupon finance, which matures in July 2010, and the term loan which is due for repayment in December 2010 are re-financed. The Board will be considering the different funding options available and will keep shareholders up to date with their plans. 

Outlook

Recent economic trends indicate some stabilisation in trends. Although unemployment continues to rise, business and consumer confidence surveys support an improving economic outlook. As ever, the stock market has moved to discount the improved environment and after a rally of almost 43% from the trough in March to the end of last month, we would caution that a short term setback is possible.

In the business world, companies are cutting costs sharply and strengthening their balance sheets. Few are reporting a sustainable pick up in business and earnings yet. We have focused closely on company balance sheets and the sustainability of dividends and will continue to follow that strategy. 

H S Cathcart

Chairman

27 August 2009

Principal Risks and Uncertainties

The principal risks and uncertainties faced by the Company and its subsidiaries fall into three broad categories: (i) market risk, comprising interest rate risk, currency risk and other price risk, (ii) liquidity risk and (iii) credit risk. Information on each of these areas is given within the Annual Report and Accounts for the year ended 31 December 2008.

Directors' Responsibility Statement

The Directors are responsible for preparing this half-yearly financial report in accordance with applicable law and regulations. The Directors confirm that to the best of their knowledge:

• the condensed set of interim financial statements contained within the half yearly financial report has been prepared in accordance with IAS34; and

• the Chairman's Statement (constituting the interim management statement) includes a fair review of the information required by rules 4.2.7R of the Disclosure and Transparency Rules (being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements and a description of the principal risks for the remaining six months of the financial year) and 4.2.8R (being related party transactions that have taken place during the first six months of the financial year and that have materially affected the financial position of the Company and its subsidiary during that period; and any changes in the related party transactions described in the last annual report that could so do.)

The half yearly report for the six months to 30 June 2009 comprises the Interim Board Report, the Directors' Responsibility Statement and a condensed set of financial statements.

For and on behalf of the Board 

of Shires Smaller Companies plc

H S Cathcart

Chairman

27 August 2009

  Consolidated Income Statement 

for the half year ended 30 June 2009

	Six months ended
	30 June 2009
	(unaudited)
	Revenue	Capital	Total
	£'000	£'000	£'000
Dividend income	697	-	697
Interest income from investments	344	(20)	324
Deposit interest	18	-	18
Other income	-	-	-
Losses of dealing subsidiary	-	-	-
Gains/(losses) on investments held at fair value	-	438	438
Fair value movement in zero coupon finance derivatives	-	(182)	(182)
	_________	_________	_________
Total income	1,059	236	1,295
	_________	_________	_________
Expenses
Investment management fees	(59)	(59)	(118)
VAT recoverable on investment management fees	-	-	-
Other administrative expenses	(85)	-	(85)
	_________	_________	_________
Profit/(loss) before finance costs and taxation	915	177	1,092
	_________	_________	_________
Taxation	-	-	-
Finance costs of borrowing	(187)	(187)	(374)
	_________	_________	_________
Profit and total comprehensive income for the year	728	(10)	718
	_________	_________	_________
Earnings/(Loss) per Ordinary share (pence)	3.29	(0.05)	3.24
	_________	_________	_________

The Company does not have any income or expense that is not included in profit for the year, and therefore the 'Profit for the year' is also the 'Total comprehensive income for the year' as defined in International Accounting Standard 1(revised).

All of the profit and total comprehensive income for the year is attributable to the owners of the Company.

The total column of the statement is the Statement of Comprehensive Income of the Company prepared in accordance with IFRS. The supplementary revenue and capital columns are presented for information purposes as recommended by the Statement of Recommended Practice issued by the Association of Investment Companies.

All items in the above statement derive from continuing operations. No operations were acquired or discontinued in the year.

  Consolidated Income Statement 

(Continued)

	Six months ended			Year ended
	30 June 2008			31 December 2008
	(unaudited)			(audited)
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Dividend income	1,657	-	1,657	2,704	-	2,704
Interest income from investments	727	(40)	687	1,247	(69)	1,178
Deposit interest	16	-	16	88	-	88
Other income	-	-	-	105	-	105
Losses of dealing subsidiary	(109)	-	(109)	(109)	-	(109)
Gains/(losses) on investments held at fair value	-	(13,849)	(13,849)	-	(29,659)	(29,659)
Fair value movement in zero coupon finance derivatives	-	(388)	(388)	-	(1,504)	(1,504)
	_______	_______	_______	_______	_______	_______
Total income	2,291	(14,277)	(11,986)	4,035	(31,232)	(27,197)
	_______	_______	_______	_______	_______	_______
Expenses
Investment management fees	(137)	(137)	(274)	(239)	(239)	(478)
VAT recoverable on investment management fees	-	-	-	220	220	440
Other administrative expenses	(142)	-	(142)	(260)	-	(260)
	_______	_______	_______	_______	_______	_______
Profit/(loss) before finance costs and taxation	2,012	(14,414)	(12,402)	3,756	(31,251)	(27,495)
	_______	_______	_______	_______	_______	_______
Taxation	-	-	-	-	-	-
Finance costs of borrowing	(172)	(172)	(344)	(312)	(312)	(624)
	_______	_______	_______	_______	_______	_______
Profit and total comprehensive income for the year	1,840	(14,586)	(12,746)	3,444	(31,563)	(28,119)
	_______	_______	_______	_______	_______	_______
Earnings/(Loss) per Ordinary share (pence)	8.32	(65.97)	(57.65)	15.58	(142.76)	(127.18)
	_______	_______	_______	_______	_______	_______

  Consolidated Balance Sheet

as at 30 June 2009

	As at	As at	As at
	30 June	30 June	31 December
	2009	2008	2008
	(unaudited)	(unaudited)	(audited)
	£'000	£'000	£'000
Non-current assets
Ordinary shares	16,226	34,849	13,590
Convertibles	1,152	1,270	1,180
Corporate bonds	6,796	18,563	7,791
Other fixed interest	3,737	8,807	6,908
	____________	____________	____________
Securities at fair value	27,911	63,489	29,469
Zero coupon finance derivatives at fair value	2,542	1,899	3,048
	____________	____________	____________
	30,453	65,388	32,517
	____________	____________	____________
Current assets
Trade and other receivables	542	32	460
Accrued income and prepayments	553	1,119	560
Cash and cash equivalents	1,948	2,220	9,573
Zero coupon finance derivatives at fair value	-	983	1,154
	____________	____________	____________
Total current assets	3,043	4,354	11,747
	____________	____________	____________
Total assets	33,496	69,742	44,264
Current liabilities
Trade and other payables	(128)	(227)	(303)
Zero coupon finance derivatives at fair value	-	(16,729)	(6,460)
	____________	____________	____________
Total current liabilities	(128)	(16,956)	(6,763)
	____________	____________	____________
Non-current liabilities
Long-term loan	(7,000)	(10,000)	(10,000)
Zero coupon finance derivatives at fair value	(7,745)	(6,535)	(8,126)
	____________	____________	____________
	(14,745)	(16,535)	(18,126)
	____________	____________	____________
Total liabilities	(14,873)	(33,491)	(24,889)
	____________	____________	____________
Net assets	18,623	36,251	19,375
	____________	____________	____________
Issued capital and reserves attributable to equity holders of the parent
Called-up share capital	11,055	11,055	11,055
Share premium account	11,892	11,892	11,892
Capital redemption reserve	2,032	2,032	2,032
Capital Reserve	(8,291)	8,696	(8,281)
Revenue reserve	1,935	2,576	2,677
	____________	____________	____________
	18,623	36,251	19,375
	____________	____________	____________
Net asset value per Ordinary share (pence)	84.23	163.96	87.63
	____________	____________	____________

Consolidated Statement of Changes in Equity

Six months ended 30 June 2009 (unaudited)

		Share	Capital
	Share	premium	redemption	Capital	Revenue
	capital	account	reserve	reserve	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 31 December 2008	11,055	11,892	2,032	(8,281)	2,677	19,375
Revenue profits for the period	-	-	-	-	728	728
Capital losses for the period	-	-	-	(10)	-	(10)
Equity dividends	-	-	-	-	(1,470)	(1,470)
	______	______	______	______	______	______
Balance at 30 June 2009	11,055	11,892	2,032	(8,291)	1,935	18,623
	______	______	______	______	______	______
Six months ended 30 June 2008 (unaudited)
		Share	Capital
	Share	premium	redemption	Capital	Revenue
	capital	account	reserve	reserve	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 31 December 2007	11,055	11,892	2,032	23,282	2,571	50,832
Revenue profits for the period	-	-	-	-	1,840	1,840
Capital losses for the period	-	-	-	(14,586)	-	(14,586)
Equity dividends	-	-	-	-	(1,835)	(1,835)
	______	______	______	______	______	______
Balance at 30 June 2008	11,055	11,892	2,032	8,696	2,576	36,251
	______	______	______	______	______	______
Year ended 31 December 2008 (audited)
		Share	Capital
	Share	premium	redemption	Capital	Revenue
	capital	account	reserve	reserve	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 31 December 2007	11,055	11,892	2,032	23,282	2,571	50,832
Revenue profits for the year	-	-	-	-	3,444	3,444
Capital losses for the year	-	-	-	(31,563)	-	(31,563)
Equity dividends	-	-	-	-	(3,338)	(3,338)
	______	______	______	______	______	______
Balance at 31 December 2008	11,055	11,892	2,032	(8,281)	2,677	19,375
	______	______	______	______	______	______

Consolidated Cash Flow Statement

for the half year ended 30 June 2009

	Six months ended	Six months ended	Year  ended
	30 June  2009	30 June  2008	31 December 2008
	(unaudited)	(unaudited)	(audited)
	£'000	£'000	£'000
Cash flows from operating activities
Investment income received	1,041	2,410	4,542
Deposit interest received	30	6	77
Money market interest received	-	-	105
Investment management fees paid	(264)	(144)	(442)
Dealing subsidiary receipts	-	348	346
Other cash expenses	(148)	(334)	(264)
	___________	___________	___________
Cash generated from operations	659	2,286	4,364
Interest paid	(369)	(341)	(624)
	___________	___________	___________
Net cash inflows from operating activities	290	1,945	3,740
	___________	___________	___________
Cash flows from investing activities
Purchases of investments	(5,456)	(8,226)	(13,016)
Sales of investments	7,374	15,775	38,740
	___________	___________	___________
Net cash inflow from investing activities	1,918	7,549	25,724
	___________	___________	___________
Cash flows from financing activities
Equity dividends paid	(1,470)	(1,835)	(3,338)
Repayment of Loan	(3,000)	-	-
Repayment of December 2008 ZCF position	-	-	(16,098)
Repayment of September 2009 ZCF position	(5,363)	-	-
Proceeds from September 2009 ZCF tranche	-	-	4,984
	___________	___________	___________
Net cash outflows from financing activities	(9,833)	(1,835)	(14,452)
	___________	___________	___________
Net (decrease)/increase in cash and cash equivalents	(7,625)	7,659	15,012
Cash and cash equivalents at the start of the period	9,573	(5,439)	(5,439)
	___________	___________	___________
Cash and cash equivalents at the end of the period	1,948	2,220	9,573
	___________	___________	___________
Cash and cash equivalents comprise:
Cash and cash equivalents	1,948	2,220	9,573
	___________	___________	___________

Distribution of Assets and Liabilities

	Valuation at		Movement during the period				Valuation at
	31 December					Gains/	30 June
	2008		Purchases	Sales	OtherA	(losses)	2009
	£'000	%	£'000	£'000	£'000	£'000	£'000	%
Listed investments
Ordinary shares	13,590	70.1	3,677	(2,554)	-	1,513	16,226	87.1
Convertibles	1,180	6.1	-	(148)	-	120	1,152	6.2
Corporate Bonds	7,791	40.2	1,805	(2,070)	(20)	(710)	6,796	36.5
Other fixed interest	6,908	35.7	-	(2,686)	-	(485)	3,737	20.1
	_______	_______	_______	_______	_______	_______	_______	_______
	29,469	152.1	5,482	(7,458)	(20)	438	27,911	149.9
	_______	_______	_______	_______	_______	_______	_______	_______
Other non current assets	3,048	15.7					2,542	13.7
Current assets	11,747	60.6					3,043	16.3
Current liabilities	(6,763)	(34.9)					(128)	(0.7)
Non current liabilities	(18,126)	(93.5)					(14,745)	(79.2)
	_______	_______					_______	_______
Net assets	19,375	100.0					18,623	100.0
	_______	_______					_______	_______
Net asset value per Ordinary share	87.6p						84.2p
	_______						_______
A Represents amortisation costs on debt securities of £20,000

Notes to the Accounts
1.  Accounting policies
	(a)	Basis of accounting
		The Group's financial statements have been prepared in accordance with International Financial Reporting Standards ('IFRS') 34 - 'Interim Financial Reporting', as adopted by the International Accounting Standards Board ('IASB'), and interpretations issued by the International Financial Reporting Interpretations Committee ('IFRIC') of the IASB. They have also been prepared using the same accounting policies applied for the year ended 31 December 2008 financial statements, which received an unqualified audit report.
	(b)	Dividends payable
		Dividends are recognised in the period in which they are paid.

2.	Taxation
	The taxation expense reflected in the Income Statement is based on management's best estimate of the weighted average annual income tax rate expected for the full financial year. The estimated average annual tax rate used for the year to 31 December 2009 is 28%, taking into consideration the reduction in the corporation tax rate from 30% to 28% from 1 April 2008.

3.	Dividends
	The following table shows the revenue for each period less the dividends declared in respect of the financial period to which they relate.
		Six months ended	Six months ended	Year ended
		30 June 2009	30 June 2008	31 December 2008
		£'000	£'000	£'000
	Revenue	915	1,840	3,444
	Dividends declared	(774) A	(1,503) B	(3,338) C
		___________	___________	___________
		141	337	106
		___________	___________	___________
	A     Dividends declared relate to first two interim dividends (both 1.75p each) declared in respect of the financial year 2009.
	B     Dividends declared relate to first two interim dividends (both 3.40p each) declared in respect of the financial year 2008.
	C     Dividends declared relate to the four interim dividends declared in respect of the financial year 2008 totalling 15.10p.

		Six months ended	Six months ended	Year  ended
		30 June  2009	30 June  2008	31 December 2008
4.	Return and net asset value per share	p	p	p
	Revenue return	3.29	8.32	15.58
	Capital return	(0.05)	(65.97)	(142.76)
		___________	___________	___________
	Total return	3.24	(57.65)	(127.18)
		___________	___________	___________
	The figures above are based on the following attributable assets:
		£'000	£'000	£'000
	Revenue return	728	1,840	3,444
	Capital return	(10)	(14,586)	(31,563)
		___________	___________	___________
	Total return	718	(12,746)	(28,119)
		___________	___________	___________
	Weighted average number of Ordinary shares in issue	22,109,765	22,109,765	22,109,765
		___________	___________	___________
	The net asset value per share is based on net assets attributable to Shareholders of £18,623,000 (30 June 2008 - £36,251,000; 31 December 2008 - £19,375,000) and on 22,109,765 (30 June 2008 - 22,109,765; 31 December 2008 - 22,109,765) Ordinary shares in issue at each period end.

5.	Capital reserves
	The capital reserve reflected in the Balance Sheet at 30 June 2009 includes losses of £11,118,000 (30 June 2008 loss of £11,935,000; 31 December 2008 loss of £15,775,000) which relate to the revaluation of investments held at the reporting date.

6.	Transaction costs
	During the period expenses were incurred in acquiring or disposing of investments classified as fair value though profit or loss. These have been expensed through capital and are included within (losses)/gains on held-at-fair-value investments in the Consolidated Income Statement. The total costs were as follows:
		Six months ended	Six months ended	Year ended
		30 June 2009	30 June 2008	31 December 2008
		£'000	£'000	£'000
	Purchases	19	28	76
	Sales	3	16	57
		___________	___________	___________
		22	44	133
		___________	___________	___________

7.	Publication of non-statutory accounts
	The financial information contained in this Interim Report does not constitute statutory accounts as defined in Sections 434 of the Companies Act 2006. The financial information for the six months ended 30 June 2009 and 30 June 2008 has not been audited.
	The information for the year ended 31 December 2008 has been extracted from the latest published audited financial statements which have been filed with the Registrar of Companies. The report of the auditors on those accounts contained no qualification or statement under Section 498 (2), (3) or (4) of the Companies Act 2006.

8.    The half yearly financial report is available on the Company's website, www.shiressmallercompanies.co.uk, and the Interim Report will be posted to shareholders in September 2009 and copies will be available from the investment manager.

Please note that past performance is not necessarily a guide to the future and that the value of investments and the income from them may fall as well as rise. Investors may not get back the amount they originally invested

 

END

 

 

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