Half Yearly Report

RNS Number : 7471Z

F&C Global Smaller Companies PLC

15 December 2014

 



Date:                15 December 2014

Contact:           Peter Ewins                                                   

                        F&C Investment Business Limited                   

                        020 7628 8000                                               

F&C Global Smaller Companies PLC

Unaudited statement of results

for the half-year ended 31 October 2014

Summary of Unaudited Results

Attributable to shareholders	31 October 2014	30 April 2014	% Change
Share price	881.50p	840.00p	+4.9
Net asset value per share (debenture at nominal value)	877.98p	841.78p	+4.3
Net asset value per share (debenture at market value)	877.66p	840.50p	+4.4
Net assets	£455.8m	£431.1m	+5.7
	Half-year ended 31 October 2014	Half-year ended 31 October 2013	% Change
Revenue return per share (basic)	4.88p	5.15p	-5.2
Interim dividend per share	2.65p*	2.50p	+6.0

* Payable on 30 January 2015 to shareholders on the register at 5 January 2015.

Manager's Review

 

In the first six months of the financial year, equity markets around the world produced a mixed performance. The 2013/14 financial year had delivered strong returns from the UK and European markets, while the Japanese and Asian stocks had lagged, but these patterns reversed in the first six months of 2014/15. Investors were un-nerved by lacklustre economic data in the Eurozone, and were drawn to more attractive valuations in the Far East, with the Japanese equity market also receiving a fillip from a weaker yen. The US dollar appreciated in the period against nearly all global currencies as the Federal Reserve moved to end quantitative easing as previously scheduled in October.

Performance

Against a backdrop of some pressure on corporate earnings particularly for European exposed companies, and heightened currency volatility, smaller company shares underperformed larger stocks during the six months in most markets. Nevertheless, solid stock selection led to further progress for your Company's investment portfolio, with the Net Asset Value ("NAV") per share delivering a total return over the six months of 5% and the share price, excluding dividend income, rose by 4.9%.

The Company's Benchmark is a blended index of the returns from the MSCI All Country World ex UK Small Cap Index (70%) and Numis UK Smaller (excluding investment companies) Index (30%). This produced a total return of 3.1% in the period.

Geographical distribution of the investment portfolio
	Portfolio weighting
	31 October 2014 %	30 April 2014 %
North America	41.6	39.7
UK	27.3	28.5
Continental Europe	10.7	12.7
Rest of World	11.7	10.3
Japan	8.7	8.8
Source: F&C Management Limited

Convertible Unsecured Loan Stock Issue

The Company's £10m 11.5% debenture will be repaid at the end of 2014. In July, shareholders approved the issue of £40m of five year dated 3.5% Convertible Unsecured Loan Stock ("CULS") to keep in place structural gearing at a fixed and lower cost. The cash proceeds from the CULS issue were rapidly deployed into topping up holdings across our investment portfolio. The Company ended the period with effective gearing of 8.5%. The share price ended the six months at a 0.4% premium to the NAV per share including the debenture at fair value and 705,000 new shares were issued to satisfy demand from the market.

Dividends

We seek to invest in companies with the ability to grow their dividends over time and once again, income received from the portfolio benefited from this. The Board has decided to raise the interim payment by 6.0% to 2.65p. The dividend will be paid to shareholders on 30 January 2015.

Economic background

The US economy has been expanding at a reasonable pace in 2014 after the weather induced weakness in the winter months, with good growth in the number of people in employment, improved industrial production and a stronger housing market, while consumer inflation has remained low. The same can largely be said for the UK, and in both cases, the question from here is how long it is likely to be before interest rates need to be pushed up from near zero to more normalised levels. The absence of inflationary pressures outside of certain asset classes such as real estate, remains something of a mystery given the extent of monetary stimulus applied in the last few years in both countries. However, with oil prices falling sharply in the last couple of months on the back of weaker global demand for energy and expanding supply from the US shale oilfields, it seems likely that inflation will remain low for a while, reducing the need for the authorities to rush to move rates higher.

The weakness of mainland European economies was disappointing and prompted further action from the European Central Bank ("ECB"), which moved to push interest rates even lower, and to buy asset backed securities in the financial markets. The Bank's aim is to stimulate extra bank lending into the real economy over time and avert a damaging slide towards deflation. This policy and a suspicion that further moves might be necessary, combined with the better outlook for the US, fed through into weakness for the euro. This in itself should in time help the European growth environment though there remains a need for structural reform to enhance competitiveness in a number of countries.

The Japanese economy was not surprisingly hit by the 3% rise in sales tax imposed in April and there was a contraction in GDP in Q2, but this had been anticipated by investors. More surprisingly, the Bank of Japan moved to increase the scale of its quantitative easing bond buying in October, prompting further equity market gains and yen weakness late in the period.

Elsewhere while published economic data does not necessarily show the true picture, China's growth evidently slowed. Countries such as Australia and Brazil dependent on supplying commodities to China have felt the pinch as a result, and there have been signs of stress in the Chinese banking sector requiring some intervention in recent months from the People's Bank of China. It has not all been bad news in Asia however, with the Indian election result being enthusiastically received by equity investors looking for a more reform orientated and less bureaucratic future for the country, and a number of other markets such as Thailand and Taiwan posted solid gains. In Latin America, Brazil's election, on the other hand, did not change the status quo, which was a disappointment for those investors hoping for a more pro-business administration to take control.

Portfolio performance

Geographical performance (total return sterling adjusted)
for the half year ended 31 October 2014
	Portfolio	Local smaller companies index
USA	+8.5%	+10.6%
UK	-0.3%	-4.8%
Continental Europe	-3.8%	-10.3%
Japan	+15.9%	+9.7%
Rest of World	+7.2%	+6.3%  (Pacific ex Japan) +0.9%  (Latin America)
Source: F&C Management Limited

This has been a decent period for stock selection on the portfolio, and we beat the local small cap indices in the UK, Europe, Japan and the Rest of World, only underperforming in the US, where returns, augmented by dollar strength, were still more than respectable as shown in the table above.

The best returns came from our Japanese portfolio, up 15.9% in sterling terms after taking account of the fall in the yen. Here small caps beat large caps, bucking the overall global trend, and our two fund holdings managed by M&G and Aberdeen both comfortably beat the local small cap index. We also employ funds to give exposure to the Rest of World incorporating Asia outside of Japan, Latin America and Africa, and after a disappointing performance for these markets in 2013/14, our portfolio delivered a positive return over this period as global investors became less negative on the local outlook. The two largest fund holdings concentrating on Asia, managed by Aberdeen and First State (Scottish Oriental Smaller Companies trust), both outperformed by a good margin. Returns from two other funds focusing on Brazil and Australia representing a smaller part of the Rest of World portfolio, were negative in the period, at least in part reflecting the trickier local macro-economic situation in these countries and consequential local currency weakness.

The UK and European portfolios both materially outperformed weak local small cap indices, in both cases benefiting from corporate activity. In the UK, six holdings received firm offers from peers. Max Property, healthcare services company Synergy Health and technology business CSR, were all the subject of offers from US based acquirers. Media content provider Perform Group received a bid from its major shareholder after a disappointing 2013 for the business, while Spirit Pub Companyand Hyder Consultingwere both approached by more than one party, leading to higher eventual agreed terms. We had held all of these stocks with the exception of CSR for some time, and were happy with their prospects on a stand-alone basis, but the premiums over the pre bid share price levels have been good enough to gain overall shareholder support.

Corporate results on the UK portfolio have generally been encouraging, especially in relation to more domestically focused stocks. We were pleased with the performance of a number of recently acquired stocks including the records management company, Restore and the IPOs of Clipper Logistics, which focuses on online business fulfilment and OneSavings Bank, which primarily serves the non-standard mortgage and buy to let lending markets. Disappointments are a fact of life on any equity portfolio and in the six months our energy sector investments, notably Faroe Petroleum and Salamander Energy, were hard hit by the fall in oil prices while shares in Regenersis, a mobile devices repairing business, fell as the company surrendered some low margin business and was hit by currency movements.

In Europe, three of our stocks were bid for. Orange agreed a takeover of Spanish telecoms business Jazztel, while Dutch based software provider Exact succumbed to a private equity bidder. Nutreco, the animal nutrition and fish feed business received an offer from a Dutch family business and subsequently some further interest from US based trade peer Cargill in conjunction with private equity.

As in the UK though outperformance of the European portfolio was not solely due to bids, with the quality focus of the portfolio helping at a time when investors were becoming more reluctant to back the more cyclical and lower quality stocks given the weaker macro tone. Quality business franchises that performed well and reported positive results in the first half included non-life insurer Topdanmark, flavours and fragrances business Symrise and robotics business Kuka. Structured financial products business Leonteq did well as it expanded its client base and moved to strengthen its distribution capability. On the downside Plastics Omnium suffered in the general fall-out within cyclicals, Tods dropped as luxury goods lost appeal in some of the key Far Eastern markets, while C&C dropped as its UK and US cider businesses produced disappointing returns, prompting the company to examine the potential of bidding for Spirit Pub Company mentioned above.

On the US portfolio there were several very strong performers. Vail Resorts rose as its results pleased the market and the company announced the acquisition of another ski resort. Pernix Therapeutics, a turnaround story under new management more than doubled with the company acquiring additional drugs including a migraine treatment from GlaxoSmithKline. Covanta, the integrated waste management business, now our largest individual company investment, also made progress and won additional contracted business in Ireland. One of the new holdings in the period Cinemark, which operates a chain of cinemas in the US and through Latin America also made a positive contribution to performance, while insurer Hallmark did well on the back of strong underwriting results.

Among the stocks that dragged on US performance were Conn's, Chefs Warehouse and Graftech. Conn's credit business suffered a worse than expected amount of bad debts, Chefs Warehouse margins fell below hopes as it struggled to pass on rising meat prices to its restaurant customers. Graftech, a graphite electrode and carbon based materials producer was a new holding during the period. Sadly it had to reduce profits guidance as demand for its products failed to meet expectations especially within the steel sector. Not surprisingly, in common with the UK situation, our energy sector stocks Rex Energy, Resolute Energy and contractor Willbrossuffered as oil prices weakened.  

Asset allocation

There were no dramatic changes to the geographic skew of the portfolio in the first half. The decision to be overweight in Japan was beneficial to overall fund performance, as was being underweight to the UK. However, these gains were more than offset by the overweight stance to Europe and underweight position in relation to the US. We moved from being underweight to overweight in the Rest of the World segment. Valuations in Asia in particular looked relatively more attractive compared to the other developed markets and so we added to some of our fund holdings during the six months. Lately, we have taken some cash out of Japan after this market's rally and added a little to the UK. Domestic stocks are benefiting from the UK economic recovery, we are finding some new ideas and sterling has now fallen back from an arguably overbought position earlier in the year.

Outlook

Financial markets have been more volatile of late as US quantitative easing has ended, while geopolitical tensions remain elevated. More helpfully, the threat of rising interest rates seems to have abated a little for now, especially given the marked weakness in the oil price. We remain of the view that our investment portfolio contains many companies with the inherent ability to become much larger businesses in the future.

Peter Ewins

15 December 2014 

Unaudited Condensed Income Statement

for the half-year ended 31 October	2014			2013
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Gains on investments	-	19,753	19,753	-	35,740	35,740
Foreign exchange (losses)/gains	(2)	273	271	3	(323)	(320)
Income	3,503	-	3,503	3,069	-	3,069
Management and performance fees	(208)	(1,577)	(1,785)	(172)	(516)	(688)
Other expenses	(362)	(14)	(376)	(287)	(14)	(301)
Return before finance costs and taxation	2,931	18,435	21,366	2,613	34,887	37,500
Finance costs	(255)	(765)	(1,020)	(145)	(434)	(579)
Return on ordinary activities before taxation	2,676	17,670	20,346	2,468	34,453	36,921
Taxation on ordinary activities	(157)	-	(157)	(78)	-	(78)
Return attributable to shareholders	2,519	17,670	20,189	2,390	34,453	36,843
Return per share (basic) - pence	4.88	34.21	39.09	5.15	74.31	79.46
Return per share (diluted) - pence	n/a	33.50	38.39	n/a	n/a	n/a

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.

A statement of total recognised gains and losses is not required as all gains and losses of the Company have been reflected in the above statement.

Unaudited Condensed Reconciliation of Movements in Shareholders' Funds

Half-year ended 31 October 2014	Called up	Share	Capital	Equity			Total
	share	premium	redemption	component	Capital	Revenue	shareholders'
	capital	account	reserve	of CULS	reserves	reserve	funds
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Balance at 30 April 2014	12,803	102,460	16,158	-	289,568	10,097	431,086
Movements during the half-year ended 31 October 2014
Dividends paid	-	-	-	-	-	(2,839)	(2,839)
Convertible Unsecured Loan Stock ("CULS")	-	-	-	1,339	-	-	1,339
Issue costs of equity component of CULS	-	-	-	(27)	-	-	(27)
Shares issued	176	5,891	-	-	-	-	6,067
Return attributable to equity shareholders	-	-	-	-	17,670	2,519	20,189
Balance at 31 October 2014	12,979	108,351	16,158	1,312	307,238	9,777	455,815

Half-year ended 31 October 2013	Called up	Share	Capital				Total
	share	premium	redemption		Capital	Revenue	shareholders'
	capital	account	reserve		reserves	reserve	funds
	£'000s	£'000s	£'000s		£'000s	£'000s	£'000s
Balance at 30 April 2013	11,243	53,009	16,158		250,760	8,920	340,090
Movements during the half-year ended 31 October 2013
Dividends paid	-	-	-		-	(2,071)	(2,071)
Shares issued	688	21,092	-		-	-	21,780
Return attributable to equity shareholders	-	-	-		34,453	2,390	36,843
Balance at 31 October 2013	11,931	74,101	16,158		285,213	9,239	396,642

Year ended 30 April 2014	Called up	Share	Capital				Total
	share	premium	redemption		Capital	Revenue	shareholders'
	capital	account	reserve		reserves	reserve	funds
	£'000s	£'000s	£'000s		£'000s	£'000s	£'000s
Balance at 30 April 2013	11,243	53,009	16,158		250,760	8,920	340,090
Movements during the year ended 30 April 2014
Dividends paid	-	-	-		-	(3,284)	(3,284)
Shares issued	1,560	49,451	-		-	-	51,011
Return attributable to equity shareholders	-	-	-		38,808	4,461	43,269
Balance at 30 April 2014	12,803	102,460	16,158		289,568	10,097	431,086

Unaudited Condensed Balance Sheet

	31 October 2014	31 October 2013	30 April 2014
	£'000s	£'000s	£'000s
Fixed assets
Investments	496,343	386,317	425,344
Current assets
Debtors	418	1,283	3,574
Cash at bank and short-term deposits	9,722	20,602	16,705
	10,140	21,885	20,279
Creditors: amounts falling due within one year	(2,679)	(1,560)	(4,537)
Debenture	(10,000)	-	(10,000)
	(12,679)	(1,560)	(14,537)
Net current (liabilities)/assets	(2,539)	20,325	5,742
Total assets less current liabilities	493,804	406,642	431,086
Creditors: amounts falling due after more than one year
Debenture	-	(10,000)	-
CULS	(37,989)	-	-
Net assets	455,815	396,642	431,086
Capital and reserves
Called up share capital	12,979	11,931	12,803
Share premium account	108,351	74,101	102,460
Capital redemption reserve	16,158	16,158	16,158
Equity component of CULS	1,312	-	-
Capital reserves	307,238	285,213	289,568
Revenue reserve	9,777	9,239	10,097
Total shareholders' funds	455,815	396,642	431,086
Net asset value per share (basic and diluted) - pence	877.98	831.13	841.78

Unaudited Condensed Cash Flow Statement

	Half-year ended	Half-year ended
	31 October 2014	31 October 2013
	£'000s	£'000s
Net cash inflow from operating activities	2,491	166
Cash outflow from servicing of finance	(575)	(577)
Net cash outflow from financial investment	(52,449)	(19,315)
Equity dividends paid	(2,839)	(2,071)
Net cash outflow before use of liquid resources and financing	(53,372)	(21,797)
Net cash inflow from financing	46,118	21,949
(Decrease)/increase in cash	(7,254)	152
Reconciliation of net cash flow to movement in net (debt)/cash
(Decrease)/increase in cash and short term deposits	(7,254)	152
Increase in CULS liability	(37,989)	-
Foreign exchange movement	271	(321)
Movement in net debt	(44,972)	(169)
Net cash brought forward	6,705	10,771
Net (debt)/cash carried forward	(38,267)	10,602
Represented by:
Cash at bank and short term deposits	9,722	20,602
Debenture	(10,000)	(10,000)
CULS	(37,989)	-
	(38,267)	10,602

Unaudited Notes on the Condensed Accounts

1    Significant accounting policies

These financial statements have been prepared on the basis of accounting policies set out in the Company's annual financial statements at 30 April 2014. In July 2014 the Company issued Convertible Unsecured Loan Stock ("CULS"), the accounting policies for which are set out below. The Company expects to follow these and all policies set out in the annual financial statements throughout the year to 30 April 2015.

The CULS are regarded as a compound instrument comprising a liability and an equity component. The fair value of the liability component, assessed at the date of issue of the CULS, was estimated based on an equivalent non-convertible security. The fair value of the equity component is derived by deducting the CULS issue proceeds from the fair value of the liability component.

The liability component is subsequently measured at amortised cost using the effective interest rate. The equity component value remains unchanged over the life of the CULS.

Cost incurred directly as a result of the CULS issue are allocated between the liability and equity components in proportion to the split of the proceeds. Expenses allocated to the liability component are amortised over the life of the CULS using the effective interest rate.

Interest payable on the CULS is calculated based on an effective interest rate of 4.7% applied to the liability component of the CULS.

Interest payable and amortised costs incurred on the CULS are allocated 75% to capital reserve - arising on investment sold.

On conversion of the CULS, equity is issued and the relevant liability component is de-recognised.

2    Dividend

The Directors have declared an interim dividend in respect of the year ended 30 April 2015 of 2.65p per share, payable on 30 January 2015 to all shareholders on the register at close of business on 5 January 2015. The amount of this dividend will be £1,383,000 based on 52,203,102 shares in issue at 12 December 2014. This amount has not been accrued in the results for the half-year ended 31 October 2014.

3    Results

The results for the half-year ended 31 October 2014 and 31 October 2013, which are unaudited and which have not been reviewed by the Company's auditors pursuant to the Auditing Practices Board guidance on 'Review of Interim Financial Information', constitute non-statutory accounts within the meaning of Section 434 of the Companies Act 2006. The latest published accounts which have been delivered to the Registrar of Companies are for the year ended 30 April 2014; the report of the auditors thereon was unqualified and did not contain a statement under Section 498 of the Companies Act 2006. The abridged financial statements shown above for the year ended 30 April 2014 are an extract from those accounts.

The report and accounts for the half-year ended 31 October 2014 will be posted to shareholders and made available on the website www.fandcglobalsmallers.com shortly. Copies may also be obtained from the Company's registered office, Exchange House, Primrose Street, London EC2A 2NY.

By order of the Board

F&C Investment Business Limited, Secretary

Exchange House, Primrose Street, London EC2A 2NY

15 December 2014

Directors' Statement of Principal Risks and Uncertainties

Most of the Company's principal risks and uncertainties are market related and no different from those of other investment trusts investing primarily in listed equities. The Board analyses these under three main categories: the security of assets; investment performance; and the deviation of the share price from the underlying net asset value per share. These risks are described in more detail under the heading "Principal risks and uncertainties and risk management" within the strategic report in the Company's annual report for the year ended 30 April 2014. They have not changed materially since the date of that report and are not expected to change materially for the remaining six months of the Company's financial year.

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

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

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

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

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

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

·       in light of the controls and monitoring processes that are in place, the Company has adequate resources and arrangements to continue operating within its stated objective and policy for the foreseeable future. Accordingly, the accounts continue to be drawn up on the basis that the Company is a going concern.

On behalf of the Board

Anthony Townsend

Chairman

15 December 2014

 

END

 

 

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