In the Financial Highlights section, the Numis Smaller Companies Index (XIC)
total return performance has been corrected to -20.2% and the Ordinary Share
Price to -18.4%. The remainder of the announcement is the same as released
earlier today.
Aberforth Smaller Companies Trust plc
Half Yearly Report for the six months to 30 June 2022
The following is an extract from the Company’s Half Yearly Report for the six month period to 30 June 2022.
FINANCIAL HIGHLIGHTS
Total Return Performance | % |
Net Asset Value per Ordinary Share | -16.8 |
Ordinary Share Price | -18.4 |
Numis Smaller Companies Index (XIC) | -20.2 |
30 June 2022 | 31 December 2021 | 30 June 2021 | |
Shareholders’ Funds | £1,191m | £1,473m | £1,502m |
Market Capitalisation | £1,018m | £1,288m | £1,355m |
Actual Gearing | 4.6% | 5.6% | 5.1% |
Ordinary Share Net Asset Value | 1,373.14p | 1,674.35p | 1,696.49p |
Ordinary Share price | 1,174.00p | 1,464.00p | 1,530.00p |
Ordinary Share price discount | 14.5% | 12.6% | 9.8% |
Interim dividend of 12.05p per share for the year ended 31 December 2022, which is 10% higher than the previous year’s 10.95p per share.
INVESTMENT OBJECTIVE
The investment objective of Aberforth Smaller Companies Trust plc (“ASCoT”) is to achieve a net asset value total return (with dividends reinvested) greater than that of the Numis Smaller Companies Index (excluding Investment Companies (“NSCI (XIC)”)) over the long term.
Chairman’s Statement
Performance review
Investment returns in most stockmarkets around the world were negative in the first half of 2022. ASCoT was caught up in the general malaise and produced a net asset value total return of -16.8%. The discount between the share price and the net asset value widened, which meant that the share price total return was -18.4%.
Absolute performance was disappointing, but there was consolation in relative terms. ASCoT’s net asset value total return was better than that of the investment benchmark. The total return of the Numis Smaller Companies Index (excluding investment companies) (NSCI (XIC)) was -20.2%. However, larger companies proved more resilient. The FTSE All-Share was down by just 4.6% in total return terms in the first half. This was due to the significance of commodity producers and defensive businesses among the index’s membership. These companies were better suited to the troubled macro-economic and geopolitical climate of the first half.
Russia’s shocking invasion of Ukraine has accentuated the lingering economic effects of the pandemic. Supply chains have been put under additional pressure and energy prices, already rising as demand recovered from the pandemic, have reached levels that threaten household budgets and business profitability alike. Inflation has therefore proved much less transient than many had hoped or expected. Central bankers have belatedly responded, and higher interest rates have added to concerns about a slowdown in economic activity or recession. This threat explains the weakness in share prices during the first half and is explored in more detail within the Managers’ Report. Also examined therein is the value investment style, which has fared comparatively well amid inflation and tightening monetary policy to the benefit of ASCoT’s relative performance.
Dividends
The first half’s lower share prices contrast with another period of dividend growth for the investment universe as a whole and for the portfolio companies. After widespread dividend cuts amid the pandemic in 2020, the recovery started in 2021 and has continued in 2022, to the extent that ASCoT’s investment income earned in the first half was above the expectations we held when the annual report was issued at the end of January. Good underlying progress was enhanced by five special dividends, though the contribution of special dividends to overall income was lower than in the same period last year. In total, investment income in the six months to 30 June 2022 was up by 52% year-on-year.
Clearly, this rate of progress is influenced by what is still a depressed base and is unsustainable. However, the Managers’ current estimates suggest that ASCoT’s investment income this year is on course to exceed its pre-pandemic levels. Risks to this outlook are a potential economic slowdown and the presently high rates of inflation, which may squeeze companies’ profitability. Notwithstanding these risks, the Board’s aim is to grow ASCoT’s full year dividend, excluding any special dividend, in real terms. In making its decision about the interim dividend, the Board considered scenario analyses based on previous recessions and took into account the 59.0p per Ordinary Share of revenue reserves with which ASCoT entered 2022.
We are pleased to announce an interim dividend of 12.05p, which is 10% higher than the previous year’s 10.95p. The increase is set above the anticipated inflation rate in December 2022, which is based on an average of forecasts aggregated by Bloomberg. Should this rate of growth also apply to the final dividend, the full year dividend would be funded from income earned in the year on the basis of current forecasts. The Board would encourage Shareholders, as they think about future dividends, to focus on the real – inflation adjusted – rate of progress.
The interim dividend will be paid on 26 August 2022 to Shareholders on the register as at close of business 5 August 2022. The ex dividend date is 4 August 2022. The Company operates a Dividend Reinvestment Plan, details of which are available from Aberforth Partners LLP or on its website, www.aberforth.co.uk.
Gearing
ASCoT has a £130m borrowing facility with The Royal Bank of Scotland International. It runs to June 2023, a term aligned with the three-year continuation vote cycle.
Throughout ASCoT’s life, the Board has deployed gearing in a tactical fashion, seeking to take advantage of severe stress in stockmarkets and then to repay the debt once share prices have recovered. The most recent opportunity to gear came in the second quarter of 2020 with the pandemic. Gearing since then has enhanced ASCoT’s investment returns, though it was disadvantageous as share prices fell in the first six months of 2022. Over this period, the gearing ratio declined from 5.6% to 4.6%, which is influenced by the timing of proceeds from sales of companies subject to takeover bids. The Managers’ Report provides additional commentary on gearing.
Share buy-back
Authority to buy back up to 14.99% of outstanding Ordinary Shares was renewed at March’s Annual General Meeting. In the six months to 30 June 2022, 1,216,342 shares were bought back and cancelled. The total value of these repurchases was £16.7m, on an average discount of 12.7%.
The Board continues to believe that, at the margin, buy-backs provide an increase in liquidity for those Shareholders wishing to realise their investment and, at the same time, deliver an economic uplift for those Shareholders wishing to remain invested with the Company.
Board changes
The Board was pleased to announce the appointment of Patricia Dimond as a non-executive Director and Audit Committee member with effect from 3 March 2022. Patricia has had an international career with over 30 years in the consumer, retail and financial sectors. As an industry executive or strategic adviser she has worked with FTSE 100, private equity and founder/owner managed companies with a focus on finance, strategy and corporate governance.
Conclusion
We are confronted by an unholy combination of war in Ukraine, potential famine stemming from the conflict and lingering pestilence in China. High rates of inflation are proving much more persistent than many had expected. It is widely believed that rising interest rates and high energy prices will tip economies into recession within the next twelve months. The outlook is all the murkier for a political situation in which leaders lurch reactively from one issue to the next apparently without strategy and in which national agendas increasingly impede international cooperation.
For financial markets, these issues cast doubt on the comfortable assumptions of recent decades, when the disinflationary tide allowed central banks to resort to ever looser monetary policy in order to offset economic threats. So, echoing my words in the annual report six months ago, I remain perplexed that government bond markets are not more concerned. Certainly, yields have risen sharply, but they remain well below present rates of inflation. The reaction of equity markets is more understandable – the recession fear has precipitated the 20.2% fall for the NSCI (XIC) this calendar year. And within equity markets, the investment styles are behaving in a manner that one might expect in an environment of high inflation and rising rates, with value out-performing to ASCoT’s benefit.
It is heartening that the Managers’ patience and commitment to their value investment philosophy is being rewarded after growth stocks’ lengthy hegemony took them to what are proving unsustainable levels. This is a salutary reminder that exogenous factors, such as inflation and monetary policy, play important roles in how the stockmarket values companies and that, while these factors can dominate for extended periods, they are not constants.
Turning to ASCoT’s portfolio, if it is to be tested by recession, I take comfort from the resilience displayed by the investee companies through the challenges of recent years. The Managers’ Report describes the balance sheet strength currently enjoyed by the holdings and how this is contributing to the on-going recovery in dividends. I would also note that valuations, whether historical or forecast, are already at unusually low levels, which suggests to me that some of the big picture concerns are already reflected in share prices. Indeed, to judge by the frequency of takeovers, that would seem to be an opinion…
Read More: Aberforth Smaller Companies Trust Plc – Correction : Half-year Report | MarketScreener