Aberforth
Smaller Companies Trust plc
Half
Yearly Report for the six months to 30 June
2024
The
following is an extract from Aberforth Smaller Companies Trust
plc’s Half Yearly Report for the six month period to 30 June 2024.
FINANCIAL
HIGHLIGHTS
Total
Return Performance
|
%
|
|
|
Net
Asset Value per Ordinary Share
|
13.1
|
Deutsche
Numis Smaller Companies Index (excluding Investment
Companies)
|
5.4
|
Ordinary
Share Price
|
12.9
|
|
30
June 2024
|
31
December 2023
|
30
June 2023
|
|
|
|
|
|
|
Shareholders’
Funds
|
£1,426m
|
£1,297m
|
£1,219m
|
|
Market
Capitalisation1
|
£1,272m
|
£1,163m
|
£1,044m
|
|
Actual
Gearing employed1
|
6.5%
|
5.1%
|
3.6%
|
|
Net Asset
Value per Ordinary Share
|
1,694.73p
|
1,536.73p
|
1,438.50p
|
|
Ordinary
Share price1
|
1,512.00p
|
1,378.00p
|
1,232.00p
|
|
Ordinary
Share discount1
|
10.8%
|
10.3%
|
14.4%
|
|
Interim
dividend of 13.60p per share for the year ended 31 December 2024, which is 5.0% higher than the
previous year’s 12.95p per share.
1Alternative
Performance Measures (refer to Note 9 and the 2023 Annual
Report)
INVESTMENT
OBJECTIVE
The
investment objective of the Company is to achieve a net asset value
total return (with dividends reinvested) greater than that of the
Deutsche Numis Smaller Companies Index (excluding Investment
Companies) (“DNSCI (XIC)”) over the long term.
Chairman’s Statement
Review
of performance
ASCoT’s
net asset value total return in the six months to 30 June 2024 was +13.1%, while its share price
total return was +12.9%.
The
difference between the two numbers reflected a slight widening of
the discount of the share price to the net asset value per
share.
This was a
particularly good performance for a six month period and compares
well with the +5.4% total return from the benchmark index, the
Deutsche Numis Smaller Companies Index (excluding investment
companies (DNSCI (XIC)).
Large UK
companies, represented by the FTSE All-Share, recorded a +7.4%
return.
So strong
an investment performance was not the obvious outcome against a
background of wars, elections and recessions, but markets move to
their own beat.
As 2023
drew to a close, valuations of small UK quoted companies were so
low that it seemed something had to give.
The
immediate challenge to the despondency has come in the form of
takeover activity.
Bigger
companies, overseas companies and private equity have spotted the
opportunity in small UK quoted companies even as institutional and
retail investors lose interest.
The other
important development has been a further decline in the inflation
rate.
This has
inspired the market to look ahead to the prospect of lower interest
rates and beyond that to an upturn in economic activity.
The
Managers’ Report explains how this investment environment has
affected ASCoT’s performance, as well as setting out the
portfolio’s positioning and valuation.
Dividends
ASCoT
enjoyed a very strong income performance in
2023.
Dividend
receipts from investee companies were the highest ever and one
third above their 2019 level before the
pandemic.
For 2024,
a modest decline in underlying dividend receipts (i.e. excluding
special dividends) is currently expected.
This
reflects the recession in the second half of last year and weaker
trading conditions encountered by investee companies.
Notwithstanding
this cyclical weakness, the Board expects to be able to meet its
ambition to grow ASCoT’s 2024 full year dividend above the rate of
inflation.
We take
confidence both from the Managers’ dividend estimates and from
ASCoT’s healthy revenue reserves.
These
reserves amounted to 80.1p per Ordinary Share at the start of the
year, equivalent to roughly 1.9 times last year’s underlying
dividend.
On the
basis of current forecasts, we do not anticipate using these
reserves in respect of 2024.
The Board
is pleased to announce an interim dividend of 13.60p per Ordinary
Share.
This is
5.0% higher than the previous year’s 12.95p.
As was the
case last year, this rate of increase is set above the anticipated
year end inflation rate, which is based on an average of forecasts
aggregated by Bloomberg.
Should
these forecasts prove inaccurate, it would be the Board’s intention
to use the final dividend to meet the ambition to grow ASCoT’s full
year underlying dividend (i.e. excluding any special dividend
declared) in real terms.
The
interim dividend will be paid on 29 August
2024 to Shareholders on the register at the close of
business on 9 August
2024.
The
ex-dividend date is 8 August
2024.
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
benefits from a £130m credit facility from The Royal Bank of
Scotland International Limited, which runs to 15 June 2026.
The
facility is deployed tactically to take advantage of periods of
equity market stress, with a view to increasing investment returns
for Shareholders. ASCoT has been geared on four occasions over its
33 year history.
The
present opportunity arose amid the pandemic in 2020, since when
gearing has enhanced returns. Because portfolio valuations remain
depressed, the Board and Managers believe it appropriate that ASCoT
remains geared.
Influenced
by the timing of M&A activity within the portfolio, the gearing
ratio has varied through the first half of 2024.
At
30 June 2024, £98m of the credit
facility was deployed and the gearing ratio was 6.5%.
Share
buy-back
The Board
believes that buy-backs provide an increase in liquidity at the
margin for those Shareholders looking to crystallise their
investment and, at the same time, deliver an economic uplift for
those Shareholders wishing to remain invested in the
Company.
In the six
months to 30 June 2024, 275,000
shares were bought back and cancelled.
The total
value of these repurchases was £3.7m, on an average discount of
12%.
Since
2008, ASCoT’s share buy-backs have totalled £161m and added £24m of
value to Shareholders.
Annual
General Meeting (AGM)
All
resolutions at the AGM held on 5 March
2024 were passed, including approval for the renewal of
authority to buy back up to 14.99% of ASCoT’s Ordinary
Shares
Conclusion
Financial
markets are never boring.
The
revaluation of those companies enabling artificial intelligence
(AI) has been extraordinary, exemplified by Nvidia as it vies to be
the world’s most valuable company.
Its
staggering ascent has been a challenge to the valuation of other
companies and indeed asset classes.
The effect
has been akin to that of a black hole, sucking liquidity and
interest away from other investment
opportunities.
Whether
Nvidia and the others go on to justify investors’ confidence
remains to be seen – markets do tend to overshoot in both
directions.
Small UK
quoted companies are a case in point.
At the end
of 2023 the market was deeply despondent about their
prospects.
This left
their valuations vulnerable to good news, or at least less bad
news, which has come in the form of numerous bids for UK companies
and improving inflation reports.
It is most
encouraging that ASCoT has taken advantage of this renewed interest
in the asset class to start 2024 with good investment
returns.
Of course,
it would be unwise to expect the stockmarket to deliver the further
reappraisal of smaller companies in an uninterrupted
fashion.
After all,
a clear lesson from the last couple of years is the
unpredictability of inflation data, which has affected monetary
policy and economic activity.
To this we
should add the on-going uncertainties at the political
level.
The
decisive election outcome should improve perceptions of the UK, but
the actions of the new government remain to be
determined.
Meanwhile,
France’s election highlights political strain within the EU and the
American presidential election looms.
However,
the Board remains optimistic about ASCoT’s prospects for several
reasons.
Our
discussions with the Managers and their reports make clear that
ASCoT invests in good businesses – they are well run, they have
strong balance sheets, and they grow their profits and dividends
over time.
Additionally,
despite the improvement of the first half of the year, valuations
remain attractive both in relation to history and to equities in a
broader international context.
Furthermore,
the Managers are unwaveringly committed to their investment
approach and value investment philosophy, a consistency which has
served ASCoT well over its 33 years even as the markets ebb and
flow.
Richard Davidson
Chairman
26 July 2024
richard.davidson@aberforth.co.uk
Managers’ Report
Investment
background
Over the
six months to 30 June 2024, ASCoT’s
net asset value total return was +13.1%.
This
compares with a +5.4% return from ASCoT’s benchmark, the DNSCI
(XIC), and with a +7.4% return from large companies in the form of
the FTSE All-Share.
This good
start to 2024 has its roots in the very low valuations ascribed by
the stockmarket to small UK quoted companies as 2023 drew to a
close – with sentiment so negative, it was never going to take much
to bring improved investment performance.
The first
half has indeed brought encouraging developments for the UK’s
economy, its politics and its stockmarket.
•
On the
economic front, recession has been a persistent concern over the
past two years.
Higher
inflation and interest rates threatened a slowdown in domestic
activity, which became noticeable in the trading statements of
smaller companies from the second quarter of
2023.
We now
know that there was indeed a recession in the second half of last
year.
It was,
though, a mild and short downturn, much less severe than some
commentators had expected.
Growth
remains subdued, but, with the rate of inflation easing, there is
the prospect of lower interest rates later in the
year.
In turn,
more accommodating monetary policy should herald more favourable
trading conditions for companies and an upturn in the profit
cycle.
•
To many
outside observers, the UK’s political situation since the EU
referendum has been baffling.
Perceptions
of political dysfunction have discouraged investment in UK equities
and affected their valuation relative to other
markets.
However,
the UK’s seeming monopoly on political uncertainty is becoming less
clearcut.
On the one
hand, the General Election has delivered a government with a
decisive majority that should not be in thrall to the more extreme
elements of the ruling party.
On the
other hand, the politics of several other western democracies
threaten to become less certain.
The EU
elections have seen an upswing in support for populist parties and
have precipitated a potentially destabilising parliamentary
election in France.
Meanwhile,
the US faces its own democratic test later in the year, with the
outcome still far from certain.
•
Concerns
that the UK stockmarket may not be fit for purpose intensified in
2023 when Arm, the semiconductor business, chose to list in the
US.
Before
that, there was a broadening recognition by government and
regulators that the UK’s capital markets could be
improved.
A slew of
initiatives – such as the Edinburgh Reforms, the Mansion House
Compact, the FCA’s review of listing rules and consultation for a
UK ISA – has followed.
It is easy
to be sceptical about each of these in isolation, but official
recognition of the issue and the general direction of travel are
encouraging.
However,
taking a step back, it is worth reflecting on whether the UK
stockmarket has a particular problem.
After all,
de-equitisation and the loss of companies to private capital have
been features of many markets for two decades.
The
unusual stockmarket in the global context has not been the UK, but
the US with the extraordinary and incredible valuations accorded to
a small number of technology giants.
From their
daily interactions with the UK stockmarket, the Managers believe
that it can value companies fairly over time.
The
valuation process may be complicated by concerns about the economic
cycle and by politics, but these ebb and flow and currently enhance
the opportunity in UK equities.
As equity
investors mull this opportunity, the first half of 2024 brought
clear evidence of how gaps between stockmarket valuations and
companies’ intrinsic value can be bridged – M&A activity
continued at an elevated rate.
Larger
companies, overseas companies and private equity have identified
the opportunity in depressed UK valuations and are emerging as the
marginal buyers of UK equities.
Over the
six months, the investment universe saw agreed bids for seven
companies announced and there were numerous approaches for other
companies.
Of the
agreed deals, ASCoT had holdings in three, which together accounted
for around one third of ASCoT’s out-performance against the DNSCI
(XIC) in the period.
Throughout
its history, ASCoT’s performance tends to have benefited from
M&A – part of the Managers’ investment approach is to consider
who might want to own a company if the stockmarket proves unwilling
to value it appropriately.
However,
given how low valuations are at present, there is a heightened risk
that companies are sold too cheaply.
Some
company boards, influenced by the pervasive gloom about the UK and
sometimes encouraged by other Shareholders, have been too quick to
yield to takeover interest.
Where
takeover valuations fall short of their determination of intrinsic
value, the Managers vote against the proposed deals or engage to
seek improved terms from the acquirers.
However,
the chance of a better outcome for Shareholders is improved by
timely consultation by boards of target companies before they agree
to a deal.
In order
to engage constructively, the Managers are prepared to be taken
inside for extended periods.
To be
clear, the purpose of these engagement efforts is not to protect
the UK stockmarket but to improve investment results for ASCoT’s
Shareholders.
Analysis
of
performance and portfolio
characteristics
Over the six months to 30 June 2024,
ASCoT’s net asset value total return was +13.1% and the DNSCI
(XIC)’s was +5.4%.
An analysis of the difference between the two numbers is shown in
the table below.
The most significant influence on the performance attributable to
the portfolio of investments was M&A activity: as noted above,
the three companies that announced agreed bids in the period
accounted for 240 basis points of relative performance.
For
the
six
months
ended
30
June
2024
|
Basis
points
|
Attributable
to
the
portfolio
of
investments,
based
on
mid
prices
|
746
|
(after
transaction
costs
of
8
basis
points)
|
|
Movement
in
mid
to
bid
price
spread
|
11
|
Cash/gearing
|
47
|
Purchase
of
ordinary
shares
|
4
|
Management
fee
|
(36)
|
Other
expenses
|
(3)
|
Total
attribution
based
on
bid
prices
|
769
|
Note: 100 basis points = 1%.
Total Attribution is the difference between the total return of the
NAV and the Benchmark Index (i.e. NAV = 13.12%; Benchmark Index =
5.43%; difference is 7.69% being 769 basis points).
The next table sets out a series of characteristics of both the
portfolio and the DNSCI (XIC).
The paragraphs that follow provide context and explanation for
these characteristics and for ASCoT’s performance in the first half
of 2024.
Portfolio characteristics
|
30 June 2024
|
30 June 2023
|
ASCoT
|
DNSCI (XIC)
|
ASCoT
|
DNSCI (XIC)
|
Number of
companies
|
77
|
339
|
78
|
339
|
Weighted
average market capitalisation
|
£624m
|
£986m
|
£528m
|
£945m
|
Weighting
in “smaller small” companies*
|
56%
|
27%
|
60%
|
31%
|
Portfolio
turnover over prior 12 months
|
19%
|
N/A
|
21%
|
N/A
|
Active
share
|
73%
|
N/A
|
76%
|
N/A
|
Price
earnings (PE) ratio (historical)
|
10.2x
|
13.5x
|
7.1x
|
10.8x
|
Dividend
yield (historical)
|
3.8%
|
3.4%
|
4.2%
|
3.5%
|
Dividend
cover (historical)
|
2.6x
|
2.2x
|
3.4x
|
2.6x
|
*“Smaller small” companies are members of the DNSCI (XIC) that are
not also members of the FTSE 250
Style
& size
The
Managers’ value investment style has been helpful to ASCoT’s
returns since the start of the pandemic rally in late
2020.
Higher
inflation and interest rates have contributed to a more favourable
environment for the value investor.
So far in
2024, the London Business School’s analysis of style effects within
the DNSCI (XIC) suggests little difference between the performances
of the index’s value and growth cohorts, with the latter very
slightly ahead of the former.
This would
imply that style did not have a meaningful effect on ASCoT’s
relative returns in the six month period.
Size
positioning relative to the DNSCI (XIC) was more
helpful.
ASCoT
retains its higher exposure to “smaller small”
companies.
FTSE 250
stocks represent 73% of the total value of the DNSCI (XIC) but only
44% of ASCoT’s portfolio.
The
Managers’ preference for the smaller non FTSE 250 companies is
motivated by their lower valuations.
Over the
six months to 30 June 2024, “smaller
small” companies out-performed the FTSE 250, which indicates a
boost to ASCoT’s return from its size positioning.
Balance
Sheets
The table
below shows the balance sheet profile of the portfolio and of the
Tracked Universe, which is a subset of the DNSCI
(XIC).
It
comprises 227 companies, which the Managers follow closely and
which together represent 98% by value of the total DNSCI (XIC)
index.
Weight in companies with:
|
Net
cash
|
Net
debt/EBITDA
<
2x
|
Net
debt/EBITDA
>
2x
|
Other*
|
Portfolio: 2024
|
34%
|
45%
|
14%
|
7%
|
Tracked universe: 2024
|
37%
|
39%
|
17%
|
6%
|
*Includes loss-makers and lenders
Notwithstanding the recession in the second half of 2023, small
companies’ balance sheets remain in good
condition.
The table above shows that over one third of both the investment
universe and ASCoT’s portfolio is represented by companies with net
cash on their balance sheets.
This resilience has allowed companies to continue to invest despite
the tougher trading conditions.
The ratio of capital expenditure to depreciation for companies with
December year ends, which reported their 2023 results in the first
quarter of 2024, was a healthy 1.2x.
Balance sheet strength has also contributed to an upsurge in share
buy-back activity.
Fourteen of ASCoT’s holdings repurchased shares in the first half
of 2024, as boards sought to take advantage of depressed
stockmarket valuations.
Income
The table
below divides ASCoT’s 77 holdings in categories that are determined
by each company’s most recent dividend action. The balance of the
analysis is positive, with the most populated category being
Increased Payers.
Nil
Payer
|
Cutter
|
Unchanged
Payer
|
Increased
Payer
|
New/Returner
|
14
|
15
|
12
|
34
|
2
|
The main change compared with twelve months ago is the higher
number of Cutters.
This reflects the recession and more challenging trading conditions
in the second half of 2023. Consistent with this, it is likely that
ASCoT’s dividend income from its holdings will be lower in 2024
than it was in 2023.
However, last year’s dividend experience was extremely strong and
so, on the basis of current estimates for the rest of the year, it
is likely that the Board will be able to meet its dividend ambition
and have the option to strengthen revenue reserves
further.
The average historical yield of ASCoT’s 77 holdings was 3.8% at
30 June 2024, which is down from 4.2%
twelve months earlier.
Dividend cover has declined from 3.4x to 2.6x.
This is because dividends have proved more resilient than have
profits through the recent downturn.
Such resilience reflects the strong balance sheets previously
described.
It is also influenced by a general appreciation among investee
company boards of the importance of dividends to their investors,
particularly when broad interest in UK equities is at a low
ebb.
ASCoT’s
gearing
At
30 June 2024, ASCoT’s gearing ratio
was 6.5%, up from 5.1% at the start of the year.
The ratio
has oscillated through the period with share price movements and as
proceeds from holdings subject to takeovers have been
received.
ASCoT
employs gearing tactically to take advantage of periods of stress
in financial markets.
The
current instance of gearing is the fourth since launch in 1990 and
stems from the pandemic in 2020.
Since
then, gearing has enhanced investment returns, but valuations of
smaller companies remain very attractive.
As long as
the opportunity embedded in these valuations remains, it is
appropriate for ASCoT to be geared.
Active
share
Active
share is a measure of how different a portfolio is from an
index.
The ratio
is calculated as half of the sum of the absolute differences
between each stock’s weighting in the index and its weighting in
the portfolio.
The higher
a portfolio’s active share, the higher its chance of performing
differently from the index, for better or worse.
The
Managers target an active share ratio of at least 70% for ASCoT’s
portfolio compared with the DNSCI (XIC).
At
30 June 2024, it stood at
73%.
Value
roll and portfolio turnover
The main
influence on ASCoT’s portfolio turnover in any period is usually
the stockmarket’s appetite for small UK quoted
companies.
If prices
and valuations are rising, the upsides to the Managers’ target
prices are likely to be narrowing.
All else
being equal, this would encourage the rotation of ASCoT’s capital
from companies with lower upsides to those with higher upsides. The
Managers’ term this dynamic the “value roll” and it has made an
important contribution to ASCoT’s capital and income returns over
the years.
It follows
that periods of higher portfolio turnover are often associated with
strong returns for ASCoT.
Over the
twelve months to 30 June 2024,
portfolio turnover, defined as the lower of purchases and sales
divided by average portfolio value, was 19%.
This is
below the long term average of 34%.
Notwithstanding
ASCoT’s positive return in the six month period, this suggests that
there was less opportunity for “value roll” than
usual.
This is
another symptom of the deep under-valuation of small UK quoted
companies – if the stockmarket does not reflect their true value,
there is every incentive to maintain the position.
Valuations
The
valuations of UK equities in general and small UK quoted companies
in particular remain attractive.
The
Managers’ Report published in January described how ASCoT benefited
from three layers of valuation advantage: (1) the PE ratio of UK
equities is lower than that of the rest of the world; (2) the PE of
smaller companies is lower than that of large UK companies; (3) the
PE ratio of ASCoT’s portfolio is lower than that of small UK quoted
companies.
This
triple discount was still in place at 30
June 2024, but, importantly, there are signs that a
re-rating is under way.
The chart
below depicts the historical PE ratio of ASCoT’s
portfolio.
At the
start of 2024, the PE was 7.9x, a rating consistent with
recession.
The
previous three occasions on which the PE has reached this level
have come with economic downturns: the early 1990s recession at the
left of the chart, the global financial crisis in the middle and
the pandemic recession in 2020.
On each
occasion, the de-rating of the portfolio’s companies has been
followed by a re-rating, as the stockmarket moves from worrying
about falling earnings to enthusing about earnings recovery. The
chart indicates that we are in the early stages of a similar
recovery, with the average PE of the portfolio having risen to
10.2x at 30 June 2024.
![A graph showing the value of a stock marketDescription automatically generated](https://mb.cision.com/Public/22371/4018946/a1db283323f67816_800x800ar.png)
Both the
numerator and the denominator of the PE ratio contributed to its
rise over the first six months of 2024.
Share
prices have risen even as earnings reported by companies have
declined –data from London Business
School suggest that small company profits declined by 8% in
2023.
The
stockmarket looks ahead and, gaining confidence from easing
inflation and a likely peak in interest rates, is starting to
anticipate a turn in the profits cycle.
The
opportunity for recovery in profits comes from both the impact of
last year’s recession and the pandemic’s lingering effects, such as
the extensive supply chain problems.
As the
chart suggests, there is scope for a further re-rating as profits
recover.
Of the
three earlier recessions in ASCoT’s lifetime, one – the early 1990s
downturn – was caused by inflation and the monetary policy
reaction.
The table
below shows how the recession played out and its impact on small UK
quoted companies.
|
1990
|
1991
|
1992
|
1993
|
Cumulative
1991-93
|
UK
economic context
|
|
|
|
|
|
GDP
YoY
|
+0.6%
|
-1.4%
|
+0.2%
|
+2.3%
|
+1.1%
|
CPI
YoY
|
+7.0%
|
+7.5%
|
+4.2%
|
+2.4%
|
+15.9%
|
Year end
base rates
|
13.9%
|
10.4%
|
6.9%
|
5.4%
|
-
|
DNSCI
(XIC)* experience
|
|
|
|
|
|
Year end
PE ratio
|
8.2x
|
11.3x
|
13.9x
|
18.6x
|
-
|
Implied
earnings growth
|
+1.8%
|
-13.7%
|
-13.0%
|
+6.2%
|
-20.3%
|
Total
return
|
-23.5%
|
+18.9%
|
+7.1%
|
+41.5%
|
+80.2%
|
*Taken or
calculated from London Business School
data
The table
shows that small company share prices fell in 1990 as the market
anticipated the recession in 1991 and two years of sharp declines
in earnings.
However,
even as the profit downturn played out, share prices started to
rise as the market was encouraged by lower interest rates to
anticipate an upturn in earnings.
That
upturn duly arrived in 1993, which precipitated further share
prices gains.
Over the
period, small company valuations took the strain as the year end PE
ratio rose from 8.2x to 18.6x.
It is
tempting to draw parallels between the early 1990s experience and
the current situation.
In 2022,
the total return from small companies was -17.9% and the PE was
8.1x at the year end.
In 2023,
the recessionary conditions meant that earnings declined by 8.2%,
but the total return from the asset class turned positive as the
market started to anticipate recovery and took the year end PE
ratio up to 12.8x.
In 2024 so
far, the total return has again been positive, even though earnings
are likely to be flat to slightly down over the year as a
whole.
The market
again seems enthused by the prospect of interest rate cuts, which
in due course might bring an earnings recovery in 2025.
Clearly,
much could change over coming months and there is no guarantee that
the events of the early 1990s will be
replicated.
However,
the experience then serves as a useful reminder of how the market
gets to grips with inflection points in the economic cycle and
looks through prevailing or near term gloom.
Outlook
and
conclusion
Around the world, financial markets remain focused on the US
interest rate cycle.
US economic data released through the first half of the year proved
more robust than anticipated – disinflation is happening, but
uncertainty about the future path of inflation remains higher than
in the years before the pandemic.
This has contributed to a delay to the first cut to US interest
rates.
Until the Federal Reserve moves, it is unlikely that other central
banks will be able to ease monetary policy in a meaningful fashion.
Meanwhile, financial markets are also contending with elevated
geopolitical risk.
Russia’s invasion of Ukraine
continues, while Israel and Hamas
remain in conflict. Elsewhere, the implications of recent elections
and of those to come add to the uncertainty.
An additional complication for markets has been the burgeoning
fascination for AI.
This promises significant productivity benefits for many companies
in due course but benefits a very small number of stocks in the
near term.
Nvidia and its ilk have assumed truly incredible valuations and,
with their apparent promise of secular and low risk growth, would
appear to be sucking interest from other equities.
This has been an invidious backdrop for many asset classes, small
UK quoted companies included. However, such conditions give rise to
investment opportunities as the stockmarket inevitably overreacts
in both directions.
There are several strands to the investment opportunity in front of
ASCoT today.
•
The valuations of UK assets have attracted a discount since the EU
referendum as political uncertainty has deterred investment
activity.
By giving Labour a convincing majority, the recent election
promises a period of greater stability.
It will take time to understand their priorities and the impact of
their policies on the economy and markets, but it is feasible that
the UK could emerge from 2024 with a less uncertain political
situation than many of its western peers, which could help the
relative valuation of UK assets.
•
The companies available to ASCoT in the investment universe have
good and well managed businesses.
Their balance sheets are strong and in normal economic conditions
their profits grow.
Using the five years up to the end of 2019, to exclude the pandemic
and its aftereffects, small company dividend growth averaged 8% per
annum.
When the pandemic then hit dividends by one third, they recovered
fully in less than two years.
Such growth and resilience are not characteristics of poor
companies.
•
Having endured the downside of an economic slowdown, the market is
now contemplating an upturn in the economic
cycle.
Corporate profitability should benefit as interest rates decline
and, contemporaneously, market valuations should also improve as
has happened in previous recoveries.
•
The on-going high rate of M&A activity is highlighting the
attractiveness of UK valuations and the quality of small UK quoted
companies.
After all, it is unlikely that overseas companies and private
equity firms are buying UK companies merely to benefit from a
cyclical recovery in profits.
The emergence of these M&A buyers, together with the upsurge in
share buy-backs by smaller companies, introduces marginal demand
from informed buyers for the asset class and mitigates the effect
of retail and institutional selling.
It is encouraging that these factors have begun to be recognised in
stronger share prices and higher valuations over recent
months.
The path to a fuller and merited revaluation of the portfolio’s
holdings is unlikely to be smooth, but ASCoT is well placed to
generate good medium and long term investment returns for its
Shareholders.
Aberforth Partners LLP
Managers
26 July 2024
INTERIM
MANAGEMENT REPORT
A review
of the half year and the outlook for the Company can be found in
the Chairman’s Statement and the Managers’ Report.
Risks
and Uncertainties
The
Directors have a process for identifying, evaluating and managing
the principal and emerging risks faced by the Company. The Board
believes that the Company has a relatively low risk profile in the
context of the investment trust industry. This belief arises from
the fact that the Company has a simple capital structure; invests
only in small UK quoted companies; is not exposed to derivatives
and does not presently intend any such exposure; and outsources all
the main operational activities to recognised, well established
firms.
The
principal risks faced by the Company relate to investment
strategy/performance, market risk, share price discount, gearing,
reputational risk and regulatory risk. An explanation of these
risks and how they are managed can be found in the Strategic Report
contained within the 2023 Annual Report. These principal risks and
uncertainties continue to apply as disclosed in the 2023 Annual
Report and as updated by the Managers' Report in these interim
statements.
Going
Concern
The
Directors are satisfied that the Company has sufficient resources
to continue in operation for the foreseeable future, a period of
not less than 12 months from the date of this report. The Company’s
assets comprise mainly readily realisable equity securities and
funding flexibility can typically be achieved through the use of
the Company’s borrowing facilities. Accordingly, they continue to
adopt the going concern basis in preparing the financial
statements.
DIRECTORS’
RESPONSIBILITY STATEMENT
The
Directors confirm that, to the best of their knowledge:
(i) the
condensed set of financial statements has been prepared in
accordance with Financial Reporting Standard 104 “Interim Financial
Reporting”.
(ii) the
Half Yearly Report includes a fair review of information required
by:
(a) DTR
4.2.7R of the Disclosure Guidance and Transparency Rules, being an
indication of important events during the first six months of the
year and their impact on the financial statements together with a
description of the principal risks and uncertainties for the
remaining six months of the year; and
(b) DTR
4.2.8R of the Disclosure Guidance and Transparency Rules, being
disclosure of related party transactions and changes
therein.
(iii) the
Half Yearly Report, taken as whole, is fair, balanced and
understandable and provides information necessary for Shareholders
to assess the Company’s performance, objective and
strategy.
On behalf
of the Board
Richard Davidson
26 July 2024
INCOME
STATEMENT (unaudited)
For
the six months ended 30 June
2024
|
Revenue
£’000
|
Capital
£’000
|
Total
£’000
|
Realised
net gains on sales
|
-
|
73,968
|
73,968
|
Movement
in fair value
|
-
|
72,570
|
72,570
|
|
_______
|
_______
|
_______
|
Net gains
on investments
|
-
|
146,538
|
146,538
|
Investment
income
|
27,050
|
-
|
27,050
|
Other
income
|
57
|
-
|
57
|
Investment
management fee (Note 2)
|
(1,770)
|
(2,950)
|
(4,720)
|
Portfolio
transaction costs
|
-
|
(1,102)
|
(1,102)
|
Other
expenses
|
(427)
|
-
|
(427)
|
|
_______
|
_______
|
_______
|
Net
return before finance costs and tax
|
24,910
|
142,486
|
167,396
|
Finance
costs (Note 2)
|
(1,239)
|
(2,066)
|
(3,305)
|
|
_______
|
_______
|
_______
|
Return
on ordinary activities before tax
|
23,671
|
140,420
|
164,091
|
Tax on
ordinary activities
|
-
|
-
|
-
|
|
_______
|
_______
|
_______
|
Return
attributable to equity shareholders
|
23,671
|
140,420
|
164,091
|
|
_______
|
_______
|
_______
|
|
|
|
|
Returns
per Ordinary Share (Note 4)
|
28.12p
|
166.78p
|
194.90p
|
Dividends
On
26 July 2024, the Board declared an
interim dividend for the year ending 31
December 2024 of 13.60p per Ordinary Share (2023 – 12.95p),
which will be paid on 29 August
2024.
For
the six months ended 30 June
2023
|
Revenue
£’000
|
Capital
£’000
|
Total
£’000
|
Realised
net gains on sales
|
-
|
34,230
|
34,230
|
Movement
in fair value
|
-
|
(47,669)
|
(47,669)
|
|
_______
|
_______
|
_______
|
Net
(losses) on investments
|
-
|
(13,439)
|
(13,439)
|
Investment
income
|
27,591
|
-
|
27,591
|
Other
income
|
51
|
-
|
51
|
Investment
management fee (Note 2)
|
(1,685)
|
(2,809)
|
(4,494)
|
Portfolio
transaction costs
|
-
|
(1,173)
|
(1,173)
|
Other
expenses
|
(431)
|
-
|
(431)
|
|
_______
|
_______
|
_______
|
Net return
before finance costs and tax
|
25,526
|
(17,421)
|
8,105
|
Finance
costs (Note 2)
|
(792)
|
(1,319)
|
(2,111)
|
|
_______
|
_______
|
_______
|
Return on
ordinary activities before tax
|
24,734
|
(18,740)
|
5,994
|
Tax on
ordinary activities
|
(82)
|
-
|
(82)
|
|
_______
|
_______
|
_______
|
Return
attributable to equity shareholders
|
24,652
|
(18,740)
|
5,912
|
|
_______
|
_______
|
_______
|
|
|
|
|
Returns
per Ordinary Share (Note 4)
|
29.04p
|
(22.08)p
|
6.96p
|
For
the year ended 31 December
2023
|
Revenue
£’000
|
Capital
£’000
|
Total
£’000
|
Realised
net gains on sales
|
-
|
59,725
|
59,725
|
Movement
in fair value
|
-
|
(1,293)
|
(1,293)
|
|
_______
|
_______
|
_______
|
Net gains
on investments
|
-
|
58,432
|
58,432
|
Investment
income
|
56,423
|
-
|
56,423
|
Other
income
|
91
|
-
|
91
|
Investment
management fee (Note 2)
|
(3,350)
|
(5,583)
|
(8,933)
|
Portfolio
transaction costs
|
-
|
(1,855)
|
(1,855)
|
Other
expenses
|
(823)
|
-
|
(823)
|
|
_______
|
_______
|
_______
|
Net return
before finance costs and tax
|
52,341
|
50,994
|
103,335
|
Finance
costs (Note 2)
|
(1,578)
|
(2,631)
|
(4,209)
|
|
_______
|
_______
|
_______
|
Return on
ordinary activities before tax
|
50,763
|
48,363
|
99,126
|
Tax on
ordinary activities
|
(82)
|
-
|
(82)
|
|
_______
|
_______
|
_______
|
Return
attributable to equity shareholders
|
50,681
|
48,363
|
99,044
|
|
_______
|
_______
|
_______
|
|
|
|
|
Returns
per Ordinary Share (Note 4)
|
59.79p
|
57.05p
|
116.84p
|
RECONCILIATION
OF MOVEMENTS IN SHAREHOLDERS’ FUNDS
(unaudited)
For
the six months ended 30 June
2024
|
Share
capital
£’000
|
Capital
redemption
reserve
£’000
|
Special
reserve
£’000
|
Capital
reserve
£’000
|
Revenue
reserve
£’000
|
Total
£’000
|
Balance
as at 31 December 2023
|
844
|
144
|
38,840
|
1,158,046
|
99,353
|
1,297,227
|
Return on
ordinary activities after tax
|
-
|
-
|
-
|
140,420
|
23,671
|
164,091
|
Equity
dividends paid
|
-
|
-
|
-
|
-
|
(31,686)
|
(31,686)
|
Purchase
of Ordinary Shares
|
(3)
|
3
|
(3,695)
|
-
|
-
|
(3,695)
|
|
_______
|
_______
|
_______
|
________
|
_______
|
________
|
Balance
as at 30 June 2024
|
841
|
147
|
35,145
|
1,298,466
|
91,338
|
1,425,937
|
|
_______
|
_______
|
_______
|
________
|
_______
|
________
|
For
the year ended 31 December
2023
|
Share
capital
£’000
|
Capital
redemption
reserve
£’000
|
Special
reserve
£’000
|
Capital
reserve
£’000
|
Revenue
reserve
£’000
|
Total
£’000
|
Balance as
at 31 December 2022
|
853
|
135
|
50,481
|
1,109,683
|
89,718
|
1,250,870
|
Return on
ordinary activities after tax
|
-
|
-
|
-
|
48,363
|
50,681
|
99,044
|
Equity
dividends paid
|
-
|
-
|
-
|
-
|
(41,046)
|
(41,046)
|
Purchase
of Ordinary Shares
|
(9)
|
9
|
(11,641)
|
-
|
-
|
(11,641)
|
|
_______
|
_______
|
_______
|
________
|
_______
|
________
|
Balance as
at 31 December 2023
|
844
|
144
|
38,840
|
1,158,046
|
99,353
|
1,297,227
|
|
_______
|
_______
|
_______
|
________
|
_______
|
________
|
For
the six months ended 30 June
2023
|
Share
capital
£’000
|
Capital
redemption
reserve
£’000
|
Special
reserve
£’000
|
Capital
reserve
£’000
|
Revenue
reserve
£’000
|
Total
£’000
|
Balance as
at 31 December 2022
|
853
|
135
|
50,481
|
1,109,683
|
89,718
|
1,250,870
|
Return on
ordinary activities after tax
|
-
|
-
|
-
|
(18,740)
|
24,652
|
5,912
|
Equity
dividends paid
|
-
|
-
|
-
|
-
|
(30,084)
|
(30,084)
|
Purchase
of Ordinary Shares
|
(6)
|
6
|
(7,501)
|
-
|
-
|
(7,501)
|
|
_______
|
_______
|
_______
|
________
|
_______
|
________
|
Balance as
at 30 June 2023
|
847
|
141
|
42,980
|
1,090,943
|
84,286
|
1,219,197
|
|
_______
|
_______
|
_______
|
________
|
_______
|
________
|
BALANCE
SHEET
(unaudited)
As
at 30 June 2024
|
30
June
2024
£’000
|
31
December
2023
£’000
|
30
June
2023
£’000
|
Fixed
assets
|
|
|
|
Investments
at fair value through profit or loss (Note 5)
|
1,519,222
|
1,363,980
|
1,262,992
|
|
________
|
________
|
________
|
Current
assets
|
|
|
|
Investment
income receivable
|
2,086
|
2,593
|
4,151
|
Amounts
due from brokers
|
894
|
-
|
8,461
|
Other
debtors
|
93
|
68
|
41
|
Cash at
bank
|
5,691
|
2,734
|
10,710
|
|
________
|
________
|
________
|
|
8,764
|
5,395
|
23,363
|
|
________
|
________
|
________
|
Creditors
(amounts
falling due within one year)
|
|
|
|
Amounts
due to brokers
|
(3,892)
|
-
|
(2,096)
|
Other
creditors
|
(282)
|
(305)
|
(252)
|
|
________
|
________
|
________
|
|
(4,174)
|
(305)
|
(2,348)
|
|
________
|
________
|
________
|
Net
current assets
|
4,590
|
5,090
|
21,015
|
|
________
|
________
|
________
|
Total
assets less current liabilities
|
1,523,812
|
1,369,070
|
1,284,007
|
Creditors
(amounts
falling due after more than one year)
|
|
|
|
Bank debt
facility
|
(97,875)
|
(71,843)
|
(64,810)
|
|
________
|
________
|
________
|
TOTAL
NET ASSETS
|
1,425,937
|
1,297,227
|
1,219,197
|
|
________
|
________
|
________
|
|
|
|
|
CAPITAL
AND RESERVES: EQUITY INTERESTS
|
|
|
|
Share
Capital
|
|
|
|
Ordinary
Shares
|
841
|
844
|
847
|
|
|
|
|
Reserves
|
|
|
|
Capital
redemption reserve
|
147
|
144
|
141
|
Special
reserve
|
35,145
|
38,840
|
42,980
|
Capital
reserve
|
1,298,466
|
1,158,046
|
1,090,943
|
Revenue
reserve
|
91,338
|
99,353
|
84,286
|
|
________
|
________
|
________
|
TOTAL
SHAREHOLDERS’ FUNDS
|
1,425,937
|
1,297,227
|
1,219,197
|
|
________
|
________
|
________
|
|
|
|
|
Net
Asset Value per share (Note 6)
|
1,694.73p
|
1,536.73p
|
1,438.50p
|
|
|
|
|
CASH
FLOW STATEMENT
(unaudited)
For
the six months ended 30 June
2024
|
Six
months ended
30
June 2024
£’000
|
Six
months
ended
30 June
2023
£’000
|
Year
ended
31
December
2023
£’000
|
|
|
|
|
Net
cash inflow from operating activities
|
22,441
|
20,586
|
46,160
|
|
|
|
|
Investing
activities
|
|
|
|
Purchases
of investments
|
(163,680)
|
(127,971)
|
(255,193)
|
Sales of
investments
|
156,872
|
166,262
|
270,051
|
|
_______
|
_______
|
_______
|
Cash
(outflow)/inflow from investing activities
|
(6,808)
|
38,291
|
14,858
|
|
|
|
|
Financing
activities
|
|
|
|
Purchases
of Ordinary Shares
|
(3,695)
|
(7,501)
|
(11,641)
|
Equity
dividends paid
|
(31,686)
|
(30,084)
|
(41,046)
|
Interest
and fees paid
|
(3,295)
|
(2,250)
|
(4,265)
|
Gross
drawdowns of bank debt facilities (before any costs)
|
56,000
|
20,000
|
52,000
|
Gross
repayments of bank debt facilities (before any costs)
|
(30,000)
|
(30,000)
|
(55,000)
|
|
_______
|
_______
|
_______
|
|
|
|
|
Cash
(outflow) from financing activities
|
(12,676)
|
(49,835)
|
(59,952)
|
|
|
|
|
Change
in cash during the period
|
2,957
|
9,042
|
1,066
|
|
_______
|
_______
|
_______
|
Cash at
the start of the period
|
2,734
|
1,668
|
1,668
|
Cash at
the end of the period
|
5,691
|
10,710
|
2,734
|
|
_______
|
_______
|
_______
|
NOTES
TO THE FINANCIAL STATEMENTS
1.
Accounting Standards
The
financial statements have been prepared on a going concern basis
and in accordance with the Financial Reporting Standard 104 and the
AIC’s Statement of Recommended Practice “Financial Statements of
Investment Trust Companies and Venture Capital Trusts”. The total
column of the Income Statement 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 2023
have been applied.
2.
Investment Management Fee and Bank Borrowings
The
Managers, Aberforth Partners LLP, receive an annual management fee,
payable quarterly in advance, equal to 0.75% of net assets up to £1
billion, and 0.65% thereafter.
The
investment management fee and finance costs of bank borrowings have
been allocated 62.5% to capital reserve and 37.5% to revenue
reserve, in line with the Board’s expected long term split of
returns, in the form of capital gains and income respectively, from
the investment portfolio of the Company.
3.
Dividends
|
Six
months ended
30
June 2024
£’000
|
Six months
ended
30 June
2023
£’000
|
Year
ended
31
December
2023
£’000
|
|
|
|
|
Amounts
recognised as distributions to equity holders in the
period:
|
|
|
|
Final
dividend of 26.95p for the year ended 31 December 2022
|
-
|
23,000
|
23,000
|
Special
dividend of 8.30p for the year ended 31 December 2022
|
-
|
7,084
|
7,084
|
Interim
dividend of 12.95p for the year ended 31 December 2023
|
-
|
-
|
10,962
|
Final
dividend of 28.55p for the year ended 31 December 2023
|
24,091
|
-
|
-
|
Special
dividend of 9.00p for the year ended 31 December 2023
|
7,595
|
-
|
-
|
|
______
|
______
|
______
|
|
31,686
|
30,084
|
41,046
|
|
______
|
______
|
______
|
The
interim dividend for the year ending 31
December 2024 of 13.60p (2023 – 12.95p) will be paid on
29 August 2024 to shareholders on the
register on 9 August 2024. The ex
dividend date is 8 August 2024. The
interim dividend has not been included as a liability in these
financial statements.
4.
Returns per Ordinary Share
The
returns per Ordinary Share are based on the following.
|
30
June
2024
|
30
June
2023
|
31
December 2023
|
|
|
|
|
Returns
attributable to Ordinary Shareholders
|
£164,091,000
|
£5,912,000
|
£99,044,000
|
|
|
|
|
Weighted
average number of shares in issue during the period
|
84,192,569
|
84,888,578
|
84,766,084
|
|
|
|
|
Return per
Ordinary Share
|
194.90p
|
6.96p
|
116.84p
|
5.
Investments at fair value
In
accordance with FRS 102 and FRS 104, 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).
Investments
held at fair value through profit or loss
|
Level
1
|
Level
2
|
Level
3
|
Total
|
As
at 30 June 2024
|
£'000
|
£'000
|
£'000
|
£'000
|
Listed
equities
|
1,519,222
|
-
|
-
|
1,519,222
|
Unlisted
equities
|
-
|
-
|
-
|
-
|
|
________
|
________
|
________
|
________
|
Total
financial asset investments
|
1,519,222
|
-
|
-
|
1,519,222
|
|
________
|
________
|
________
|
________
|
|
|
|
|
|
|
Level
1
|
Level
2
|
Level
3
|
Total
|
As at 31
December 2023
|
£'000
|
£'000
|
£'000
|
£'000
|
Listed
equities
|
1,363,980
|
-
|
-
|
1,363,980
|
Unlisted
equities
|
-
|
-
|
-
|
-
|
|
________
|
________
|
________
|
________
|
Total
financial asset investments
|
1,363,980
|
-
|
-
|
1,363,980
|
|
________
|
________
|
________
|
________
|
|
|
Level
1
|
Level
2
|
Level
3
|
Total
|
As at 30
June 2023
|
£'000
|
£'000
|
£'000
|
£'000
|
Listed
equities
|
1,262,992
|
-
|
-
|
1,262,992
|
Unlisted
equities
|
-
|
-
|
-
|
-
|
|
________
|
________
|
________
|
________
|
Total
financial asset investments
|
1,262,992
|
-
|
-
|
1,262,992
|
|
________
|
________
|
________
|
________
|
6.
Net Asset Value per Ordinary Share
The net
assets and the net asset value per share 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
2024
|
31
December 2023
|
30
June
2023
|
Net assets
attributable
|
£1,425,937,000
|
£1,297,227,000
|
£1,219,197,000
|
|
|
|
|
Ordinary
Shares in issue at end of period
|
84,139,605
|
84,414,605
|
84,754,605
|
Net Asset
Value per Ordinary Share
|
1,694.73p
|
1,536.73p
|
1,438.50p
|
7.
Share Capital
During the
period, the Company bought back and cancelled 275,000 shares (2023:
590,000) at a cost of £3,695,000 (2023: £7,501,000). No shares have
been bought back for cancellation between 1
July 2024 and 26 July
2024.
8.
Related party transactions
There have
been no transactions with related parties during the first six
months of the current financial year that have materially affected
the financial position or the performance of the Company. Under UK
accounting standards, the Directors have been identified as related
parties and their fees and interests are disclosed in the 2023
Annual Report.
9.
Alternative Performance Measures
Alternative
Performance Measures ("APMs") are measures that are not defined by
FRS 102 and FRS 104. The Company believes that APMs, referred to
within ‘Financial Highlights’ on page 1 and in the Half Yearly
Report, provide Shareholders with important information on the
Company and are appropriate for an investment trust. These APMs are
also a component of reporting to the Board. A glossary of APMs can
be found in the 2023 Annual Report.
10.
Further Information
The
foregoing do not constitute statutory accounts of the Company (as
defined in section 434(3) of the Companies Act 2006). The financial
information for the year ended 31 December
2023 has been extracted from the statutory accounts, which
have been filed with the Registrar of Companies. The Auditor issued
an unqualified opinion on those accounts and did not make any
statements under section 498(2) or (3) of the Companies Act 2006.
All information shown for the six months to 30 June 2024 is unaudited.
Certain
statements in this report are forward looking. 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.
Copies of
the Half Yearly Report will be sent to shareholders and will be
available shortly from Aberforth Partners LLP, 14 Melville Street,
Edinburgh, EH3 7NS or from the
website www.aberforth.co.uk. A copy will also shortly be available
for inspection at the National Storage Mechanism at:
https://data.fca.org.uk/#/nsm/nationalstoragemechanism.
CONTACT:
Jeremy Hall (Telephone: 0131 220 0733)
Aberforth
Partners LLP, Managers and Secretaries
26 July 2024