ABERFORTH SMALLER COMPANIES TRUST plc
INTERIM RESULTS
For the Six Months to 30 June 2003
FEATURES
Fully Diluted Net Asset Value Total Return +18.5%
Benchmark Index Total Return +19.2%
Increase in Interim Dividend per Ordinary Share +6.1%
Aberforth Smaller Companies Trust plc (ASCoT) invests only in small UK quoted
companies and is managed by Aberforth Partners.
CHAIRMAN'S STATEMENT TO SHAREHOLDERS
RESULTS REVIEW
For the six months to 30 June 2003 ASCoT achieved a total return of 18.5%, which
compares with the total return of 19.2% from the Hoare Govett Smaller Companies
Index (Excluding Investment Companies), your Company's investment benchmark.
Larger companies, as represented by the FTSE All-Share Index, registered a total
return of 6.3%. ASCoT has therefore slightly underperformed its benchmark,
though the real feature of the period was the significant outperformance from
smaller companies relative to their larger brethren.
Your Board is pleased to announce an increase in this year's interim dividend to
3.50p per share. This represents a rise of 6.1% compared with the equivalent
period last year. This rate of increase reflects the robustness of ASCoT's
portfolio in difficult economic times as well as your Board's belief that
dividend yield and growth will continue to be of significance to investors'
total return. The interim dividend will be paid on 5 September 2003 to
Shareholders on the register on 8 August 2003.
At the Annual General Meeting held in February, Shareholders renewed the
authority for your Company to buy in up to 14.99% of its Ordinary Shares. No
shares have yet been bought in under this authority, but your Board would not
hesitate to act should we believe it to be in Shareholders' best interests.
During the six month period, your Company was able to buy 40,000 Warrants for
cancellation at a price that modestly enhanced the fully diluted net asset
value. However, of greater importance was the passing of the final exercise
date for the Warrants of 31 March 2003. The remaining 963,311 Warrants were
exercised and the listing of the resulting Ordinary Shares took place on 9 April
2003.
With the expiry of its Warrants, ASCoT's capital structure is even simpler, now
comprising only Ordinary Shares. Investment trusts' ability to enhance
shareholder returns by borrowing is one of their greatest strengths, although
the use of long term fixed rate debt has proved a burden to many in recent
times. ASCoT is not currently geared and has no long term debt. A flexible
�80m debt facility is, however, available and may be drawn down on request.
This or similar facilities have been used in the past to the advantage of
ASCoT's shareholders, and no doubt will be used again.
INVESTMENT BACKGROUND
The recent rally in stockmarkets around the world would appear to have been
justified by a resolution of the Iraqi war, which has helped to lower the price
of oil, and by the efficient containment of SARS. A remarkable feature of the
rebound has been the concomitant development in the prices of other asset
classes: rising equities have been accompanied by reinvigorated commodities
prices, narrowing spreads on corporate debt and a falling dollar - all
potentially indicative of inflation - but also by a continuation in the bull
market for government bonds - hardly consistent with resurgent inflation.
These unusual price movements have fuelled a debate between those who worry that
the Western world is following Japan into deflation and those who identify
inflation as the true threat. Those in the former camp point to the legacies of
the equity bubble of the late 1990s - excess capacity and a highly indebted
private sector risk - and to China's emergence as a major economy. The US has
responded by cutting interest rates to their lowest level for 45 years, together
with tax cuts and greater public spending. On top of these, ambiguous comments
about the commitment to "the strong dollar" have helped push the US currency
down against the euro by 16% since 30 June 2002. But, most remarkably, Fed
officials have expressed their confidence in "making sure it (deflation) doesn't
happen" through the use of so-called "unconventional measures".
Financial markets are entering uncharted waters, but such measures appear to
entail the use of the printing press to create more money. One mooted tactic,
which gratifyingly goes some way to rationalise the unusual combination of asset
price movements in recent months, is for the Fed to suppress yields of
government bonds of all maturities by buying them with their newly printed
dollars. To date, "unconventional measures" have not been employed, but the
mere suggestion appears to have driven financial markets to build in a greater
likelihood of reflation. Such an outcome would probably prove more benign for
equities than a slide into deflation.
Whether through luck or judgement, however, the spectre of deflation is much
less frightening in the UK. Inflation, as gauged by the RPIX, is running at
around 3% and, thanks to government spending and low interest rates, the economy
is forecast to grow in nominal terms at least as quickly as the US and more
quickly than the Eurozone in 2003. Sterling's weakness against the euro is also
helpful and may assist in addressing some of the imbalances in the UK economy.
In particular, it should be of more direct benefit than lower interest rates to
exporters and those businesses with continental competitors: according to the
National Statistics Office, the manufacturing sector's output managed a small
improvement in the first quarter of 2003 after having fallen for eight
consecutive quarters.
The key to the UK's relative resilience, however, remains the consumer. There
are signs, though, that confidence is slipping and that house price inflation
has fallen sharply from the 26% rate reached at the end of 2002. Against this
background, and with the global economic outlook murky, it is perhaps as well
that the government has opted to maximise the country's fiscal and monetary
flexibility by deciding against EMU entry for the time being.
INVESTMENT PERFORMANCE
The six months to 30 June 2003 can be split into two distinct periods. In a
continuation of the trends that prevailed in the second half of 2002, the first
two and a half months were in the grip of the bear market. ASCoT performed
relatively well in this period. From mid March, however, the stockmarket
staged a strong rally that was led by small companies. ASCoT's performance
lagged in this recovery phase, as the Managers questioned the fundamental
justification for the revaluation of a number of businesses.
Corporate activity made a minor contribution to ASCoT's performance, though
there are signs that confidence is returning. Although only 22 benchmark
companies were acquired in ASCoT's first half, against 53 deals in the whole of
2002, many more are in discussions or have actually received bids. Clearly, a
proportion of these approaches will fail, but there are grounds for optimism:
large amounts of money in venture capital funds are waiting to be invested; in a
low growth world, management teams may seek to add value through consolidation;
and, as is described below in greater detail, small UK companies appear to offer
good value.
The companies in ASCoT's portfolio have, on the whole, coped well with the
uncertain economic environment. A useful means to assess this assertion is to
examine their dividend payments. The dividends announced by the 103 companies
in the portfolio at 30 June 2003 were 6% higher than the corresponding payments
in the previous year, although it is should be noted that ASCoT's actual
receipts vary from this since the portfolio is actively managed. Of the 103
businesses, 13 did not, as anticipated, pay a dividend; seven cuts were endured,
three of which were expected; and 23 companies reported unchanged dividends. The
remaining 60 raised their payouts.
With inflation around 3%, this level of dividend growth is encouraging and, in
the absence of robust growth in the economy at large, is due in part to the
average dividend cover of the portfolio, which at the end of June was the same
as that of the benchmark. This is significant, given that over ASCoT's history
the portfolio's cover has been on average 11% lower than that of the benchmark.
The opportunity to construct such a portfolio has been presented by the
compression of the gap between the price earnings ratios of "value" and "growth"
stocks that has characterised the bear market. This allowed the Managers to
make selective purchases of higher quality businesses whose valuations would
previously have been too demanding.
30 June 2003 30 June 2002
Characteristics ASCoT Benchmark ASCoT Benchmark
Number of Companies 103 827 96 915
Weighted Average Market Capitalisation �309.0m �334.0m �317.6m �355.4m
Price Earnings Ratio (Historic) 11.9x 13.4x 12.3x 14.3x
Net Dividend Yield (Historic) 3.4% 3.0% 3.0% 2.8%
Dividend Cover (Historic) 2.5x 2.5x 2.7x 2.5x
INVESTMENT OUTLOOK
The threat of deflation, whether real or imagined, has profound implications for
both economies and financial markets. For the Fed, the threat is very real. It
has responded with interest rate cuts and, more recently, talk about
"unconventional measures". The truth is that words are a more powerful weapon
than actual deployment of these measures: the trick is to build confidence among
consumers and businesses that deflation will not happen, so that they resume
spending and investment. The risk is that, as in Japan, loose monetary
conditions do not translate into greater activity in the real economy.
Consumers and businesses may, for example, consider it more rational to reduce
their indebtedness than to spend.
Therefore, despite a prompt end to the Iraqi war, economic conditions still do
not appear conducive to sustained growth in corporate profits, the sine qua non
of successful equity investment. Such doubts are reflected in the actions of
those running the businesses. Judging by the results of ASCoT's portfolio
companies, management teams are doing a fine job in controlling costs. They are
not, though, sufficiently confident yet to invest: their focus remains on
optimising cash generation, often by setting capital expenditure at under
depreciation.
The Managers do not, therefore, foresee an imminent return to double-digit
increases in earnings per share for the stockmarket as a whole. It still seems
appropriate to think of real returns from equities of close to the 5-7% long
term average. They will, though, be prone to wild swings from year to year,
perhaps of the sort witnessed so far in 2003.
Dividend yield and dividend growth may therefore assume greater significance.
From the point of view of investors in small UK quoted companies, the
combination of a 3.0% yield and 2.5x dividend cover is encouraging. Although
larger companies, as gauged by the FTSE All-Share Index (excluding loss makers
and investment companies), boast a higher yield of 3.5%, they do so at the
expense of a lower dividend cover at 1.7x and, therefore, ceteris paribus,
inferior dividend growth prospects.
Following this logic, ASCoT's portfolio would appear relatively well positioned.
It is diversified, with holdings in 103 companies, and generates a 3.4% yield
without sacrificing dividend cover, which stands at 2.5x. In constructing this
portfolio, the Managers have applied the same principles of value investment to
which they have adhered throughout ASCoT's life. Such consistency has
inevitably led to volatile relative performance, as the mood of the market has
changed, but has, on the whole, resulted in respectable returns.
William Y. Hughes
Chairman
17 July 2003
The Statement of Total Return, summary Balance Sheet and summary Cash Flow
Statement are set out below:-
STATEMENT OF TOTAL RETURN
(Incorporating the Revenue Account1)
(unaudited)
6 months to 6 months to
30 June 2003 30 June 2002
Revenue Capital Total Revenue Capital Total
�'000 �'000 �'000 �'000 �'000 �'000
Realised (losses)/gains on sales - (1,260) (1,260) - 7,298 7,298
Unrealised gains - 47,623 47,623 - 10,187 10,187
------- ------- ------- ------- ------- -------
Gains/(losses) on investments - 46,363 46,363 - 17,485 17,485
Deemed cost of Warrants
purchased for - (50) (50) - - -
cancellation
Dividend income 5,988 - 5,988 5,442 254 5,696
Interest income 207 - 207 299 - 299
Other income 9 - 9 48 - 48
Investment management fee (475) (792) (1,267) (580) (967) (1,547)
Other expenses (146) - (146) (127) - (127)
------- ------- ------- ------- ------- --------
Return on ordinary
activities before tax 5,583 45,521 51,104 5,082 16,772 21,854
Tax on ordinary activities - - - - - -
------- ------- ------- ------- ------- -------
Return attributable to
equity shareholders 5,583 45,521 51,104 5,082 16,772 21,854
Dividends in respect of
equity shares (2,969) - (2,969) (2,767) - (2,767)
------- ------- ------- ------- ------- -------
Transfer to reserves 2,614 45,521 48,135 2,315 16,772 19,087
======= ======= ======= ======= ======= =======
Returns per Ordinary Share2:
Basic 6.62p 53.97p 60.59p 6.07p 20.03p 26.10p
Diluted 6.59p 53.76p 60.35p 5.99p 19.76p 25.75p
Dividends per Ordinary Share 3.50p - 3.50p 3.30p - 3.30p
NOTES
1. The revenue 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. No operations were acquired or discontinued
in the period.
2. The calculations of revenue return per Ordinary Share are based on net revenue of �5,583,000 (30 June 2002
- �5,082,000) and on Ordinary Shares of 84,339,740 (30 June 2002 - 83,741,322) in the case of basic returns
and 84,677,027 (30 June 2002 - 84,864,791) in the case of diluted returns.
The calculations of capital return per Ordinary Share are based on net capital gains of �45,521,000 (30 June 2002
- �16,772,000) and on Ordinary Shares of 84,339,740 (30 June 2002 - 83,741,322) in the case of basic returns and
84,677,027 (30 June 2002 - 83,741,322) in the case of diluted returns.
SUMMARY BALANCE SHEET
(unaudited)
30 June 30 June 31 December
2003 2002 2002
�'000 �'000 �'000
Securities officially listed on the London Stock Exchange 310,834 335,263 273,543
-------- -------- --------
Cash at bank 14,332 612 6,555
Debtors 5,233 2,315 1,024
Creditors (5,434) (3,617) (5,227)
-------- -------- --------
Net current assets/ (liabilities) 14,131 (690) 2,352
-------- -------- --------
Total assets less liabilities 324,965 334,573 275,895
======== ======== ========
Capital and reserves: equity interests
Called up share capital (Ordinary Shares) 848 839 839
Reserves:
Share premium account 2,043 1,089 1,090
Special reserve 133,525 133,525 133,525
Capital reserve - realised 149,471 144,040 151,600
Capital reserve - unrealised 25,638 42,828 (21,985)
Revenue reserve 13,440 12,252 10,826
-------- -------- --------
324,965 334,573 275,895
======== ======== ========
Net Asset Values:
per Ordinary Share (basic) 383.1p 399.0p 329.0p
per Ordinary Share (fully diluted) n/a 394.0p 326.3p
per Ordinary Share (diluted - FRS 14) n/a 394.1p 326.3p
NOTES
As at 30 June 2003, the Company had 84,818,734 Ordinary Shares (30 June 2002 and 31 December 2002 - 83,855,423).
No warrants remain in issue (30 June 2002 - 1,434,811 and 31 December 2001 - 1,003,311) in issue.
In April 2003, as a result of holders exercising the subscription rights of their Warrants, 963,311 Ordinary Shares
of 1p were issued at 100p per share. During the six months to 30 June 2003, the Company purchased 40,000 Warrants for
cancellation at a total cost of �77,000.
SUMMARY CASH FLOW STATEMENT
(unaudited)
6 months to 6 months to
30 June 2003 30 June 2002
�'000 �'000 �'000 �'000
Net cash inflow from operating activities 3,802 3,312
Capital expenditure and financial investment
Payments to acquire investments (34,101) (61,962)
Receipts from sales of investments 42,390 49,762
-------- --------
Net cash inflow/(outflow) from capital
expenditure and financial investment 8,289 (12,200)
------- --------
12,091 (8,888)
Equity dividends paid (5,199) (4,934)
-------- --------
6,892 (13,822)
Financing
Issue of Ordinary Shares 962 224
Warrants purchased for cancellation (77) -
-------- --------
Net cash inflow from financing 885 224
-------- --------
Increase/(decrease) in cash 7,777 (13,598)
======== ========
NOTES
1. The foregoing do not comprise statutory accounts (as defined in section 240(5) of the Companies Act 1985)
of the Company. The statutory accounts for the year to 31 December 2002, which contained an unqualified
Report of the Auditors, have been lodged with the Registrar of Companies and did not contain a statement
required under section 237(2) or (3) of the Companies Act 1985.
2. The Interim Report is expected to be posted to shareholders on 21 July 2003. Members of the public may obtain
copies from Aberforth Partners, 14 Melville Street, Edinburgh EH3 7NS or from its website at www.aberforth.co.uk.
CONTACT: David Ross Aberforth Partners 0131 220 0733
Aberforth Partners, Secretaries - 17 July 2003
ANNOUNCEMENT ENDS