18 Dec 2012 10:43
AMENDMENT
The announcement released on 17th December at 07:00 hours (RNS No: 6201T) showed an incorrect record date in Section 3. The paragraph has been corrected and is also shown below.
Results and Dividends
The Directors recommend that a final dividend of 3.00p (2011 - 2.90p) is paid on 11 February 2013 to shareholders on the register on 18 January 2013. The ex-dividend date is 16 January 2013.
Please note all other information within this announcement remains unchanged.
DUNEDIN SMALLER COMPANIES INVESTMENT TRUST PLC
ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 OCTOBER 2012
The objective of Dunedin Smaller Companies Investment Trust PLC is the achievement of long-term growth from a portfolio of smaller companies in the United Kingdom.
·; Net asset value per share increased by 21.6% on a total return basis and the FTSE SmallCap Index (ex IC's) increased by 22.4%
·; The Board is recommending an increase in the final dividend to 3.00p (2011 - 2.90p). The total dividend for the year will amount to 5.00p (2011 - 4.85p).
For further information, please contact:-
Ed Beal
Aberdeen Asset Managers Limited 0131 528 4000
Andrew Leigh
Aberdeen Asset Managers Limited 0207 463 6312
Please note that past performance is not necessarily a guide to the future and that the value of investments and the income from them may fall as well as rise. Investors may not get back the amount they originally invested.
1. CHAIRMAN'S STATEMENT
I am pleased to report on a year of good returns for our shareholders. Over the twelve months ended 31 October 2012, the Company's net asset value per share (NAV) increased from 143.0p to 168.2p. This represented an increase of 21.6% in total return terms which compares with a return of 22.4% for the Company's benchmark. The Company's share price rose from 129.5p to 166.0p, an increase of 28.2%. It is also pleasing to report that we are achieving our objective of long term growth with our NAV rising by 58.5% in total return terms over the last three years which compares to the benchmark total return of 21.5%.
Our investment portfolio is constructed to deliver both capital and income growth and we remain focused on identifying good quality companies run by strong management teams, particularly where an above-average dividend yield is available. As a general rule, we do not invest in loss-making businesses which may be high-risk and carry a material chance of failure. The success of this approach is reflected in our returns over longer time periods.
Equity markets remained volatile but with a positive bias over the period. Politicians averted an implosion in the Eurozone although the uncertainty over the currency and the outlook for some of the weaker member states unsettled investors on a number of occasions. World trade has stagnated in 2012, pushing down global growth which has been bad news for struggling western economies. The culprits are easily identified and include the Eurozone crisis, a sharp slowdown in China, a lacklustre US recovery and rising oil prices. With such a weak background, the UK economy deteriorated with a contraction being recorded in GDP for the first half of 2012 although there was a welcome recovery in the third quarter from the positive impact of the Olympic Games. An improvement in the rate of inflation proved to be one of the few positive factors.
The number of companies in the portfolio increasing dividends against a difficult business environment is encouraging although the portfolio has suffered from dividend reductions from a small number of holdings. The Company's revenue return per share has fallen from 5.34p to 4.61p although shareholders should note that last year's revenue return included a receipt of non-recurring interest on VAT payments amounting to 0.61p. On a like for like basis, the revenue return per share fell by 2.5% over the previous year. The Board is proposing an increase in the final dividend to 3.00p per share (2011 - 2.90p) which will be paid on 11 February 2013 to shareholders on the register on 18 January 2013. When combined with the interim dividend of 2.00p, the total dividend for the year will amount to 5.00p (2011 - 4.85p), an increase of 3.1%. Following the payment of the final dividend, revenue reserves per share will amount to 5.70p (2011 - 6.09p), which makes the Board's policy on dividends viable in the medium term.
The Company did not repurchase any ordinary shares during the period. The Directors will continue to monitor the Company's discount with that of its peer group and will use the Company's share buyback powers, subject to market conditions, when it feels this to be appropriate. The discount at 31 October 2012 was 1.3% which compares with an average of 15.0% for the Association of Investment Companies UK Smaller Companies sector.
The economic outlook for the UK continues to be uncertain as evident in the Bank of England's recent comments that underlying growth in the economy was likely to remain sluggish over the next three years. The Bank also cited the scale of the adjustments in indebtedness and competitiveness in the Eurozone area as a major threat to sustained recovery in the UK. This background provides a challenging environment for many companies and profits will come under pressure if there is any further deterioration. Our portfolio however should benefit from its exposure to more buoyant foreign markets - approximately 45% of the sales generated by the portfolio's holdings are into overseas markets. Our policy of investing in good quality companies which offer robust balance sheets, transparent profitability and strong cash flows should serve us well in these difficult times.
Corporate Broker
During the year the Company changed its financial adviser and corporate broker from Canaccord Genuity Limited to Cantor Fitzgerald Europe.
Corporate Governance
The Board reviews annually the performance of the Manager, the Chairman and the Board as a whole. The Board has assessed the performance of the Manager, the investment process and risk controls. The Directors have reviewed the terms of the management agreement and believe that the continuing appointment of the Manager is in the interests of shareholders.
Annual General Meeting
The Annual General Meeting this year will be held at Discovery Point, Dundee on 7 February 2013, at 12.30 p.m. and I would encourage shareholders to attend. In addition to the formal business of the meeting, our portfolio manager, Ed Beal, will provide an update on the outlook for smaller companies and there will also be an opportunity for shareholders to meet informally with the Directors at the conclusion of the Annual General Meeting.
Performance to31 October 2012 | 1year return | 3year return | 5year return | 10year return |
Total return* | % | % | % | % |
Share price | +33.3 | +85.9 | +44.6 | +363.2 |
Net asset value per share | +21.6 | +58.5 | +21.0 | +231.0 |
FTSE SmallCap Index (ex IC's) | +22.4 | +21.5 | -11.6 | +102.9 |
\* The total return for share price and net asset value is calculated on the basis of reinvesting dividends to shareholders on the ex-dividend date.
The Earl of Dalhousie
Chairman
14 December 2012
2. MANAGER'S REVIEW
The year to October 2012 has been a good one for small companies. The FTSE Small Cap Index (ex Investment Companies) has increased by almost 19%, outperforming larger companies by 15%. The Company's share price rose by 28.2% and the discount has narrowed. Clearly the market not the manager determines the level of the discount but it is pleasing that the discount remains narrower than that on most, if not all, of the peer group.
Performance during the year has been good and the net asset value per share has risen by 21.6% on a total return basis. Our objective is to deliver growth over the long term. Therefore we are pleased to be able to report that over the last three years the net asset value per share has increased by 58.5% exceeding the FTSE SmallCap Index by 37%. Our conservative approach means that we expect to deliver more sedate relative returns when businesses that are, to our minds, at the riskier end of the spectrum are driving the performance of the index. During the year there has been a marginal underperformance which occurred during a period when markets were very strong.
As we entered the new financial year, markets continued to be volatile. Indeed, the FTSE 100 index declined for nine consecutive days, only the second time that this has happened since 1994. Events in Europe continued to dominate both the headlines and investor sentiment. Two Prime Ministers were forced to resign. In Greece, Mr Papandreou had threatened to call a referendum on his country's proposed bailout. This had the effect of making a Greek exit from the Euro appear even more likely. Meanwhile, in Italy, Silvio Berlusconi had to step down after it became clear that investors had lost faith in him.
The European Financial Stability Fund had been proposed as a key plank of the solution for the debt crisis. However, this would have required both private and sovereign funding and it became quite clear that there was no appetite to provide this. There was some good news though. In Europe and the US, central banks demonstrated that they were very aware of the liquidity risks facing the banking sector when they engaged in unexpected and co-ordinated action to ease the dollar funding constraints being experienced by many institutions. At the same time, the Chinese authorities reduced interest rates for the first time in three years, indicating that they recognised the signs that their economy may be facing more than a mild slowdown in growth. Corporate performance was broadly satisfactory though some sectors, notably those exposed to UK consumer spending were finding life increasingly tough.
2011 ended fairly quietly with markets virtually unchanged. The European Central Bank reduced interest rates and there was another summit in Europe, though these had become an almost weekly affair. Such an environment served to illustrate the dichotomy facing investors. On the one hand, equities offered good value. With their generally much improved balance sheets, many companies were well positioned to survive should trading conditions deteriorate and to capitalise on opportunities that may arise. On the other, the implications of a potential breakup of the Eurozone were so significant that investors were largely reduced to reacting to policy announcements.
The new year started much more constructively with small companies in particular delivering positive returns. The environment felt less strained. US economic data continued to improve. In Europe, the Long Term Refinancing Operation ('LTRO') was delivering tangible results as evidenced by both Spain and Italy's able to issue new bonds at lower rates than they had previously experienced. In the UK, the picture was more mixed with inflation beginning to fall but GDP contracting during the fourth quarter 2011. But the clearest sign that investor appetite for risk was increasing came on the back of the news from Standard & Poor's that they were downgrading the ratings of nine members of the Eurozone, including France and Austria. Markets barely moved.
The rally continued through the early part of the year and small companies remained at the fore. But aside from the US and China the recovery remained weak. In the UK the Bank of England released a further £50billion of quantitative easing and in Europe there was another phase of the LTRO. The take up of €529billion meant that the facility had provided almost €1trillion of liquidity since it came into being. It was indicative of sentiment in the markets that investors had constructed arguments to explain why both a large and a small take up would be good news. Importantly though this activity was serving to reduce borrowing costs for the more indebted nations.
The reporting season revealed few surprises. Consumer-facing businesses were having a difficult time. Elsewhere results were broadly in line with expectations. What was becoming clear though was that Chinese growth was slowing. Expectations for European growth continued to decline with most commentators now anticipating a recession.
By the spring, faced with ongoing negative economic news flow, markets had run out of steam. A particularly weak performance from the construction sector led to a second quarter of economic contraction and the UK was officially back in recession. One of the distinguishing features of the recovery in the UK was just how anaemic it was. Conventionally, a deep recession leads to a sharp rebound in activity once the economy begins to pick up. This time though the recovery has been prolonged, characterised by periods of low growth interspersed with bouts of further contraction. This is all the more surprising when one considers the quantum of stimulus that was being deployed.
Once again the European sovereign debt crisis moved back into focus. Electorates across the region and particularly in France and Greece were showing increasing resistance to austerity. Investors were beginning to worry that even if the funding required to prevent the break-up of the Euro could be organised, politics would prevent governments from taking the action necessary to address the underlying imbalances.
By May the news from emerging markets was deteriorating. It had been hoped that demand from these nations and in particular the BRICs (Brazil, Russia, India and China) would prove strong enough to act as a driver of global growth and help pull the developed markets out of their difficulties. However, it was becoming clear that as demand from the developed nations declined on the back of ongoing recession and austerity so the exports of China in particular would also be impacted. Decoupling was again being shown to be more of a theory than a reality. Chinese and Brazilian growth continued to slow and Indian GDP reached a nine year low.
A Greek exit from the Euro now seemed as likely as not and the situation in Spain was worsening. The Spanish banking system was struggling to cope with the bursting of the property bubble. Despite the government's protestations to the contrary a bail out of some sort looked increasingly likely. The European Central Bank was engaged in further action. By increasing its lending to the region's banks they were in turn able to step up their purchases of Spanish and Italian government debt. As some commentators noted that this was, in fact, quantitative easing by the back door, others observed just how small the total European stimulus had been relative to that provided in the US and UK. The clear intimation being that a great deal more may be required.
Volatility remained a factor as events were subject to rapid change. This was exemplified in June when it was announced that the Spanish banks were indeed to be bailed out and that the New Democracy Party had won the Greek election thereby reducing the risk Greece would choose to exit the Euro. In the UK, there was some positive data as inflation continued to fall and this allowed the Monetary Policy Committee to announce a further £50billion of stimulus. Whilst in the EU, the European Central Bank cut interest rates to their lowest ever level. What was remarkable was that the reaction from markets suggested that they were already pricing in such actions. Profit warnings began to accelerate. These emanated from a broad range of industries and came particularly from companies with weak customer relationships.
The summer was characterised by markets rising on the back of increasing investor appetite for risk which was picking up as a result of another wave of extraordinary stimulus in both the EU and US. In the EU, the President of the ECB, Mario Draghi, stated that they would "do whatever it takes to keep the Euro together." This manifested itself as the Outright Monetary Transactions facility. This was a theoretically unlimited support package for distressed nations. In the US, the Federal Reserve Open Market Committee announced an extension to the duration of zero interest rates and a commitment that they would be kept low until after the economy had strengthened. Additionally, they would provide further stimulus by purchasing $40billion of mortgage backed securities each month for the foreseeable future. Even Brazil, where growth had practically stalled, was forced to announce a package of infrastructure investment that it was hoped would provide a stimulus for the economy.
Markets continued to rise as your Company's year ended. There was some better news flow, especially from the US where unemployment fell to its lowest level for three years and the housing market showed signs of improvement. However, at the corporate level there were signs that trading was deteriorating. Profit warnings began to increase and one notable feature of many of them was that they referred to slowing markets in Asia and China in particular.
Portfolio Activity
This has been another good year for many of the companies in the portfolio and this can perhaps be most clearly seen when one considers the dividend distributions being made by your investments. Fifteen companies in the portfolio increased their payments by 10% or more. As I commented last year this reflects a combination of solid trading allied to balance sheets that are in aggregate in a good state of repair. Some of these businesses are worthy of special mention.
Aveva sells software that is used in the design stages of very large projects such as oil rigs and power stations. They are a market leader in this field and have been benefitting from high levels of demand particularly from emerging markets. They have increased their dividend by 15%.
Bellway the UK house builder has been benefitting from rising demand and selling prices coupled with the utilisation of land that has been bought at lower prices. These factors have resulted in rising margins. This has manifested itself in the form of a 57% increase in profits and a 60% rise in the dividend.
Elementis is a market leader in the supply of rheological additives. These are used in the coatings, oil and gas and cosmetics markets to confer specialised thickening properties to fluids and creams. The mission critical nature of their products combined with their low cost as a proportion of the end product confers meaningful pricing power. At their final results, they announced a 40% improvement in profitability and a 42% uplift to the dividend. They have subsequently announced a sizable special dividend as well.
We have held Weir Group for many years. It has been a real success, rising from being a smaller company to now being a member of the FTSE 100. The company is a market leader in the production of specialist pumps and has a sizable after market operation that provides it with a degree of resilience in more difficult markets. We continue to regard it as an attractive investment and have therefore retained a holding in the portfolio despite the increase in the size of the company. Although parts of the business that are exposed to the natural gas market in the US have been hit by the falling gas price, the company still posted a 27% rise in profits at its recent results. Shareholders were rewarded with an 11% increase in the dividend.
Last year I wrote about Victrex the speciality chemicals company that produces PEEK. The company had posted very strong results and had raised its interim dividend by 25%. This rate of growth continued and they were able to increase the final dividend by 32%.
There were two material dividend reductions during the year.
Mothercare has had well publicised problems in its domestic operations. These have resulted in the UK part of the business moving into losses and the departure of the Chief Executive. Understandably, the company has cut its dividend in order to ensure that it retains the balance sheet strength that is necessary to allow it undertake a significant restructuring. We believe that this remains a good company, especially in regard to its growing international division. A new Chief Executive has been appointed and he has laid out a clear pathway for the restoration of profitability in the UK.
McBride is the UK's leading manufacturer of private label household and personal goods. They have experienced some difficulties with the rapid pace of raw material price increases. However, they have taken action to pass on these costs and have been improving the quality of their European business as they have exited some very low margin contract manufacturing turnover. They took the decision to rebase their dividend when they announced their final results. Given the improvements in trading, we were surprised and disappointed by this decision.
Pleasing as the general growth in dividends has been it is worth remembering that two alternative uses for the cash that has been paid out are organic and acquisitive investment. It says something about the mind set of many management teams that they still lack the confidence to engage in either activity. Clearly this has implications for long term growth expectations.
The last two years have seen a recovery in dividends. Typically we would expect dividend growth to lag economic recovery. That scenario has been inverted this time round with a bout of strong dividend growth accompanying a period of minimal economic recovery. Profit margins remain at or close to peak levels, reducing the potential for expansion here to drive future improvements in profitability. Indeed, aggregate earnings expectations for next year are coming under increasing pressure. Therefore it would seem prudent to anticipate a slowing in the rate of dividend growth in 2013. We are not however anticipating a return to widespread dividend reductions. This is in part because pay out ratios - the proportion of earnings that companies distribute in the form of dividends - remain close to historically low levels.
We have introduced three new companies to the portfolio over the year.
Domino Printing is the market leader in continuous inkjet and laser printing and occupies a top three position in the other two key technologies. They are also the global number one in the primary packaging market and have stronger emerging market operations than either of their two competitors. Primary packaging is likely to grow ahead of GDP as regulation and customer demand drive increased use of variable data, which is printed onto primary packaging. 60% of sales are consumables and services. Once embedded into a customer's supply chain there is a low incentive for the customer to change supplier given the low cost of sale and the high cost of failure.
BBA Aviation has a leading position in the operation of flight support stations for private business jets in the US. This is a recovering market with ample scope for additional growth through consolidation. The barriers to entry are high as the ability to provide a national network of bases is very attractive to customers whilst being difficult to replicate. They also have a unique business that provides out of production spares to the aviation industry. The management team has shown itself able to manage the cost base in the event that markets slow again.
Devro is the global leader in the production of collagen based artificial sausage skins. The collagen market is benefitting from two structural drivers. Firstly, there is increasing protein consumption across the World and especially in emerging markets. Secondly, collagen benefits from cost and efficiency advantages when compared to traditional hog gut. Therefore there is an ongoing trend of substitution that is causing collagen based sales to grow ahead of the market.
There has been relatively little corporate activity in the portfolio.
We had a holding in Umeco, the supplier of composite products to the wind, aerospace and motor industries and the company was bid for by Cytech Industries. We regarded the price as fair and sold the holding generating a profit of more than 75% on our book cost.
Dechra Pharmaceuticals had a rights issue to help fund its acquisition of Eurovet. We have held Dechra for many years and we were happy to support the management team in their efforts to develop the European side of their pharmaceutical division. Recent announcements have indicated that the integration of this business is proceeding ahead of expectations.
Whilst there has been absolutely no change to our investment process there has been a shift in the shape of the portfolio over the course of the year. Specifically, the weighting of mid-capitalised companies has risen from a little over 51% at the start of the year to almost 63% by the end of October. This does not reflect a change in our approach, rather it is a function of two related factors. Firstly, many of our investments have performed well over the year. We and your Board take a pragmatic approach and believe that a change in the index classification of a company is not in itself grounds to sell it if we believe that it remains an attractive investment. This has been the case for many years and over 2012 we have benefitted from the promotion of Dechra Pharmaceuticals and John Menzies to the FTSE 250 Index. Simultaneously, two of the holdings we have exited, Umeco and Hornby, were both smaller companies. Additionally, as we have continued to focus very closely on the quality of our investments we have seen better opportunities among some of the slightly larger companies. This is reflected in the introduction of BBA Aviation, Domino Printing and Devro and the top-ups of Elementis, Berendsen, Fenner, AG Barr, Savills and Restaurant Group all of which are FTSE 250 constituents. Many of these companies have been in the portfolio for several years, reflecting our long term approach to investing.
Outlook
The macro economic factors that have hung over markets in recent years remain firmly in place.
In Europe, there has been no meaningful progress made towards a resolution of the over indebtedness and lack of productivity of many peripheral nations. It is true that the proposed Outright Monetary Transactions facility has persuaded many investors that a break up of the Euro can be avoided. However, there are a number of significant questions that remain unanswered. These include whether the European Central Bank will be successful in ensuring that all lending under the LTRO will be matched by deposits. Specifically, will the stringent criteria that are attached to any bail out make potential recipients reluctant to seek assistance and would the ECB really feel able to withdraw assistance in the event that the terms of a bail out were broken? Even if all these issues can be overcome we still face a long period of debt reduction and rebalancing of the economies of the peripheral nations. In such an environment the prospects for growth in the region remain anaemic.
In the US, the authorities continue to address a problem of over indebtedness with economic stimulus and the creation of further debt. Although President Obama remains in the White House, it is difficult to envisage that he will be able to avoid making very significant cuts to spending. Whilst the economy is currently performing better than most developed nations, with improving employment and housing markets, such cuts are likely to be damaging to the recovery in the short term.
Meanwhile growth in many emerging markets is beginning to slow. As demand for its goods falls, China is less willing to engage in the quantum of stimulatory infrastructure spending that provided a substantial boost to global growth as we exited the global financial crisis a few years ago. India is labouring under high unemployment and inflation and Brazil's growth is on a par with that of many members of the EU.
For much of 2012 companies have in aggregate proven to be largely resilient to a very difficult economic backdrop. This is beginning to change. Across a broad range of industries profits warnings are increasing. It is notable how many companies are reporting that they expect to meet expectations for this year but that with order rates slowing they are cautious about the prospects for next year.
When one considers the macro economic situation, it is difficult to determine where meaningful growth is likely to come from in the short term. However, we believe that our investments have strong business models and balance sheets and that these will allow them to negotiate the current difficulties and to prosper in the medium term.
Ed Beal
Aberdeen Asset Managers Limited
14 December 2012
3. DIRECTORS' REPORT
Business Review
A review of the Company's activities is given in the Chairman's Statement and the Manager's Review. This includes a review of the business of the Company and its principal activities, likely future developments of the business, the recommended dividend and details of acquisition of its own shares by the Company. The Board has adopted a matrix of the key risks that affect its business. The major financial risks associated with the Company are detailed in note 18 to the Financial Statements. Other risks include:
(i) Performance risk: The performance of the portfolio relative to the benchmark (FTSE SmallCap Index (ex Investment Companies)) and the underlying stock weightings in the portfolio against their index weightings are monitored closely by the Board.
(ii) Discount volatility: The Company's shares can trade at a discount to its underlying net asset value. The Company operates a share buyback programme, and any shares repurchased may be either cancelled or held in treasury. The programme is reviewed on an ongoing basis.
(iii) Regulatory risk: The Company operates in a complex regulatory environment and faces a number of regulatory risks. Breaches of regulations, such as Sections 1158-1159 of the Corporation Tax Act 2010, the UKLA Listing Rules and the Companies Act, could lead to a number of detrimental outcomes and reputational damage. The Audit Committee monitors compliance with regulations by reviewing internal control reports from the Manager.
At each Board meeting, the Directors consider a number of performance measures to assess the Company's success in achieving its objectives. Below are the main key performance indicators (KPIs) which have been identified by the Board for determining the progress of the Company:
- Net Asset Value
- Share Price
- Discount
- FTSE SmallCap Index (ex Investment Companies)
- Ongoing Charges
The Company makes no political donations or expenditures or donations for charitable purposes and, in common with most investment trusts, has no employees.
Results and Dividends
The Directors recommend that a final dividend of 3.00p (2011 - 2.90p) is paid on 11 February 2013 to shareholders on the register on 18 January 2013. The ex-dividend date is 16 January 2013.
Principal Activity
The business of the Company is that of an investment trust and the Directors do not envisage any change in this activity in the foreseeable future.
Status
The Company is registered as a public limited company. The Company's registration number is SC014692.
The Company carries on business as an investment trust for the purpose of Sections 1158-1159 of the Corporation Tax Act 2010 and has been approved as such by HM Revenue & Customs for the period ended 31 October 2011 although approval for that year would be subject to review were there to be any enquiry under the Corporate Tax Self Assessment regime. The Company has subsequently conducted its affairs so as to enable it to continue to seek such approval for the period ended 31 October 2012.
The new regime under Chapter 4 of Part 24 of the Corporation Tax Act 2010 and the Investment Trust (Approved Company) (Tax) Regulations 2011 will apply for the year end 31 October 2013 and the Company will apply for approval under the new regime post the 2012 year end.
The affairs of the Company were conducted in such a way as to satisfy the requirements as a qualifying security for Individual Savings Accounts. The Directors intend that the Company will continue to conduct its affairs in this manner in the future.
Going Concern
The Company's assets consist substantially of equity shares in companies listed on the London Stock Exchange and in most circumstances are realisable within a short timescale. The Board has set limits for borrowing and regularly reviews actual exposures, cash flow projections and compliance with banking covenants. Borrowings of £5 million are committed to the Company until 26 November 2014. The Directors believe that the Company has adequate resources to continue in operational existence for the foreseeable future and, for the above reasons, they continue to adopt the going concern basis in preparing the accounts.
4. STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report & Accounts and the financial statements, in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with UK Accounting Standards.
The financial statements are required by law to give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.
In preparing these financial statements, the Directors are required to:
·; select suitable accounting policies and then apply them consistently;
·; make judgments and estimates that are reasonable and prudent;
·; state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
·; prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for preparing a Directors' Report, Directors' Remuneration Report and Statement of Corporate Governance that comply with that law and those regulations.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
We confirm that to the best of our knowledge:
·; the financial statements, prepared in accordance with the applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and
·; the Directors' Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that the Company faces.
For and on behalf of the Board of Dunedin Smaller Companies Investment Trust PLC
Norman Yarrow
Chairman of the Audit Committee
14 December 2012
INCOME STATEMENT
Year ended 31 October 2012 | ||||
Revenue | Capital | Total | ||
return | return | return | ||
Notes | £'000 | £'000 | £'000 | |
Gains/(losses) on investments | 9 | - | 12,628 | 12,628 |
Income | 2 | 2,716 | - | 2,716 |
Investment management fee | 3 | (79) | (351) | (430) |
Administrative expenses | 4 | (401) | - | (401) |
________ | ________ | ________ | ||
Net return before finance costs and taxation | 2,236 | 12,277 | 14,513 | |
Finance costs | 5 | (30) | (88) | (118) |
________ | ________ | ________ | ||
Return on ordinary activities before taxation | 2,206 | 12,189 | 14,395 | |
Taxation | 6 | - | - | - |
________ | ________ | ________ | ||
Return on ordinary activities after taxation | 2,206 | 12,189 | 14,395 | |
________ | ________ | ________ | ||
Return per Ordinary share (pence) | 8 | 4.61 | 25.47 | 30.08 |
________ | ________ | ________ | ||
The total column of this statement represents the profit and loss account of the Company. |
A Statement of Total Recognised Gains and Losses has not been prepared as all gains and losses are recognised in the Income Statement. |
All revenue and capital items in the above statement derive from continuing operations. |
The accompanying notes are an integral part of the financial statements. |
INCOME STATEMENT (Cont'd)
Year ended 31 October 2011 | ||||
Revenue | Capital | Total | ||
return | return | return | ||
Notes | £'000 | £'000 | £'000 | |
Gains/(losses) on investments | 9 | - | (5,011) | (5,011) |
Income | 2 | 3,056 | - | 3,056 |
Investment management fee | 3 | (80) | (569) | (649) |
Administrative expenses | 4 | (389) | - | (389) |
________ | ________ | ________ | ||
Net return before finance costs and taxation | 2,587 | (5,580) | (2,993) | |
Finance costs | 5 | (31) | (91) | (122) |
________ | ________ | ________ | ||
Return on ordinary activities before taxation | 2,556 | (5,671) | (3,115) | |
Taxation | 6 | - | - | - |
________ | ________ | ________ | ||
Return on ordinary activities after taxation | 2,556 | (5,671) | (3,115) | |
________ | ________ | ________ | ||
Return per Ordinary share (pence) | 8 | 5.34 | (11.85) | (6.51) |
________ | ________ | ________ | ||
BALANCE SHEET
As at | As at | ||
31 October | 31 October | ||
2012 | 2011 | ||
Notes | £'000 | £'000 | |
Non-current assets | |||
Investments at fair value through profit or loss | 9 | 82,318 | 66,443 |
___________ | ___________ | ||
Current assets | |||
Debtors and prepayments | 10 | 700 | 241 |
UK Treasury Bills | 16 | - | 1,000 |
Cash and short term deposits | 16 | 3,442 | 5,940 |
___________ | ___________ | ||
4,142 | 7,181 | ||
___________ | ___________ | ||
Creditors: amounts falling due within one year | |||
Bank loan | 11,16 | (5,000) | (5,000) |
Other creditors | 11 | (961) | (178) |
___________ | ___________ | ||
(5,961) | (5,178) | ||
___________ | ___________ | ||
Net current (liabilities)/assets | (1,819) | 2,003 | |
___________ | ___________ | ||
Net assets | 80,499 | 68,446 | |
___________ | ___________ | ||
Capital and reserves | |||
Called-up share capital | 12 | 2,393 | 2,393 |
Share premium account | 30 | 28 | |
Capital redemption reserve | 2,233 | 2,233 | |
Capital reserve | 13 | 71,679 | 59,490 |
Revenue reserve | 4,164 | 4,302 | |
___________ | ___________ | ||
Equity shareholders' funds | 80,499 | 68,446 | |
___________ | ___________ | ||
Net asset value per Ordinary share (pence) | 17 | 168.21 | 143.03 |
___________ | ___________ |
Reconciliation of Movements in Shareholders' Funds
For the year ended 31 October 2012 | |||||||
Share | Capital | ||||||
Share | premium | redemption | Capital | Revenue | |||
capital | account | reserve | reserve¹ | reserve | Total | ||
Notes | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
Balance at 31 October 2011 | 2,393 | 28 | 2,233 | 59,490 | 4,302 | 68,446 | |
Exercise of Subscription shares | - | 2 | - | - | - | 2 | |
Return on ordinary activities after taxation | - | - | - | 12,189 | 2,206 | 14,395 | |
Dividends paid | 7 | - | - | - | - | (2,344) | (2,344) |
________ | ________ | ________ | ________ | ________ | ________ | ||
Balance at 31 October 2012 | 2,393 | 30 | 2,233 | 71,679 | 4,164 | 80,499 | |
________ | ________ | ________ | ________ | ________ | ________ | ||
For the year ended 31 October 2011 | |||||||
Share | Capital | ||||||
Share | premium | redemption | Capital | Revenue | |||
capital | account | reserve | reserve¹ | reserve | Total | ||
Notes | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
Balance at 31 October 2010 | 2,393 | 27 | 2,233 | 65,161 | 3,995 | 73,809 | |
Exercise of Subscription shares | - | 1 | - | - | - | 1 | |
Return on ordinary activities after taxation | - | - | - | (5,671) | 2,556 | (3,115) | |
Dividends paid | 7 | - | - | - | - | (2,249) | (2,249) |
________ | ________ | ________ | ________ | ________ | ________ | ||
Balance at 31 October 2011 | 2,393 | 28 | 2,233 | 59,490 | 4,302 | 68,446 | |
________ | ________ | ________ | ________ | ________ | ________ | ||
¹ See note 13 for further details on the capital reserve. | |||||||
The revenue reserve represents the amount of the Company's reserves distributable by way of dividend. | |||||||
The accompanying notes are an integral part of the financial statements. | |||||||
CASHFLOW STATEMENT
Year ended | Year ended | ||||
31 October 2012 | 31 October 2011 | ||||
Notes | £'000 | £'000 | £'000 | £'000 | |
Net cash inflow from operating activities | 14 | 1,896 | 2,207 | ||
Servicing of finance | |||||
Interest paid | (116) | (143) | |||
Financial investment | |||||
Purchases of investments | (12,361) | (15,917) | |||
Sales of investments | 9,425 | 17,153 | |||
________ | ________ | ||||
Net cash (outflow)/inflow from financial investment | (2,936) | 1,236 | |||
Equity dividends paid | 7 | (2,344) | (2,249) | ||
________ | ________ | ||||
Net cash (outflow)/inflow before use of liquid resources and financing | (3,500) | 1,051 | |||
Net cash inflow/ (outflow) from management of liquid resources | 1,000 | (1,000) | |||
________ | ________ | ||||
Net cash (outflow)/inflow before financing | (2,500) | 51 | |||
Financing | |||||
Repayment of bank loan | - | (5,000) | |||
Bank loan drawn down | - | 5,000 | |||
Exercise of Subscription shares | 2 | 1 | |||
________ | ________ | ||||
Net cash inflow from financing | 2 | 1 | |||
________ | ________ | ||||
(Decrease)/increase in cash | 15 | (2,498) | 52 | ||
________ | ________ | ||||
Reconciliation of net cash flow to movements in net (debt/funds | |||||
(Decrease)/increase in cash as above | (2,498) | 52 | |||
Net change in liquid resources | (1,000) | 1,000 | |||
________ | ________ | ||||
Change in net (debt)/funds resulting from cash flows | (3,498) | 1,052 | |||
Repayment of bank loan | - | 5,000 | |||
Bank loan drawn down | - | (5,000) | |||
________ | ________ | ||||
Movement in net (debt)/funds in the year | (3,498) | 1,052 | |||
Opening net funds | 1,940 | 888 | |||
________ | ________ | ||||
Closing net (debt)/funds | 16 | (1,558) | 1,940 | ||
________ | ________ | ||||
NOTES TO FINANCIAL STATEMENTS:
For the year ended 31 October 2012 | ||
1. | Accounting policies | |
(a) | Basis of preparation and going concern | |
The financial statements have been prepared in accordance with the applicable UK Accounting Standards and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts'. | ||
The financial statements have been prepared on the assumption that approval as an investment trust will continue to be granted. The financial statements have been prepared on a going concern basis. The Directors believe this is appropriate for the reasons outlined in the Business Review. | ||
The financial statements, and the net asset value per share figures, have been prepared in accordance with UK Generally Accepted Accounting Practice (UK GAAP). | ||
(b) | Revenue, expenses and interest payable | |
Income from equity investments (other than special dividends), including taxes deducted at source, is included in revenue by reference to the date on which the investment is quoted ex-dividend. Special dividends are credited to revenue or capital according to the circumstances. Foreign income is converted at the exchange rate applicable at the time of receipt. Interest receivable on short term deposits, expenses and interest payable are accounted for on an accruals basis. | ||
Expenses are charged to capital when they are incurred in connection with the maintenance or enhancement of the value of investments. In this respect, the investment management fee and relevant finance costs are allocated between revenue and capital in line with the Board's expectation of returns from the Company's investments over the long term in the form of revenue and capital respectively (see notes 3 and 5). Performance fees are allocated wholly to capital. | ||
(c) | Investments | |
Investments have been designated upon initial recognition at fair value through profit or loss. Investments are recognised at trade date where a purchase or sale is under contract whose terms require delivery within the timeframe established by the market concerned, and are measured initially at fair value. Subsequent to initial recognition, investments are recognised at fair value through profit or loss. For listed investments, this is deemed to be bid market prices or closing prices for SETS stocks, sourced from the London Stock Exchange. SETS is the London Stock Exchange electronic trading service covering most of the market including all FTSE All-Share and the most liquid AIM constituents. Gains or losses arising from changes in fair value are included in net profit or loss for the period as a capital item in the Income Statement and are ultimately recognised in the capital reserve. | ||
(d) | Dividends payable | |
Interim and final dividends are recognised in the period in which they are paid. | ||
(e) | Capital reserve | |
Gains and losses on the sale of investments and changes in fair values of investments held are transferred to the capital reserve. The capital element of the management fee and relevant finance costs are charged to this reserve. Any associated tax relief is also credited to this reserve. Performance fees are allocated wholly to capital. | ||
(f) | Taxation | |
Deferred taxation is provided on all timing differences that have originated but not reversed at the Balance Sheet date where transactions or events that result in an obligation to pay more or a right to pay less tax in the future have occurred at the Balance Sheet date measured on an undiscounted basis and based on enacted tax rates. This is subject to deferred tax assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the underlying timing differences can be deducted. Timing differences are differences arising between the Company's taxable profits and its results as stated in the financial statements which are capable of reversal in one or more subsequent periods. | ||
Owing to the Company's status as an investment trust company, and the intention to continue meeting the conditions required to obtain approval in the future, the Company has not provided deferred tax on any capital gains and losses arising on the revaluation or disposal of investments. | ||
2012 | 2011 | ||
2. | Income | £'000 | £'000 |
Income from investments¹ | |||
UK dividend income | 2,495 | 2,567 | |
Overseas dividend income | 126 | 70 | |
UK stock dividend income | 66 | 89 | |
___________ | ___________ | ||
2,687 | 2,726 | ||
___________ | ___________ | ||
Other income² | |||
Interest on Treasury Bills | - | 1 | |
Deposit interest | 25 | 28 | |
Interest on VAT recovered | - | 293 | |
Underwriting commission | 4 | 8 | |
___________ | ___________ | ||
29 | 330 | ||
___________ | ___________ | ||
Total income | 2,716 | 3,056 | |
___________ | ___________ | ||
¹ All investments have been designated fair value through profit or loss on initial recognition, therefore all investment income arises on investments at fair value through profit or loss. | |||
² Other income on financial assets not designated fair value through profit or loss. | |||
2012 | 2011 | ||||||
Revenue | Capital | Total | Revenue | Capital | Total | ||
3. | Investment management fee | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
Investment management fee | 79 | 236 | 315 | 80 | 240 | 320 | |
Performance fee | - | 115 | 115 | - | 329 | 329 | |
_______ | _______ | _______ | _______ | _______ | _______ | ||
79 | 351 | 430 | 80 | 569 | 649 | ||
_______ | _______ | _______ | _______ | _______ | _______ | ||
The management fee paid to the Manager is calculated at 0.4% per annum of the gross assets of the Company after deducting current liabilities and excluding commonly managed funds ('adjusted gross assets'). | |||||||
In addition, the Manager is entitled to a performance-related fee calculated quarterly in arrears at a rate of 0.1% per annum (up to a maximum of 0.5% per annum) of the adjusted gross assets for every 1% by which the Company's net asset value performance outperforms the capital performance of the FTSE SmallCap Index (ex Investment Companies) over the twelve month period. | |||||||
The management agreement between the Company and the Manager is terminable by either party on 3 months' notice. | |||||||
The management fee is chargeable 75% to capital and 25% to revenue. The performance-related management fee is allocated wholly to capital. | |||||||
2012 | 2011 | ||
4. | Administrative expenses | £'000 | £'000 |
Directors' fees | 78 | 75 | |
Auditors' remuneration : | |||
- fees payable to the Company's auditor : | |||
- for the audit of the annual accounts | 15 | 15 | |
- fees payable to the Company's auditor and its associates for audit-related services: | |||
- interim review | 4 | 5 | |
Secretarial fee | 77 | 73 | |
Marketing | 31 | 30 | |
Share Plan costs | 37 | 36 | |
Registrar's fees | 18 | 16 | |
Advisory fees | 33 | 31 | |
Legal fees | 1 | - | |
Irrecoverable VAT | 43 | 41 | |
Other expenses | 64 | 67 | |
_______ | _______ | ||
401 | 389 | ||
_______ | _______ | ||
The secretarial fee of £77,000 (2011 - £73,000) was paid to the Manager. | |||
Marketing expenses of £31,000 (2011 - £30,000) were paid to the Manager in respect of marketing and promotion of the Company. | |||
2012 | 2011 | ||||||
Revenue | Capital | Total | Revenue | Capital | Total | ||
5. | Finance costs | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
Financial liabilities not at fair value through profit or loss: | |||||||
Bank loan interest | 30 | 88 | 118 | 31 | 91 | 122 | |
______ | ______ | ______ | ______ | ______ | ______ | ||
6. | Taxation | ||
There is no liability to corporation tax for the year (2011 - £nil).
| |||
The corporation tax rate was 26% until 31 March 2012 and 24% from 1 April 2012 giving an effective rate of 24.83%. | |||
2012 | 2011 | ||
Factors affecting tax charge for the year | £'000 | £'000 | |
Return on ordinary activities before taxation | 14,395 | (3,115) | |
_______ | _______ | ||
Tax thereon at 24.83% (2011 - 26.83%) | 3,574 | (836) | |
Effects of: | |||
Non taxable UK dividends | (620) | (689) | |
Non taxable overseas dividends | (31) | (19) | |
Non taxable UK stock dividends | (16) | (24) | |
Gains on investments not taxable | (3,136) | 1,344 | |
Excess expenses not utilised | 229 | 224 | |
_______ | _______ | ||
- | - | ||
_______ | _______ | ||
At the year end, the Company had surplus management expenses and loan relationship losses of £27,242,000 (2011 - £26,321,000). These have been generated because such a large part of the Company's income is derived from dividends from UK companies. The Company is not expected to generate taxable income in a future period in excess of deductible expenses for that period and, accordingly, is unlikely to be able to reduce future tax liabilities by offsetting these losses. These losses are not recognised as a deferred tax asset. | |||
2012 | 2011 | ||
7. | Dividends | £'000 | £'000 |
Amounts recognised as distributions to equity holders in the period: | |||
Final dividend for 2011 - 2.90p (2010 - 2.75p) | 1,388 | 1,316 | |
Interim dividend for 2012 - 2.00p (2011 - 1.95p) | 957 | 933 | |
Return of unclaimed dividends | (1) | - | |
_______ | _______ | ||
Dividends paid in the year | 2,344 | 2,249 | |
_______ | _______ | ||
The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. | |||
The table below sets out the total dividends paid and proposed in respect of the financial year, which is the basis on which the requirements of Sections 1158-1159 Corporation Tax Act 2010 are considered. The revenue available for distribution by way of dividend for the year is £2,206,000 (2011 - £2,556,000). | |||
2012 | 2011 | ||
£'000 | £'000 | ||
Interim dividend paid for 2012 - 2.00p (2011 - 1.95p) | 957 | 933 | |
Proposed final dividend for 2012 - 3.00p (2011 - 2.90p) | 1,436 | 1,388 | |
_______ | _______ | ||
2,393 | 2,321 | ||
_______ | _______ | ||
2012 | 2011 | ||
8. | Return per Ordinary share | p | p |
Revenue return | 4.61 | 5.34 | |
Capital return | 25.47 | (11.85) | |
_______ | _______ | ||
Total return | 30.08 | (6.51) | |
_______ | _______ | ||
Weighted average number of Ordinary shares in issue | 47,856,631 | 47,855,057 | |
____________ | ____________ | ||
As detailed in note 12, the remaining Subscription shares lapsed and were cancelled following the expiry of the final exercise date on 28 February 2012. On the basis set out in Financial Reporting Standard 22 "Earnings per Share", there was no dilutive effect on net revenue or net capital per share in the prior year, arising from the exercise of the Subscription shares as detailed in note 12. | |||
Listed | Listed | ||
in UK | in UK | ||
2012 | 2011 | ||
9. | Investments | £'000 | £'000 |
Fair value through profit or loss: | |||
Opening fair value | 66,443 | 72,401 | |
Opening fair value gains on investments held | (9,378) | (17,834) | |
_______ | _______ | ||
Opening book cost | 57,065 | 54,567 | |
Purchases at cost | 13,105 | 15,917 | |
Sales - proceeds | (9,858) | (16,864) | |
Sales - gains on sales | 2,260 | 3,445 | |
_______ | _______ | ||
Closing book cost | 62,572 | 57,065 | |
Closing fair value gains on investments held | 19,746 | 9,378 | |
_______ | _______ | ||
Closing fair value | 82,318 | 66,443 | |
_______ | _______ | ||
2012 | 2011 | ||
Gains/(losses) on investments | £'000 | £'000 | |
Gains on sales of equities | 2,260 | 3,445 | |
Movement in fair value gains on investments held | 10,368 | (8,456) | |
_______ | _______ | ||
12,628 | (5,011) | ||
_______ | _______ | ||
Transaction costs | |||
During the year expenses were incurred in acquiring or disposing of investments classified as fair value through profit or loss. These have been expensed through capital and are included within (losses)/gains on investments in the Income Statement. The total costs were as follows: | |||
2012 | 2011 | ||
£'000 | £'000 | ||
Purchases | 71 | 91 | |
Sales | 11 | 19 | |
_______ | _______ | ||
82 | 110 | ||
_______ | _______ | ||
2012 | 2011 | ||
10. | Debtors: amounts falling due within one year | £'000 | £'000 |
Amounts due from stockbrokers | 433 | - | |
Net dividends and interest receivable | 252 | 233 | |
Other debtors and prepayments | 15 | 8 | |
_______ | _______ | ||
700 | 241 | ||
_______ | _______ |
11. | Creditors: amounts falling due within one year | |||
(a) | Bank loan | |||
The Company has a three year revolving credit agreement, expiring on 24 November 2014, with Scotiabank Europe for up to £5 million. At the year end the facility was drawn down in full at a rate of 1.95991%. The terms of the loan facility contain covenants that the minimum net assets of the Company are £37 million and the percentage of borrowings against net assets to be less than 25%. | ||||
On 26 November 2012 the loan facility was rolled over until 25 January 2013 at a rate of 1.96617%. | ||||
2012 | 2011 | |||
(b) | Other creditors | £'000 | £'000 | |
Amounts due to stockbrokers | 744 | - | ||
Investment management fee | 84 | 90 | ||
Interest payable | 2 | - | ||
Sundry creditors | 131 | 88 | ||
_______ | _______ | |||
961 | 178 | |||
_______ | _______ | |||
2012 | 2011 | ||
12. | Called-up share capital | £'000 | £'000 |
Allotted, called-up and fully paid: | |||
47,857,317 Ordinary shares of 5p each (2011 - 47,855,443 Ordinary shares of 5p each) | 2,393 | 2,393 | |
_______ | _______ | ||
During the year no Ordinary shares of 5p each (2011 - nil) were bought back for cancellation. | |||
In November 2006, a bonus issue of new Subscription shares of 0.001p each was completed on the basis of 15 new Subscription shares for every 100 Ordinary shares resulting from the Ordinary share sub-division. Each Subscription share conferred the right to subscribe for, or convert into, one Ordinary share on 28 February in any of the years 2007 to 2012 (inclusive) at a price of 170p per share. The Subscription shares had no voting rights or entitlement to dividends. | |||
During the year 1,874 Subscription shares were exercised (2011 - 1,091). | |||
As 28 February 2012 was the final exercise date for the Subscription shares, in accordance with the terms and conditions, all remaining Subscription shares lapsed and were cancelled. | |||
2012 | 2011 | ||
13. | Capital reserve | £'000 | £'000 |
At 1 November | 59,490 | 65,161 | |
Movement in fair value gains on investments held | 12,628 | (5,011) | |
Investment management fees | (351) | (569) | |
Finance costs | (88) | (91) | |
_______ | _______ | ||
At 31 October | 71,679 | 59,490 | |
_______ | _______ | ||
The capital reserve includes investment holding gains amounting to £19,746,000 (2011 - £9,378,000), as disclosed in note 9. | |||
14. | Reconciliation of net revenue before finance costs and | 2012 | 2011 |
taxation to net cash inflow from operating activities | £'000 | £'000 | |
Net return on ordinary activities before finance costs and taxation | 14,513 | (2,993) | |
Adjustment for: | |||
(Gains)/losses on investments | (12,628) | 5,011 | |
Increase in accrued income | (19) | (30) | |
(Increase)/decrease in other debtors | (7) | 292 | |
Increase/(decrease) in other creditors | 37 | (73) | |
_______ | _______ | ||
Net cash inflow from operating activities | 1,896 | 2,207 | |
_______ | _______ |
2012 | 2011 | ||
15. | Analysis of changes in cash during the year | £'000 | £'000 |
Opening balance | 5,940 | 5,888 | |
Net cash (outflow)/inflow | (2,498) | 52 | |
_______ | _______ | ||
Closing balance | 3,442 | 5,940 | |
_______ | _______ |
At | At | |||
1 November | 31 October | |||
2011 | Cash flow | 2012 | ||
16. | Analysis of changes in net funds | £'000 | £'000 | £'000 |
Cash and short term deposits | 5,940 | (2,498) | 3,442 | |
UK Treasury Bills | 1,000 | (1,000) | - | |
Bank loan | (5,000) | - | (5,000) | |
_______ | _______ | _______ | ||
Net funds/(debt) | 1,940 | (3,498) | (1,558) | |
_______ | _______ | _______ |
17. | Net asset value per share | 2012 | 2011 |
Equity shareholders' funds | £80,499,000 | £68,446,000 | |
Number of Ordinary shares in issue at year end | 47,857,317 | 47,855,443 | |
Equity shareholders' funds per share | 168.21p | 143.03p | |
The movements during the year of the assets attributable to the Ordinary shares were as follows: | |||
2012 | 2011 | ||
£'000 | £'000 | ||
Opening net assets | 68,446 | 73,809 | |
Capital return for the year | 12,189 | (5,671) | |
Revenue on ordinary activities after taxation | 2,206 | 2,556 | |
Dividends paid in the year | (2,344) | (2,249) | |
Exercise of Subscription shares | 2 | 1 | |
_______ | _______ | ||
Closing net assets | 80,499 | 68,446 | |
_______ | _______ | ||
18. | Financial instruments | |||||||
The Company's objective is to attract long term private and institutional investors wanting to benefit from the growth prospects of smaller companies by investment in a relatively risk averse investment trust. | ||||||||
The impact of security price volatility is reduced by diversification. Diversification is achieved by investment in the stocks and shares of companies in a range of industrial, commercial and financial sectors. The management of the portfolio is conducted according to investment guidelines, established by the Board after discussion with the Manager, which specify the limits within which the Manager is authorised to act. | ||||||||
The Company's financial instruments comprise securities and other investments, cash balances, loans and debtors and creditors that arise directly from its operations; for example, in respect of sales and purchases awaiting settlement, and debtors for accrued income. The Company also has the ability to enter into derivative transactions for the purpose of managing currency and market risks arising from the Company's activities. | ||||||||
The Manager has a dedicated investment management process, which ensures that the investment policy is followed. Stock selection procedures are in place based on the active portfolio management and identification of stocks. The portfolio is reviewed on a periodic basis by a Senior Investment Manager and also by the Manager's Investment Committee. | ||||||||
The Company's Manager has an independent Investment Risk department which reviews the investment risk parameters of the Company's portfolio on a regular basis. The department reports to the Manager's Performance Review Committee which is chaired by the Manager's Chief Investment Officer. The department's responsibility is to review and monitor ex-ante (predicted) portfolio risk and style characteristics using best practice, industry standard multi-factor models. | ||||||||
Additionally, the Manager's Compliance department continually monitors the Company's investment and borrowing powers and reports to the Manager's Risk Management Committee. | ||||||||
The main risks the Company faces from its financial instruments are (i) market price risk (comprising interest rate risk, currency risk and other price risk), (ii) liquidity risk and (iii) credit risk. | ||||||||
The Board regularly reviews and agrees policies for managing each of these risks. The Manager's policies for managing these risks are summarised below and have been applied throughout the year. The numerical disclosures exclude short-term debtors and creditors, other than for currency disclosures. | ||||||||
(i) Market risk | ||||||||
The fair value or future cash flows of a financial instrument held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements - interest rate risk, currency risk and other price risk. | ||||||||
Interest rate risk | ||||||||
Interest rate movements may affect: | ||||||||
- the fair value of the investments in fixed interest rate securities; | ||||||||
- the level of income receivable on cash deposits; | ||||||||
- interest payable on the Company's variable rate borrowings. | ||||||||
The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment and borrowing decisions. | ||||||||
It is the Company's policy to increase its exposure to equity market price risk through the judicious use of borrowings. When borrowed, funds are invested in equities, the effect is to magnify the impact on Shareholders' funds of changes - both positive and negative - in the value of the portfolio. | ||||||||
The Company's borrowings comprise a 3 year £5 million revolving credit agreement facility. Details of borrowings as at 31 October 2012 are shown in note 11. | ||||||||
Interest risk profile | ||||||||
The interest rate risk profile of the portfolio of financial assets and liabilities at the Balance Sheet date was as follows: | ||||||||
Weighted | ||||||||
average | Weighted | |||||||
period for | average | |||||||
which | interest | Floating | Fixed | |||||
rate is fixed | rate | rate | rate | |||||
At 31 October 2012 | Years | % | £'000 | £'000 | ||||
Assets | ||||||||
Cash deposits | - | 0.54 | 3,442 | - | ||||
_______ | _______ | _______ | _______ | |||||
Total assets | - | - | 3,442 | - | ||||
_______ | _______ | _______ | _______ | |||||
Weighted | ||||||||
average | Weighted | |||||||
period for | average | |||||||
which | interest | Floating | Fixed | |||||
rate is fixed | rate | rate | rate | |||||
Years | % | £'000 | £'000 | |||||
Liabilities | ||||||||
Bank loans | 0.07 | 1.96 | - | (5,000) | ||||
_______ | _______ | _______ | _______ | |||||
Total liabilities | - | - | - | (5,000) | ||||
_______ | _______ | _______ | _______ | |||||
Weighted | ||||||||
average | Weighted | |||||||
period for | average | |||||||
which | interest | Floating | Fixed | |||||
rate is fixed | rate | rate | rate | |||||
At 31 October 2011 | Years | % | £'000 | £'000 | ||||
Assets | ||||||||
UK Treasury Bills | 0.04 | - | - | 1,000 | ||||
Cash deposits | - | 0.60 | 5,940 | - | ||||
_______ | _______ | _______ | _______ | |||||
Total assets | - | - | 5,940 | 1,000 | ||||
_______ | _______ | _______ | _______ | |||||
Liabilities | ||||||||
Bank loans | 0.07 | 2.06 | - | (5,000) | ||||
_______ | _______ | _______ | _______ | |||||
Total liabilities | - | - | - | (5,000) | ||||
_______ | _______ | _______ | _______ | |||||
The weighted average interest rate is based on the current yield of each asset, weighted by its market value. The weighted average interest rate on bank loans is based on the interest rate payable, weighted by the total value of the loans. The maturity dates of the Company's loans are shown in note 11 to the financial statements. | ||||||||
The floating rate assets consist of cash deposits on call earning interest at prevailing market rates. | ||||||||
The Company's equity portfolio and short-term debtors and creditors (excluding bank loans) have been excluded from the above tables. | ||||||||
All financial liabilities are measured at amortised cost. | ||||||||
Maturity profile | ||||||||
The maturity profile of the Company's financial assets and liabilities at the Balance Sheet date was as follows: | ||||||||
Within | More than | |||||||
1 year | 1 year | |||||||
At 31 October 2012 | £'000 | £'000 | ||||||
Fixed rate | ||||||||
Short term bank loan | (5,000) | - | ||||||
_______ | _______ | |||||||
(5,000) | - | |||||||
_______ | _______ | |||||||
Floating rate | ||||||||
Cash | 3,442 | - | ||||||
_______ | _______ | |||||||
Total | (1,558) | - | ||||||
_______ | _______ | |||||||
Within | More than | |||||||
1 year | 1 year | |||||||
At 31 October 2011 | £'000 | £'000 | ||||||
Fixed rate | ||||||||
UK Treasury Bills | 1,000 | - | ||||||
Short term bank loan | (5,000) | - | ||||||
_______ | _______ | |||||||
(4,000) | - | |||||||
_______ | _______ | |||||||
Floating rate | ||||||||
Cash | 5,940 | - | ||||||
_______ | _______ | |||||||
Total | 1,940 | - | ||||||
_______ | _______ | |||||||
Interest rate sensitivity | ||||||||
The sensitivity analyses below have been determined based on the exposure to interest rates at the Balance Sheet date and with the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period in the case of instruments that have floating rates. | ||||||||
If interest rates had been 100 basis points higher or lower and all other variables were held constant, the Company's: | ||||||||
- profit for the year ended 31 October 2012 would increase/decrease by £16,000 (2011 - increase/decrease by £59,000). This is mainly attributable to the Company's exposure to interest rates on its short term bank loan and floating rate cash balances. | ||||||||
- the Company holds no financial instruments that will have an equity reserve impact. | ||||||||
In the opinion of the Directors, the above sensitivity analyses are not representative of the year as a whole, since the level of exposure changes frequently as part of the interest rate risk management process used to meet the Company's objectives. | ||||||||
Other price risk | ||||||||
Other price risks (i.e. changes in market prices other than those arising from interest rate or currency risk) may affect the value of the quoted investments. | ||||||||
It is the Board's policy to hold an appropriate spread of investments in the portfolio in order to reduce the risk arising from factors specific to a particular sector. The allocation of assets and the stock selection process both act to reduce market risk. The Manager actively monitors market prices throughout the year and reports to the Board, which meets regularly in order to review investment strategy. The investments held by the Company are listed on the London Stock Exchange. | ||||||||
Other price risk sensitivity | ||||||||
If market prices at the Balance Sheet date had been 10% higher or lower while all other variables remained constant, the return attributable to Ordinary shareholders for the year ended 31 October 2012 would have increased/decreased by £8,231,000 (2011 - £6,664,000). This is based on the Company's equity portfolio at each year end. | ||||||||
In the opinion of the Directors, the above sensitivity analyses are not representative of the year as a whole, since the level of exposure changes frequently as part of the other price risk management process used to meet the Company's objectives. | ||||||||
(ii) Liquidity risk | ||||||||
This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. | ||||||||
Liquidity risk is not considered to be significant as the Company's assets comprise mainly cash, short term deposits, placements and listed securities, which can be sold or realised to meet funding commitments if necessary. | ||||||||
The Board imposes borrowing limits to ensure gearing levels are appropriate to market conditions, and reviews these on a regular basis. Borrowings comprise a revolving credit agreement facility. At the year end the Company had borrowings of £5 million and this amount is reviewed on an ongoing basis. Details of borrowings at 31 October 2012 are shown in note 11. | ||||||||
Short-term flexibility is achieved through the use of loan and overdraft facilities, details of which can be found in note 11. Under the terms of the loan facility, the Manager provides the lender with loan covenant reports on a monthly basis, to provide the lender with assurance that the terms of the facility are not being breached. The Manager will also review the credit rating of a lender on a regular basis. Details of the Board's policy on gearing is shown in the interest rate risk section of this note. | ||||||||
(iii) Credit risk | ||||||||
This is failure of the counter party to a transaction to discharge its obligations under that transaction that could result in the Company suffering a loss. | ||||||||
The risk is managed as follows: | ||||||||
- where the Manager makes an investment in a bond, corporate or otherwise, the credit rating of the issuer is taken into account so as to minimise the risk to the Company of default; | ||||||||
- investment transactions are carried out with a large number of brokers, whose credit rating of which is taken into account so as to minimise the risk to the Company of default; | ||||||||
- investment transactions are carried out with a large number of brokers, whose credit-standing is reviewed periodically by the Manager, and limits are set on the amount that may be due from any one broker; | ||||||||
- the risk of counterparty exposure due to failed trades causing a loss to the Company is mitigated by the review of failed trade reports on a monthly basis. In addition, the custodian carries out a stock reconciliation to third party administrators' records on a monthly basis to ensure discrepancies are picked up on a timely basis. The Manager's Compliance department carries out periodic reviews of the Custodian's operations and reports its finding to the Manager's Risk Management Committee. This review will also include checks on the maintenance and security of investments held; | ||||||||
- cash is held only with reputable banks with high quality external credit enhancements. | ||||||||
None of the Company's financial assets are secured by collateral or other credit enhancements. | ||||||||
Credit risk exposure | ||||||||
In summary, compared to the amounts in the Balance Sheet, the maximum exposure to credit risk at 31 October 2012 was as follows: | ||||||||
2012 | 2011 | |||||||
Balance | Maximum | Balance | Maximum | |||||
Sheet | exposure | Sheet | exposure | |||||
£'000 | £'000 | £'000 | £'000 | |||||
Non-current assets | ||||||||
Securities at fair value through profit or loss | 82,318 | 82,318 | 66,443 | 66,443 | ||||
Current assets | ||||||||
Trades and other receivables | 448 | 448 | 8 | 8 | ||||
Accrued income | 252 | 252 | 233 | 233 | ||||
UK Treasury Bills | - | - | 1,000 | 1,000 | ||||
Cash and cash equivalents | 3,442 | 3,442 | 5,940 | 5,940 | ||||
_______ | _______ | _______ | _______ | |||||
86,460 | 86,460 | 73,624 | 73,624 | |||||
_______ | _______ | _______ | _______ | |||||
None of the Company's financial assets are past due or impaired. | ||||||||
Fair values of financial assets and financial liabilities | ||||||||
The book value of cash at bank and bank loans and overdrafts included in these financial statements approximate to fair value because of their short-term maturity. Investments held as dealing investments are valued at fair value. The carrying values of fixed asset investments are stated at their fair values, which have been determined with reference to quoted market prices. For all other short-term debtors and creditors, their book values approximate to fair values because of their short-term maturity. | ||||||||
19. | Fair value hierarchy |
FRS 29 'Financial Instruments: Disclosures', requires an entity to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels: | |
- Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities; | |
- Level 2: inputs other than quoted prices included within Level 1 that are observable for the assets or liabilities, either directly (ie as prices) or indirectly (ie derived from prices); and | |
- Level 3: inputs for the assets or liabilities that are not based on observable market data (unobservable inputs). | |
All of the Company's investments are in quoted equities (2011 - same) actively traded on recognised stock exchanges, with their fair value being determined by reference to their quoted bid prices at the reporting date. The total value of the investments as at the year end of £82,318,000 (2011 - £66,443,000) have therefore been deemed as Level 1. |
20. | Capital management policies and procedures | |
The Company's capital management objectives are: | ||
- | to ensure that the Company will be able to continue as a going concern; and | |
- | to maximise the capital return to its equity shareholders through an appropriate balance of equity capital and debt. | |
The capital of the Company consists of equity, comprising issued capital, reserves and retained earnings. | ||
The Board monitors and reviews the broad structure of the Company's capital on an ongoing basis. This review includes the nature and planned level of gearing, which takes account of the Manager's views on the market and the extent to which revenue in excess of that which is required to be distributed should be retained. The Company is not subject to any externally imposed capital requirements. | ||
Additional Notes to Annual Financial Report
The Annual General Meeting will be held on 7 February 2013 at 12.30 p.m. at Discovery Point, Dundee, DD1 4XA.
The Annual Financial Report Announcement is not the Company's statutory accounts. The above results for the year ended 31 October 2012 are an abridged version of the Company's full accounts, which have been approved and audited with an unqualified report. The 2011 and 2012 statutory accounts received unqualified reports from the Company's auditors and did not include any reference to matters to which the auditors drew attention by way of emphasis without qualifying the reports, and did not contain a statement under s.498 of the Companies Act 2006. The financial information for 2011 is derived from the statutory accounts for 2011 which have been delivered to the Registrar of Companies. The 2012 accounts will be filed with the Registrar of Companies in due course.
The Annual Report will be posted to shareholders at the end of December 2012 and additional copies will be available from the registered office of the Company and on the Company's website, www.dunedinsmaller.co.uk*.
Please note that past performance is not necessarily a guide to the future and that the value of investments and the income from them may fall as well as rise and may be affected by exchange rate movements. Investors may not get back the amount they originally invested.
For Dunedin Smaller Companies Investment Trust PLC
Aberdeen Asset Management PLC, Secretary
* Neither the Company's website nor the content of any website accessible from hyperlinks on the Company's website (or any other website) is (or is deemed to be) incorporated into, or forms (or is deemed to form) part of this announcement.
END