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Aberdeen Smaller Companies Income Trust PLC

Half Yearly Financial Report for the six months to 30 June 2019

OBJECTIVE

The objective of the Company is to provide a high and growing dividend and capital growth from a portfolio invested principally in the ordinary shares of smaller UK companies and UK fixed income securities.

BENCHMARK

FTSE SmallCap Index - excluding Investment Companies (total return).

MANAGEMENT

The Company's alternative investment fund manager is Aberdeen Standard Fund Managers Limited ("ASFML" or "the Manager") (authorised and regulated by the Financial Conduct Authority). The Company's portfolio is managed on a day-to-day basis by Aberdeen Asset Managers Limited ("AAML" or "the Investment Manager") by way of a delegation agreement in place between ASFML and AAML.

HIGHLIGHTS

PERFORMANCE (TOTAL RETURN)

INTERIM BOARD REPORT - CHAIRMAN'S STATEMENT

Performance

In the six month period to the end of June 2019, I am pleased to report that the Trust has strongly outperformed its benchmark, the FTSE Smaller Companies Index (excl. Investment Trusts), returning 18.1% on a Net Asset Value (NAV) basis compared to the Index return of 6.1%. The Trust's share price increased by 30.6% in the period, with the discount to NAV narrowing substantially to 13.3%. The Trust's record of outperformance can also be seen in its 1, 3 and 5 year returns.

Trust Gearing and Debt

There has been no change to the level of borrowings the Company employs. The Trust has a 5 year £5m fixed rate loan facility and a 3 year £5m revolving credit facility, of which a total of £7m is currently drawn down. Portfolio gearing remains largely unchanged at the end of June 2019 at 6.1%, compared with gearing of 6.2% at the end of December 2018.

Dividend

You will have seen that the Board announced first and second quarter dividends year to date of 1.95p each (2018 - 1.80p each), an increase on last year's equivalent figures of 8.3%. This compares to an increase in the CPI for the first six months of this year of 0.75%.

With more of a focus on growth characteristics in the investment philosophy, the outlook for income growth looks attractive. The income account is also benefitting from some further special dividends, and there is a healthy reserve. The Company is well positioned to maintain solid dividend growth in the years to come.

Benchmark

Following discussions with the Manager, the Board has decided to implement a change to the Company's benchmark from the FTSE Smaller Companies ex Investment Trusts Index to the Numis Smaller Companies ex Investment Trusts Index (NSCI XIC) with effect from 1 January 2020. The NSCI XIC is the most common benchmark for UK Smaller Companies Trusts, and we feel now has more relevance to the holdings in the Company's portfolio. Approximately 25% of the Company's stocks are in the FTSE Small Cap ex Investment Trusts index, compared to 32% in the NSCI XIC). The Numis benchmark is currently outperforming the FTSE Smaller Companies Index (excl. Investment Trusts) to 30 June 2019 with a total return of 10.5%, making the Company's out-performance relevant to the Numis Index in the period 7.6%.

Preference Share Portfolio

Subsequent to the period end, the decision was taken to sell the Company's four preference share holdings and re-invest the proceeds into equities. The Portfolio Manager and the Board felt that Aviva's proposal last year to redeem its irredeemable shares had fundamentally changed investor sentiment toward the Preference Share market and that at this time the Company's capital could be better deployed in instruments with growing rather than flat income.

Outlook

Uncertainty remains in both political and economic markets globally, with the UK at elevated levels due to Brexit and Prime Ministerial changes. UK smaller companies markets have come under pressure given the perception of their domestic focus, however more recent news flow on US-China trade tensions highlights there are concerns across regions.

Following many years of bull markets, we are without doubt closer to the next downturn than the last. The Manager's investment process, based on bottom up stock selection rather than macro views, should guide us well through more difficult markets. The Manager takes a lower risk approach to Smaller Companies investing, and we believe the quality focus should protect the portfolio through more difficult markets. Investing in businesses which can grow throughout the cycle helps continue to deliver dividend growth to shareholders.

If the environment turns to one of lower economic growth, this will undoubtedly become tougher on our investments and their ability to sustain attractive growth rates. Whilst the quality focus should provide resilience, growth may be more challenging in the short term.

Robert Lister

Chairman

19 September 2019

INTERIM BOARD REPORT - OTHER

Principal Risks and Uncertainties

There are a number of risks which, if realised, could have a material adverse effect on the Company and its financial condition, performance and prospects. The Board has identified the principal risks and uncertainties facing the Company together with a description of the mitigating actions it has taken. These can be summarised under the following headings:

- Investment and Market

- Investment Portfolio Management

- Gearing

- Income and Dividend

- Operational

Details of these risks are provided in detail on pages 5 to 6 of the 2018 Annual Report. The principal risks have not changed nor are they expected to change in the second half of the financial year ended 31 December 2019.

In addition to these risks, the outcome of the UK Government's negotiations with the European Union on Brexit is still unclear at the date of this report. This remains an economic risk for the Company, principally in relation to the potential impact of Brexit on UK companies within the portfolio and on the Manager's operations. Whilst most of the portfolio holdings are UK-based companies, many have operations overseas with broad and geographically diverse earnings streams. Aberdeen Standard Investments has a significant Brexit program in place aimed at ensuring that they can continue to satisfy their clients' investment needs post Brexit.

In all other respects, the Company's principal risks and uncertainties have not changed materially since the year end.

Going Concern

In accordance with the Financial Reporting Council's Guidance on Risk Management, Internal Control and Related Financial and Business Reporting issued in September 2014, the Directors have undertaken a rigorous review and consider both that there are no material uncertainties and that the adoption of the going concern basis of accounting is appropriate. The Company's assets consist principally of equity shares in companies listed on the London Stock Exchange.

The Directors have a reasonable expectation that the Company has adequate financial resources to continue in operational existence for the foreseeable future and at least twelve months from the date of approval of this Half Yearly Report. Accordingly, they continue to adopt the going concern basis in preparing the financial statements.

Directors' Responsibility Statement

The Directors are responsible for preparing the Half Yearly Financial Report in accordance with applicable law and regulations. The Directors confirm that to the best of their knowledge:

- the condensed set of Financial Statements has been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting'

- the Interim Board Report includes a fair review of the information required by rule 4.2.7R of the Disclosure and Transparency Rules (being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of Financial Statements and a description of the principal risks and uncertainties for the remaining six months of the financial year)

- the Interim Board Report includes a fair review of the information required by 4.2.8R (being related party transactions that have taken place during the first six months of the financial year and that have materially affected the financial position of the Company during that period; and any changes in the related party transactions described in the last Annual Report that could do so).

The Half Yearly Financial Report for the six months to 30 June 2019 comprises the Interim Board Report and a condensed set of financial statements.

For and on behalf of the Board of Aberdeen Smaller Companies Income Trust PLC

Robert Lister

Chairman

19 September 2019

INVESTMENT MANAGER'S REVIEW

Overview

The first half of 2019 has been a strong period of performance for the Trust, in supportive market conditions. With a Net Asset Value (NAV) total return of +18.1%, this reflects significant outperformance relative to the benchmark return for FTSE Small Cap ex Investment Companies of +6.1%. Long term performance remains very favourable over 3 and 5 year time periods, with 3 year NAV growth of +54.8% vs the benchmark of +24.8%, and 5 year NAV growth of +65.0% vs the benchmark of +30.3%. Despite some negative sentiment towards smaller companies in the UK, given the perception that it is domestically focused, we have been pleased to see the discount narrow over the period with a 30.6% total return in the share price over the first 6 months of the year.

Despite continued macro uncertainty, heightened by political volatility around Brexit, markets have shown a lot of resilience. Having sold off in the latter part of 2018, with concerns around economic growth levels and the prospect of interest rate rises, we started 2019 with a strong market rally. Valuations on the UK market had fallen, and relative to other regions limited growth was being priced in which has helped attract investors back into the UK despite broader high level concerns. What is evident though is that FTSE Small Cap ex Investment Companies has lagged other markets in the UK, driven by its more domestic focus and the markets concerns about the UK in particular and the outcome of Brexit. FTSE 100 and FTSE 250 have performed stronger so far this year, given their more international exposure, as investors continue to look overseas for what they consider more resilient exposures and perhaps also more defensive and lower risk investments.

The UK market contains a wide and diverse range of companies, sometimes even more so at the smaller end. Through our bottom up stock selection focus we identify businesses which have Quality, Growth and Momentum characteristics, with an income balance. We do not look to take macroeconomic calls or time the cycle, but instead focus on identifying businesses which we believe have the levers and ability to grow in a sustainable manner, despite the external distractions the economy might experience. In difficult market environments and at times when economic growth slows, quality is a characteristic we believe comes into even more focus. Quality businesses with healthy balance sheets, management teams with a strong pedigree, good corporate governance and strong competitive positions have the ability to be resilient through more difficult periods, and even improve their positioning when peers may be struggling.

Equity Portfolio

Strong stock selection has been a significant contributor to the outperformance the Trust has delivered over the first half of the year. Aveva shares continued their excellent long term performance driven by reporting strength. Their organic growth has remained at attractive levels, with further growth support coming through the benefits of the integration with Schneider Software. The integration of the businesses has made good progress, with benefits being seen on product innovation and through the sales teams already. Intermediate Capital has been a positive contributor, with significant earnings and dividend expectations increases. We believe the business model is higher quality than historically, with a more diversified revenue stream, and will be less cyclical then previous downturns. They are increasingly asset light given the increasing importance of the third-party asset management. Encouragingly they continue to attract assets, and given the long term and closed ended nature of funds, we view these as lower risk in more difficult times. Dechra Pharmaceuticals, a long term winner for the portfolio, has contributed positively again this period with both organic and acquisitive growth being at attractive levels, helped by new product innovation and distribution gains. The cash generation strength helps finance investment for growth as well as a dividend yield which remains attractive. The continued positive contribution from these long term holdings in the Trust highlights the merits of our desire to "run our winners". 2 newer holdings which have been strong positive contributors are AJ Bell and Games Workshop. We participated in the IPO of AJ Bell where we believed the strong market position of this founder run business could be even further enhanced through market share gains. Their product offering has many strengths and with attractive fee levels they are not subject to the same degree of fee pressures that some other players face. This helps convert Assets Under Administration growth into both earnings growth and cash generation. We were impressed with the collaborative and collegiate culture within the business, driven heavily by the founder and significant shareholder Andy Bell. Games Workshop, the hobbyist retailer, has delivered very appealing growth levels over recent periods with the business increasingly focused on online penetration and international markets. Their ownership of the intellectual property for Warhammer provides barriers to entry, and Games Workshop is a good example of where we invest in dominant players in what may be a niche market, but then that niche can expand globally and therefore, the addressable market can provide growth for years to come. The cash generation from growth has provided surplus capital, and despite also investing in capacity, the management team look to return this excess cash to shareholders.

The main detractors from performance have been non-holds over the period. Two of these, KCOM and Tarsus, are companies which have been bid for, driving their share price strength. Burford shares lagged the market rally following a couple of years of very strong performance. Given their high rating they are dependent on strong growth dynamics to sustain this, and in the period we also saw some negative market commentary challenging some governance and accounting areas. Post the period end, the aggressive short seller Muddy Waters published a short sell note on Burford, challenging a number of areas including accounting and corporate governance. Shares were heavily depressed on this report, and have since only recovered a small degree of the fall. We continue to engage with the Burford team, and are evaluating this investment on an ongoing basis.

Somero unfortunately issued a profit warning, blaming wet weather in the US. The weather disruption has made concrete laying very difficult in some regions, and therefore has detracted from sales of new equipment. Their customer's order books remain at healthy levels, however in the short term the lower earnings do depress the potential levels of shareholder returns through dividends.

Following the portfolio repositioning done in late 2018, and the increasing focus on investing in growth businesses, we have continued to add some new holdings. The portfolio is focused on investments which deliver attractive income yields, but also which have strong Quality, Growth and Momentum dynamics. The portfolio continues to have an attractive dividend yield, and through investing in faster growing businesses we look to focus on growth of income.

New holdings include Kesko, Games Workshop, Paypoint, Somero, MJ Gleeson, Moneysupermarket and Barclays Bank 9% 2023-Perpetual. These investments exhibit those Quality Growth Momentum dynamics we look for, have attractive yields and score well on our stock screening tool, the Matrix. Kesko is a Finnish business with a high market share in Finnish food retail. This business has been successfully positioned with a unique offering that has protected it versus competitors, and should provide a solid defensive core. The next stage is an improvement in their Building and Technical business, which is B2B and B2C. They have a strong balance sheet, which will allow them to do M&A. Games Workshop, is the hobbyist business that owns the intellectual propertyand manufactures the products of "Warhammer". They are driving strong growth from increasing online customer interaction, increasing trade accounts, new product launches, and store growth with increasingly global exposure. The capacity expansion of the new facility should provide further growth capabilities. They have a net cash balance sheet and are highly cash generative. Paypoint, is a relatively defensive player providing retail payment services. They have strong market positions across the service range in the UK, and their Romanian business is also well positioned with good growth opportunities. Their balance sheet is healthy and cash generation is good. Somero has a very attractive matrix score and a high dividend yield. This US based manufacturer of concrete "screeds" continues to deliver strong growth and cash generation. Utilising their machinery means the quality of flat concrete flooring is significantly higher, but also the cost and time of laying it is reduced, delivering a good return on investment to customers. They pay a good dividend, and then supplement that with paying out 50% of cash above $15m. Moneysupermarket has had a difficult couple of years, but both end markets and their operational strategy are seeing improvements. Under new management, they have reinvested in technology, with a real focus on personalisation. Building closer customer relationships means long term they should be able to spend less on customer acquisition. This would improve the quality of the revenue stream, through more repeat business, and also drive operational leverage. Shares sit on a discount to other platform stocks, and their free cash flow generation is very attractive. With a strong net cash balance sheet, they have announced a capital return to shareholders, however unfortunately the fund struggled to build a full position in advance of this due to illiquidity given multiple funds were trading. Their standard yield is around 3%, but this year including special cash it is yielding 5%. MJ Gleeson, was added after another good meeting with management. It screens well on our internal screening tool, the Matrix and has a dividend yield over 4%. Whilst shares do get impacted by sentiment on housebuilders, MJ Gleeson has a very unique market position. Their affordability, simple operational structure, unique client base, ability to expand their model into new regions through replication. They have a well-placed strategic land business in the South, which can either generate a steady profit stream over years, or could be sold and generate an upfront monetisation of that business, which we would hope might be returned to shareholders. It also trades on an attractive valuation for strong sustainable earnings growth.

We exited holdings in Scandinavian Tobacco, Victoria, Smart Metering Systems, Elementis, Genus, Anglian Water bonds and RPC (post bid). These businesses did not fit our Quality Growth Momentum focus, with many facing more challenging times where they were seeing earnings downgrades. We have also taken some profit in names such as Aveva and Dechra, keeping position sizes under control post strong performance.

Since the period end, we have also taken the opportunity to exit all of the Company's preference share holdings. This was done in a disciplined manner over a few weeks, the positions being sold down as natural liquidity presented itself. Whilst the yield from the preference shares was attractive, they did not deliver income growth which consequently dragged the overall total growth rate of income from the portfolio.

Given the heightened focus on liquidity of portfolios, we would like to take this opportunity to highlight that we have not made any investments on behalf of the Company in unquoted securities.

Fixed Income Portfolio

Amid continuing disappointing economic data and trade worries, the rally in global government bond markets were driven largely by expectations of increasing dovishness from leading global central banks. The ECB essentially confirmed that it was moving towards policy easing, both through cutting interest rates and restarting asset purchases. While in the US, the US Federal Reserve cut interest rates by 25 basis points and signalled the potential for more. In the UK, with the UK's economic future still in a state of flux, growth is likely to remain subdued with investment spending in particular being sensitive to the elevated uncertainty.

Corporate bond markets continued to deliver strong returns, driven again by both tightening credit risk premiums and falling government bond yields. Both quarterly earnings and first half results across a variety of sectors reflected the mixed global macroeconomic environment. However, management's financial and strategic discipline has been encouraging. Credit spreads have recovered all their spread widening which was seen in the fourth quarter of 2018.

With respect to portfolio activity, we added a holding in Barclays Bank 9% 2023- Perpetual rated BB+/Ba2/BBB bond to the portfolio, to replace the Anglian Water bond. The upside from Barclays comes from its potential for early redemption prior to its first call date, October 2023, as the bond is non-compliant for capital adequacy purposes post January 2022. Additionally, the yield was more attractive and the switch reduced duration by 3 years, driving less sensitivity to changes in government bond yields. This also reduced exposure to the water sector, where there is a Labour threat of nationalisation which might drive volatility around the time of a general election.

Investee Company Stewardship

We met with the Senior Independent Director of Hilton Food Group and had a good discussion on the how the changes on the board and at the executive level have been performing. The CEO has moved to the new role of Executive Chairman for a period of two years to oversee the restructuring of the Australian joint venture. The Chief Operating Officer has moved to the role of Group CEO. Both appear to be performing well in their new roles; the CEO has had decent feedback from investors for his performance on the investor roadshows. The new Executive Chair has taken a step back from the running of the day to day business and now focuses on the Australian business and his duties as Chairman. We encouraged the company that more needs to be done on diversity especially on the board; they need to appoint another female Non-Executive Director to improve the balance on the board, subject to finding the right candidate.

At Cineworld, we met the Chair and Deputy Chair to discuss board composition and succession planning. The Deputy Chair will take over at the 2020 AGM and we discussed why such a long handover was necessary and how they will work together in the interim. We also discussed executive succession which, although some way off, will need to be handled carefully given the key role of the two Greidinger brothers who are CEO and Deputy CEO and whose family own 28% of the shares. Finally, we discussed the audit tender process and the key audit matters arising from the Regal acquisition.

Post the note issued by Muddy Waters, we have engaged with Burford Capital's management on a number of separate occasions. We continue to engage with them on business operations and governance. We believe Burford had been aware of the desire by investors to improve areas of governance prior to this report and we are pleased with the public announcements made recently about board composition, a possible US listing and the change of CFO.

Outlook

Whilst some market concerns such as interest rate rises have eased since late 2018, other areas have come to the fore. Economic growth looks to be slowing, US-China trade tensions remain volatile, the outcome of Brexit remains uncertain, and after many years of bull markets investors are conscious that these can't last forever. These dynamics create a lot of uncertainty and volatility, but despite these the market has remained positive throughout the period. Towards the end of the first half this looks to be coming under some challenge, with tougher sentiment and performance in global markets.

Our investment process focused on stock analysis as the key driver of decision making, rather than taking macroeconomic driven views. We look to invest in companies who can prove resilient through tougher times, which have structural growth drivers, their own independent levers for growth, are driven by management teams with a strong pedigree and have good corporate governance to protect our interests. In this process we are not looking to time markets, and our focus on Quality Growth and Momentum with an Income focus remains true despite where we may prove to be in economic cycles, although if the economy widely slows down, growth will be more challenging for companies to achieve. In tougher periods we believe the market will reward companies with Quality aspects who prove resilient, so if we enter a more sustained downturn, we think our focus on Quality will be helpful in terms of risk reduction.

The UK market remains an attractive universe of diverse businesses, an opportunity to access a wide variety of end markets and themes globally, and gain exposure to overseas earnings where that is seen as attractive. The 'Matrix', our stock screening tool, will continue to guide us towards utilising our analytical resources on the stocks which are most suitable for inclusion in the portfolio.

Aberdeen Asset Managers Limited

19 September 2019

Distribution of Assets and Liabilities

As at 30 June 2019

Condensed Statement of Comprehensive Income

Condensed Statement of Comprehensive Income

(Continued)

Condensed Balance Sheet

Condensed Statement of Changes in Equity

Condensed Cash Flow Statement

NOTES TO THE ACCOUNTS

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

Investment Portfolio - Ordinary Shares

As at 30 June 2019

Investment Portfolio - Other Equity Investments

as at 30 June 2019