BlackRock Smaller Companies Trust PLC Regulatory News (BRSC)

The information contained in this release was correct as at 31 July 2023. Information on the Company’s up to date net asset values can be found on the London Stock Exchange Website at

https://www.londonstockexchange.com/exchange/news/market-news/market-news-home.html.

BLACKROCK SMALLER COMPANIES TRUST PLC (LEI:549300MS535KC2WH4082) 

All information is at 31 July 2023 and unaudited.Performance at month end is calculated on a Total Return basis based on NAV per share with debt at fair value 

Sources: BlackRock and Datastream

At month end

Commenting on the markets, Roland Arnold, representing the Investment Manager noted: 

During July the Company’s NAV per share rose by 1.8% to 1,490.03p on a total return basis (with debt at fair value), while our benchmark index rose 2.9%. For comparison the large cap FTSE 100 index rose by 2.3%.1

Equity markets globally were mostly positive during July as falling inflation and encouraging GDP data around developed markets led to improving market sentiment. Both the Federal Reserve (Fed) and European Central Bank (ECB) raised interest rates by the expected 25bps and hopes continued to mount that the peak in interest rates is fast approaching. In the UK, wage data remained high, but headline inflation fell more than expected to 7.9% and core inflation also fell bringing the number to 6.9%. UK equities underperformed most global developed markets, given the more challenging growth outlook. However, within the UK market, small and mid-caps outperformed, benefiting from the better-than-expected inflation numbers and strengthening sterling.

July was a disappointing month for the Company, where performance lagged our benchmark despite no negative developments or downgrades from any of our holdings. Two of the largest detractors to performance included 4imprint and Oxford Instruments which both simply drifted lower during the course of the month. After the month end, 4imprint actually reported continued solid trading, with upgrades to guidance and as a result the shares hit a record high. The largest single detractor during the month was Alfa Financial Software. Following the strong performance in June, off the back of the announced bid from private equity business EQT, the shares plummeted after EQT subsequently withdrew their offer.

The largest positive contributor was Watches of Switzerland which rose in response to results during the month which once again highlighted that trading remains strong. The shares have de-rated over the past 18 months as the market has remained concerned around the demand outlook for the business which has yet to materialise. Despite the markets concerns, demand remains robust,  the waitlist continues to grow, and the industry backdrop remains favourable with demand for luxury watches continuing to outstrip supply. The shares in our view remain attractively valued at around 13x earnings and the company has a net cash balance sheet, which provides further opportunity for M&A (Mergers & Acquisitions) in the future. The second largest relative contributor during the month came from not owning software business Wandisco. The shares were suspended earlier this year upon detection of fraudulent bookings and revenues. After coming within days of running out of cash, the company completed a restructuring and rescue fund raising in July, at a share price more than 90% below the suspension price. Shares in Hunting rose in response to a positive H1 trading update which flagged strength across almost all international markets and as a result management raised full year guidance.

2023 has seen a continuation of the themes of uncertainty around the Russia/Ukraine war, China, supply chains and inflation. However, we are closer to the end of monetary tightening, and we think inflation is peaking, albeit this is happening more slowly than we would have expected. As the year-on-year impact on inflation starts to roll over, we could see the environment turn to disinflation quite quickly. Generally speaking, financial conditions are not too stretched; corporates and consumers are reasonably well capitalised, and banks have plenty of capital. As such the path of employment will dictate the consumer outlook but we continue to expect the trough to be shallower than in previous recessions.

Industrial activity is likely to decline as excess inventory works through the system but given major markets such as automotive and aerospace were already seeing choked demand through supply chain issues, again we expect a shallower trough. Housebuilding and RMI (Renovation, Maintenance, Investment) will have a tough H1, but we still believe the outlook isn’t as bad as it was in September. Valuations have corrected quickly and looking back it appears all consumer orientated stocks overshot to the downside during the chaotic period around the Truss budget.

Whilst there is much that can be discussed with regards to the economic outlook, one thing is irrefutable; the valuation of UK small and mid-sized companies is more attractive than it has been for some time, and if that valuation is not recognized by the stock market, it will be recognized by others. As stated in recent updates, we expected to see M&A picking up through the course of the year and this certainly spiked in the last month, with approaches for several companies in the UK as Private Equity firms have decided to start deploying their substantial cash piles.

We are not out of the woods yet, but the recent round of trading updates from our investments have generally been in line or better than expectations. However, with oil and gas prices lower year-on-year, China re-opening, US$ weakening, shipping / logistics / factory gate prices dropping, much of the inflation pressure of last year could become deflationary during the course of this year, and we have tentatively started to utilise more of our gearing facilities.

Against this difficult backdrop, we remind ourselves that many equity markets (Europe, UK) are structurally under owned and could benefit as sentiment turns and investors begin to reduce these underweights. We remain focused on bottom-up company specific analysis to identify high quality, nimble businesses, operated by entrepreneurial management teams, with strong market positions and resilient cash-flows. These are the types of businesses that we believe will be best placed to manage and thrive in the current environment. Historically these periods have been followed by strong returns for the strategy and presented excellent investment opportunities.

We thank shareholders for their ongoing support. 

1Source: BlackRock as at 31 July 2023

24 August 2023

ENDS 

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