Fidelity Regulatory News (FSV)

Fidelity Special Values Plc - Half-year Report

PR Newswire

London, April 27

Fidelity Special Values PLC

Half-Yearly Results for the six months ended 29 February 2020 (unaudited)

Financial Highlights:

Contacts

For further information, please contact:

Bonita Guntrip

Senior Company Secretary

01737 837320

FIL Investments International

Portfolio Manager’s Half-Yearly Review

PERFORMANCEThe Company’s performance over the six-month period to 29 February 2020 was negative, with a net asset value (“NAV”) per share return of -6.1% and a share price return of -6.7%, compared to -5.5% for the FTSE All-Share Index (the Company’s Benchmark Index) (all returns on a total return basis). This report seeks to explain the reasons for the performance over the review period.

STOCK MARKET AND PORTFOLIO REVIEWThe UK stock market performance showed divergent trends over the review period. While the market recorded strong gains over the last four months of 2019, the start of 2020 has been marked by sharp declines reflecting increasing investor nervousness, as the Coronavirus (COVID-19) outbreak led to growing concerns over its impact in terms of human lives, the global economy and individual businesses.

The large majority achieved by the ruling Conservative party in the general elections in December 2019 was received positively by equity markets, lifting some of the near term uncertainty. The result meant that the UK could focus on executing Brexit, with a transition period expected to end in 2020. Overall investor sentiment was also supported by the preliminary “phase one” trade agreement between the US and China, while an accommodative policy stance by global central banks further supported stock prices in 2019.

However, the start of 2020 marked a reversal in market momentum with the FTSE All-Share Index declining by 11.9% over the two months to end of February, a sell-off that subsequently accelerated in March due to increased market volatility. The sharp share price declines seen across markets reflected growing fears over the spread of the virus beyond China’s borders and its potential economic impact. A surge in cases reported globally, including a growing number of infections in the UK, spooked markets. Investors were concerned about the prolonged effect of containment measures to slow down the spread of the virus and the resulting impact on companies, jobs and the broader economy. The sharp decline in oil prices, which subsequently accelerated in March, further added to investor concerns.

The near term economic outlook has deteriorated markedly in the wake of these events, prompting global central banks, including the Bank of England, to cut rates and pledge further monetary support, and governments to announce unprecedented fiscal measures to support individuals and companies through these challenging times. While these interventions are welcomed and signal the policymakers’ preparedness to respond, the extent of the necessary COVID-19 mitigation measures, and the uncertainty as to when they can be relaxed, are likely to result in a deep recession this year.

In terms of performance, the Company’s NAV fell during the period and underperformed the Benchmark Index. Most of this decline in performance occurred in the year to date period in 2020 as growing concerns over the potential impact of COVID-19 weighed on equity prices globally and the Company’s holdings were caught in the widespread sell-off. Positioning within the consumer services and utilities sectors were undermined by the Company’s lack of exposure to large defensive names such as British American Tobacco and National Grid, while some of the holdings were held back by near term company-specific setbacks. These included educational publisher Pearson, whose shares were affected by earnings concerns, mainly due to weaker trading in its US higher education courseware business, while the rest of the business fared better. The holding in Canadian gold producer Semafo also fell after the company suspended activity at its Boungou mine in Burkina Faso in the wake of a deadly attack on a convoy of its workers in November 2019 (the company reopened the mine and subsequently received a bid at a 50% premium in March). Meanwhile, the holding in Kosmos Energy fell in line with a decline in oil prices in 2020 amid growing demand concerns, especially from China. Defense contractor Babcock International also detracted as it trimmed its near term profits forecasts. Nevertheless, earnings are expected to stabilise as the one-off charges wash through, and there is an increasing opportunity to win new work with the Ministry of Defence’s budget increasing. Elsewhere, diversified support services group DCC known for making cash generative acquisitions underperformed. A lack of large acquisitions disappointed some investors, although I think it is positive the company remains disciplined. DCC has a wide acquisition opportunity set and I remain confident that it will continue deploying capital wisely and creating shareholder value.

Despite the difficult environment, several of our key holdings made significant contributions, with the overweight stance in financials and strong stock selection in the health care sectors proving particularly rewarding. Notable contributors included pharmaceutical major Roche Holdings whose shares were buoyed by solid results for 2019 and encouraging earnings guidance. The holding in Chemring, a provider of advanced technology products and services to the aerospace, defense and security markets, also added value, supported by positive growth prospects, as its latest annual results showed a return to full-year profit. In an environment of declining oil prices and general weakness in the energy sector, the underweight stance in the oil and gas sector also supported relative performance. Within financials, the position in insurer Legal & General Group contributed as it reported solid operating performance across all its divisions over the year-to-date period.

USE OF DERIVATIVESDuring the review period, the Company continued to use contracts for difference (“CFDs”) to gear portfolio long exposure and eliminate some of the currency exposure for those holdings listed outside the UK, and to contract short positions for hedging purpose. The previously opened hedge position on the FTSE 250 Index Future was closed in the period. As the Company had some gearing and the market fell in the review period, the use of derivatives was a detractor in the portfolio. This should reverse when businesses reopen, activity resumes and the uncertainty lifts. Overall, net gearing was at 6.7% at the end of February 2020, up from 2.5% at the start of the review period.

OUTLOOKI see the recent sell-off as a potential opportunity. This is not to downplay the near term challenges the economy, companies, markets and society itself will face in coming months. Indeed, it is now very clear that the impact on UK and global economic activity will be greater than we saw in the financial crisis between 2007 and 2009. Over recent weeks, together with Fidelity’s analysts, I have been reviewing the Company’s holdings, and in particular their balance sheets, to assess whether they would be able to survive several months of shutdown and the resultant recessionary phase which will follow without running out of cash. I have closed positions in companies most affected by the outbreak and the oil price slump, and where the outlook has worsened beyond the short term. For instance, I have sold out of airlines (which were a small c. 1% holding), and some small companies with levered balance sheets (small positions).

In the near term markets are likely to remain very volatile. Whilst we are now starting to see some lockdown restrictions easing, I am expecting to see a very different backdrop and level of economic activity over at least the next 6 to 12 months to the ones we have been used to. Looking further out, however, I think the sharp drop in the oil price and the unprecedented monetary and fiscal stimulus will be meaningfully positive for the UK economy (as well as the global economy as a whole) and will help to offset some of the negative effects of the lockdowns. The recent indiscriminate sell-off has resulted in some very attractive investment opportunities for selective long term investors. I have been adding to a few businesses perceived as more cyclical, such as life insurers, whose valuations are very cheap and supported by growing earnings - this is the single area I am the most positive about. I have also added selectively to some defensive names that have traded off irrespective of their expected resilience. Overall, the portfolio remains very diversified across sectors, companies and market capitalisations. One interesting, although frustrating for value investors such as myself, aspect of the current sell-off has been a lack of change in market momentum. Normally, in dramatic changes of market direction, prior trends reverse as stocks that have previously done well sell-off. This downturn has seen the opposite with a continuation of prior trends whereby expensive companies that have done well continue to do relatively well and become relatively even more expensive. In contrast, stocks that have been performing poorly and were at low valuations have continued to underperform and become even cheaper on both an absolute and relative basis. This has hurt the Company’s recent performance, but increases the relative performance potential going forward.

To conclude, while the current situation is unsettling and market volatility high, the indiscriminate sell-off is creating interesting investment opportunities. My focus remains on what I believe we do best at Fidelity, which is looking beyond the news headlines and focusing instead on individual businesses and their fundamentals. At this juncture, it is particularly important to reassess how companies are likely to fare in these uncertain times and whether they will come out of the current crisis stronger. I am encouraged by the fact that the Company currently trades on historically low valuations and is made up of companies with significant upside potential. This has been true for both companies I manage that are largely unaffected by the virus, and those more materially affected, suggesting the undiscriminating nature of recent market action.

ALEX WRIGHT, Portfolio Manager

27 April 2020

Interim Management Report

DISCOUNT/PREMIUM AND SHARE REPURCHASES/ISSUESUnder the Company’s discount management policy, the Board seeks to maintain the discount in single digits in normal market conditions and will repurchase shares to help stabilise the share price discount. As the Company’s shares have mostly been trading at a premium, the Company did not carry out any share repurchases in the reporting period and up to the date of this Half-Yearly Report.

Issuing shares increases the size of the Company, making it more liquid and allowing costs to be spread over a larger asset base. The Board will approve the issuance of shares if the Company’s shares are trading at a sufficient premium to ensure that the issue of shares is not dilutive.

Over the reporting period, the Company’s shares traded within a range of a premium of 3.4% and a discount of 1.8%. The level of discount widened from 0.6% at the start of the reporting period to 1.3% as at 29 February 2020.

In total, the Company issued 11,465,000 ordinary shares from its blocklisting facility in the six month period. Since then and as at the date of this Half-Yearly Report, the Company has issued a further 2,395,000 shares in order to meet demand.

The Board continues to monitor the discount/premium closely and will take action when it believes that it will be effective.

INTERIM DIVIDENDThe Board’s dividend policy is to pay dividends twice yearly in order to smooth the dividend payment for the reporting year. The Company’s revenue return for the six months to 29 February 2020 was 1.83 pence per share. The Board has declared an interim dividend of 2.10 pence per share thereby maintaining the 2.10 pence per share paid as the interim dividend in 2019. This will be paid on 24 June 2020 to Shareholders on the register on 15 May 2020 (ex-dividend date 14 May 2020). Shareholders should note that the Board will review the final dividend payment later in the year based on dividend receipts from the companies held in the portfolio, particularly as several companies are likely to cut or cancel their dividend payments due to the impact of the Coronavirus (COVID-19).

Shareholders may choose to reinvest their dividends for additional shares in the Company. Details of the Dividend Reinvestment Plan are set out in the Half-Yearly Report.

BOARD CHANGESHaving served on the Board for nine years as a Director, Sharon Brown stepped down from the Board at the conclusion of the Annual General Meeting (“AGM”) on 12 December 2019. She was succeeded as Chair of the Audit Committee by Claire Boyle, and as Senior Independent Director by Dean Buckley. Alison McGregor was appointed to the Board as a Non-Executive Director on 1 January 2020.

PRINCIPAL RISKS AND UNCERTAINTIESThe Board, with the assistance of the Alternative Investment Fund Manager (FIL Investment Services (UK) Limited/the “Manager”), has developed a risk matrix which, as part of the risk management and internal controls process, identifies the key risks and uncertainties faced by the Company.

The Board considers that the principal risks and uncertainties faced by the Company continue to fall into two broad categories which are external and internal risks. External risks comprise of market, economic and political risk; share price risk; discount control risk; regulatory risk; and cybercrime risk. Internal risks comprise of investment management risk; and operational risks (such as service providers). Information on each of these risks is given in the Strategic Report section of the Annual Report for the year ended 31 August 2019. A copy of the Annual Report can be found on the Company’s pages of the Manager’s website at www.fidelity.co.uk/specialvalues

These principal risks and uncertainties have not materially changed in the six months to 29 February 2020, with the exception of the risks arising from the Coronavirus (COVID-19), and are equally applicable to the remaining six months of the Company’s financial year.

CORONAVIRUS (COVID-19)The risks arising from the Coronavirus (COVID?19) are being kept under constant review by the Board and the Manager. The Manager has contingency plans in place to allow for the continuation of Fidelity’s operations and to look after the safety of their employees.

Investors should be prepared for market fluctuations and remember that holding shares in the Company should be considered to be a long term investment. These risks are somewhat mitigated by the investment trust structure which means no forced sales will need to take place to deal with any redemptions. Therefore, investments can be held over a longer time horizon.

The Manager is keeping its business continuity plans and operational resilience strategies under constant review and will take all reasonable steps to continue meeting its regulatory obligations and to assess operational risks, the ability to continue operating and the steps it needs to take to serve and support its clients, including the Board. For example, to enhance its resilience, the Manager has mandated work from home arrangements and implemented split team working for those whose work is deemed necessary to be carried out in the office. The Manager has also imposed self-isolation arrangements on staff in line with Government recommendations and guidance. The Company’s other third party service providers have also implemented similar measures to ensure business disruption can be kept to a minimum. The Board is pleased to see how well the contingency plans are working.

TRANSACTIONS WITH THE MANAGER AND RELATED PARTIESThe Manager has delegated the Company’s portfolio management and the role of Company Secretary to FIL Investments International. Transactions with the Manager and related party transactions with the Directors are disclosed in Note 13 to the Financial Statements below.

GOING CONCERNThe Directors have considered the Company’s investment objective, risk management policies, liquidity risk, credit risk, capital management policies and procedures, the nature of its portfolio (being mainly securities which are readily realisable) and its expenditure and cash flow projections and have concluded that the Company has adequate resources to continue in operational existence for the foreseeable future. Thus, they continue to adopt the going concern basis of accounting in preparing these Financial Statements. This conclusion also takes into account the Board’s assessment of the risks arising from the Coronavirus (COVID-19).

Continuation votes are held every three years and the next continuation vote will be put to Shareholders at the Annual General Meeting in 2022.

BY ORDER OF THE BOARD

FIL Investments International

27 April 2020

Directors’ Responsibility Statement

The Disclosure and Transparency Rules (“DTR”) of the UK Listing Authority require the Directors to confirm their responsibilities in relation to the preparation and publication of the Interim Management Report and Financial Statements.

The Directors confirm to the best of their knowledge that:

a) the condensed set of Financial Statements contained within the Half-Yearly Report has been prepared in accordance with the Financial Reporting Council’s Standard: FRS 104: Interim Financial Reporting; and

b) the Interim Management Report, together with the Portfolio Manager’s Half-Yearly Review above, includes a fair review of the information required by DTR 4.2.7R and 4.2.8R.

In line with previous years, the Half-Yearly Report has not been audited by the Company’s Independent Auditor.

The Half-Yearly Report was approved by the Board on 27 April 2020 and the above responsibility statement was signed on its behalf by Andy Irvine, Chairman.

Twenty Largest Investments as at 29 February 2020

The Gross Asset Exposures shown below measure exposure to market price movements as a result of owning shares and derivative instruments. The Balance Sheet Value is the actual value in the portfolio. Where a contract for difference (“CFD”) is held, the Balance Sheet Value reflects the profit or loss on the contract since it was opened and is based on how much the share price of the underlying share has moved.

1 Gross Asset Exposure is expressed as a percentage of Shareholders’ Funds.

2 Gross Asset Exposure comprises market exposure to investments of £597,554,000 plus market exposure to derivative instruments of £122,519,000.

3 Portfolio Fair Value comprises Investments of £597,554,000 plus derivative assets of £5,576,000 less derivative liabilities of £16,296,000 (per the Balance Sheet below).

Financial Statements

Income Statement for the six months ended 29 February 2020

The Company does not have any other comprehensive income. Accordingly the net return/(loss) on ordinary activities after taxation for the period is also the total comprehensive income for the period and no separate Statement of Comprehensive Income has been presented.

The total column of this statement represents the Income Statement of the Company. The revenue and capital columns are supplementary and presented for information purposes as recommended by the Statement of Recommended Practice issued by the AIC.

No operations were acquired or discontinued in the period and all items in the above statement derive from continuing operations.

Statement of Changes in Equity for the six months ended 29 February 2020

Balance Sheet as at 29 February 2020 Company number 2972628

Cash Flow Statement for the six months ended 29 February 2020

Notes to the Financial Statements

1 PRINCIPAL ACTIVITYFidelity Special Values PLC is an Investment Company incorporated in England and Wales with a premium listing on the London Stock Exchange. The Company’s registration number is 2972628, and its registered office is Beech Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey, KT20 6RP. The Company has been approved by HM Revenue & Customs as an Investment Trust under Section 1158 of the Corporation Tax Act 2010 and intends to conduct its affairs so as to continue to be approved.

2 PUBLICATION OF NON-STATUTORY ACCOUNTSThe Financial Statements in this half-yearly financial report have not been audited by the Company’s Independent Auditor and do not constitute statutory accounts as defined in section 434 of the Companies Act 2006 (the “Act”). The financial information for the year ended 31 August 2019 is extracted from the latest published Financial Statements of the Company. Those Financial Statements were delivered to the Registrar of Companies and included the Independent Auditor’s Report which was unqualified and did not contain a statement under either section 498(2) or 498(3) of the Act.

3 BASIS OF PREPARATIONThe Company prepares its Financial Statements on a going concern basis and in accordance with UK Generally Accepted Accounting Practice (“UK GAAP”) and FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland, issued by the Financial Reporting Council. The Financial Statements are also prepared in accordance with the Statement of Recommended Practice (“SORP”): Financial Statements of Investment Trust Companies and Venture Capital Trusts issued by the Association of Investment Companies (“AIC”) in October 2019. FRS 104: Interim Financial Reporting has also been applied in preparing this condensed set of Financial Statements. The accounting policies followed are consistent with those disclosed in the Company’s Annual Report and Financial Statements for the year ended 31 August 2019.

4 INCOME

Special dividends of £276,000 (year ended 31 August 2019: £6,265,000 and six months ended 28 February 2019: £3,779,000) have been recognised in capital.

5 DERIVATIVE EXPENSES

6 INVESTMENT MANAGEMENT FEES

* Includes company secretarial, fund accounting, taxation, promotional and corporate advisory services.

FIL Investment Services (UK) Limited is the Company’s Alternative Investment Fund Manager and has delegated portfolio management to FIL Investments International (“FII”). Both companies are Fidelity group companies.

FII charges portfolio management fees on a tiered fee basis of 0.85% on the first £700 million of net assets and 0.75% of net assets in excess of £700 million. In addition, there is a fixed non-portfolio management service fee of £100,00 per annum.

7 TAXATION ON RETURN/(LOSS) ON ORDINARY ACTIVITIES

8 RETURN/(LOSS) PER ORDINARY SHARE

The return/(loss) per ordinary share is based on the net return/(loss) on ordinary activities after taxation for the period divided by the weighted average number of ordinary shares held during the period, as shown below:

9 DIVIDENDS PAID TO SHAREHOLDERS

The Company has declared an interim dividend for the six month period to 29 February 2020 of 2.10 pence per ordinary share (2019: 2.10 pence). The interim dividend will be paid on 24 June 2020 to Shareholders on the register at 15 May 2020 (ex-dividend date 14 May 2020). The total cost of this interim dividend, which has not been included as a liability in these Financial Statements, is £6,091,000 (2019: £5,780,000). This amount is based on the number of ordinary shares in issue held at the date of this report.

10 FAIR VALUE HIERARCHYThe Company is required to disclose the fair value hierarchy that classifies its financial instruments measured at fair value at one of three levels, according to the relative reliability of the inputs used to estimate the fair values.

Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant asset. The table below sets out the Company’s fair value hierarchy:

11 SHARE CAPITAL

* Ordinary shares held in Treasury carry no rights to vote, to receive a dividend or to participate in a winding up of the Company.

During the period 11,465,000 ordinary shares (year ended 31 August 2019: 9,620,000 shares and six months to 28 February 2019: 5,945,000 shares) were issued. The premium received in the period on the issue of new ordinary shares of £30,223,000 (year ended 31 August 2019: £13,892,000 and six month period to 28 February 2019: £4,475,000) was credited to the share premium account. There were no ordinary shares issued out of Treasury during the current period (year ended 31 August 2019 and six months to 28 February 2019: 4,095,000 shares issued with £9,821,000 credited to capital reserve and £65,000 credited to the share premium account). No ordinary shares were repurchased into Treasury during the period (year ended 31 August 2019 and six month period to 28 February 2019: nil).

12 NET ASSET VALUE PER ORDINARY SHAREThe net asset value per ordinary share is based on net assets of £670,195,000 (31 August 2019: £698,668,000 and 28 February 2019: £686,146,000) and on 287,634,480 (31 August 2019: 276,169,480 and 28 February 2019: 272,494,480) ordinary shares, being the number of ordinary shares of 5 pence each held outside of Treasury at the period end.

It is the Company’s policy that any shares held in Treasury will only be reissued at no less than net asset value per ordinary share or at a premium to net asset value per ordinary share and, therefore, shares held in Treasury have no dilutive effect. Since 23 January 2019, there have been no shares held in Treasury.

13 TRANSACTIONS WITH THE MANAGER AND RELATED PARTIESFIL Investment Services (UK) Limited is the Company’s Alternative Investment Fund Manager and has delegated portfolio management and the role of company secretary to FIL Investments International (“FII”). Both companies are Fidelity group companies. Details of the fee arrangements are given in Note 6. During the period, fees for portfolio management services of £3,133,000 (year ended 31 August 2019: £5,821,000 and six months ended 28 February 2019: £2,795,000) and fees for non-portfolio management services of £50,000 (year ended 31 August 2019: £100,000 and six months ended 28 February 2019: £50,000) were payable to FII. Non-portfolio management fees include company secretarial, fund accounting, taxation, promotional and corporate advisory services. At the Balance Sheet date, fees for portfolio management services of £505,000 (31 August 2019: £505,000 and 28 February 2019: £441,000) and fees for non-portfolio management services of £17,000 (31 August 2019: £17,000 and 28 February 2019: £17,000) were accrued and included in other creditors. FII also provides the Company with marketing services. The total amount payable for these services during the period was £66,000 (year ended 31 August 2019: £192,000 and 28 February 2019: £79,000). At the Balance Sheet date, marketing services of £40,000 (31 August 2019: £nil and 28 February 2019: £9,000) were accrued and included in other creditors.

As at 29 February 2020, the Board consisted of six Non-Executive Directors (as shown in the Directory in the Half-Yearly Report), all of whom are considered to be independent by the Board apart from Nicky McCabe who was employed by FIL Limited until 31 December 2017. None of the Directors have a service contract with the Company. The Chairman receives an annual fee of £41,000, the Audit Committee Chairman an annual fee of £31,750 and each other Director an annual fee of £27,000.

As at the date of this report, the following members of the Board held ordinary shares in the Company: Andy Irvine 200,000 shares, Dean Buckley 50,000 shares, Nigel Foster 73,000 shares, Claire Boyle 7,466 shares, Nicky McCabe 31,970 shares and Alison McGregor 29,803 shares.

The financial information contained in this Half-Yearly Results Announcement does not constitute statutory accounts as defined in section 435 of the Companies Act 2006. The financial information for the six months ended 29 February 2020 and 28 February 2019 has not been audited or reviewed by the Company’s Independent Auditor.

The information for the year ended 31 August 2019 has been extracted from the latest published audited financial statements, which have been filed with the Registrar of Companies, unless otherwise stated. The report of the Auditor on those financial statements contained no qualification or statement under sections 498(2) or (3) of the Companies Act 2006.

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

A copy of the Half-Yearly Report will shortly be submitted to the National Storage Mechanism and will be available for inspection at www.morningstar.co.uk/uk/NSM

The Half-Yearly Report will also be available on the Company's website at www.fidelity.co.uk/specialvalues where up to date information on the Company, including daily NAV and share prices, factsheets and other information can also be found.