Last checked at 
20 Dec 2017 07:00
20 December 2017
ANNUAL REPORT AND ACCOUNTS
Schroder UK Mid Cap Fund plc (the "Company") hereby submits its Annual Report for the year ended 30 September 2017 as required by the UK Listing Authority's Disclosure Guidance and Transparency Rule 4.1.
The Company's Annual Report and Accounts for the year ended 30 September 2017 are also being published in hard copy format and an electronic copy will shortly be available to download from the Company's website www.schroders.co.uk/ukmidcap. Please click on the following link to view the document:
http://www.rns-pdf.londonstockexchange.com/rns/8526Z_-2017-12-19.pdf
The Company has submitted its Annual Report and Accounts to the National Storage Mechanism and it will shortly be available for inspection at www.morningstar.co.uk/uk/NSM.
Enquiries:
Benjamin Hanley
Schroder Investment Management Limited
Tel: 020 7658 3847
Schroder UK Mid Cap Fund plc
Chairman's Statement
Performance
This year, the net asset value ("NAV") per share total return of 21.0% outperformed the benchmark by 6.8%. Although it is very pleasing to see such strong performance, it is long-term performance that truly evidences the Company's delivery of its strategy. The Company has delivered strong capital returns over three, five and 10 years and both the Company's share price and NAV per share have nearly tripled since 2007 (including re-invested dividends).
Revenue and dividends
Revenue return per share increased by 13.2% and consequently the Directors recommend the payment of a final dividend of 10.0 pence per share for the year ended 30 September 2017, which, together with the interim dividend of 3.10 pence per share paid during the year, brings total dividends for the year to 13.10 pence per share, an increase of 16.4% over dividends declared in respect of the previous financial year.
It is a further measure of the Company's strong long-term performance that the amount of the dividend declared since 2007 has tripled.
A resolution approving the payment of the final dividend for the year ended 30 September 2017 will be proposed at the forthcoming Annual General Meeting. If the resolution is passed, the dividend will be paid on 9 February 2018 to shareholders on the register on 5 January 2018.
The Manager's Review on pages 6 to 8 of the 2017 Annual Report provides greater detail on performance, market background and investment outlook for the Company.
Gearing facility
During the year, the Company renewed its £15 million revolving credit facility with Scotiabank (Europe) Plc. At the beginning of the year the Company's gearing was 1.5%. This changed to holding net cash of 0.5% at the year end.
The Board considers that the flexibility to utilise gearing remains an important tool in allowing the Manager to pursue investment opportunities when appropriate. To this end, parameters for the use of gearing have been established and these are reviewed regularly by the Board.
Share buy backs and discount management
The Company bought back 292,500 shares into treasury which had the effect of increasing the NAV per share. The Company's share price discount to NAV per share, while narrowing slightly during the year remained wide, at 17.0% at the year end. The average discount for the year was 17.7% and it ranged between 13.7% and 21.2%.
It is disappointing that the discount remains at 17.0% despite the return to outperformance this year. Your Board believes that the most sustainable way to close the share price discount is to increase demand for the Company's shares by effective marketing over the longer term, and a continuation of the Company's strong longer term performance track record. In the meantime, the Board will continue to consider on a regular basis whether share purchases should be made, alongside other means of discount control. To provide maximum flexibility for the future, it is proposed that the existing authority to purchase up to 14.99% of the Company's issued share capital for cancellation or holding in treasury be renewed at the forthcoming Annual General Meeting.
Outlook
This time a year ago the result of the Brexit referendum had adversely impacted many UK mid cap shares. Market attention had switched to more internationally-diversified large caps, amid concern over how UK companies might be affected by the negotiation process and the move out of the EU. A year later it would be optimistic to think that there's much more clarity on those big economic questions, but mid caps have bounced back into favour, returning to what has been a long-term trend of outperforming large caps. As importantly for us, the holdings in the portfolio have done particularly well.
We have always been optimistic about mid caps generally, but even more so for the opportunities to find well-managed niche companies with excellent growth prospects. If our Manager can keep finding these types of companies at the right price I will not be too worried about the effects of macro-economic uncertainties on the portfolio. The uncertainties are undeniable - and the first UK and US interest rate rises adds to them - but we have the advantage of investing in one of the most interesting parts of the UK corporate sector.
It is equally important to note that UK mid cap shares, including many of the Company's holdings, have significant overseas exposure. By holding and adding to its diversified portfolio of financially prudent, growing, mid cap companies I believe the Company should continue to generate the long-term performance shareholders have come to expect.
Annual General Meeting
The Company's Annual General Meeting will be held at 12.00 noon on Wednesday, 31 January 2018 and shareholders are encouraged to attend. As mentioned in my Half Year Report statement, following the audit tender process, the Board selected KPMG LLP as the Company's Auditor and encourages shareholders to vote in favour of their re-appointment at the meeting. All Directors will be offering themselves for re-election, in line with the Board's policy and best practice. The meeting will include a presentation by the Manager on the prospects for the UK market and the Company's investment strategy.
Eric Sanderson
Chairman
19 December 2017
Manager's Review
It has been a good year for your Company. The net asset value's total return of 21.0% compared to 14.2% for the benchmark. The share price returned 23.6% (Source: Morningstar).
UK equities performed well against a backdrop of stable global growth as the world economy benefited from a so-called "Goldilocks" environment, with activity neither too hot nor too cold and inflation remaining low. This allowed investors to overlook a comparatively turbulent geopolitical landscape and higher bond yields, which rose in response to more comments from central banks highlighting impending interest rate increases.
Many overseas-focused sectors continued to perform well against this backdrop. Domestic cyclical sectors also bounced as the worst fears of a Brexit-driven slowdown in the UK economy failed to materialise, and this helped drive an outperformance by mid caps. Mid caps were also supported by relatively more M&A activity and a strengthening of sterling against the US dollar. The benchmark's total return of 14.2% compares to a total return of 11.2% from the larger-cap FTSE 100 over the same period.
Corporate results were generally better than expected and the outlook for profits has improved. Meanwhile, barring some high-profile profit warnings, UK consumer-facing areas responded positively to generally in-line trading against very low expectations. Housebuilders continued their strong run as trading remained resilient, despite a slowing housing market.
There was a recovery in sterling at the end of the period after the Bank of England indicated it could raise interest rates soon (it subsequently increased base rates in November by 0.25% to 0.5%). This capped off a volatile period for the currency, notably following the inconclusive result of the snap UK general election.
Portfolio performance
The outperformance of the NAV total return was chiefly due to stock selection.
The top contributor was engineering business Renishaw. The market has continued to reward the company as potential growth opportunities from its metrology products become apparent.
Travel food and beverage company SSP Group was another top contributor. The company, which is exposed to a key global structural growth trend of rising airline passenger numbers, published impressive results. The company continues to execute well, announcing new contracts and sustained positive like-for-like sales growth. The opening up of the American market and a new joint venture in India offer excellent growth prospects.
Home emergency company Homeserve demonstrated the value of having an entrepreneurial founder Chief Executive with a large shareholding. Recent moves such as the acquisition of Checkatrade (online tradesman directory) in the UK and further expansion in the US reflect what management thinks the opportunities are.
Veterinary products manufacturer Dechra Pharmaceuticals was also a notable performer as sales growth from recent acquisitions accelerated ahead of expectations, dovetailing with organic growth. This rare combination reflects a strong management team in a market which in turn continues to demonstrate structural growth.
Redrow, along with the rest of the housebuilding sector, has recovered strongly since the Brexit vote. The fundamentals of the sector remain strong with demand continuing to be fuelled by help to buy and limited supply.
The erstwhile holding in gold miner Acacia Mining, one of the top contributors last year, was the main detractor after a Tanzanian government report alleged the firm under-declared exported minerals. The company denied this, but given our view that resolution was unlikely to be swift, we sold the position.
The share price of IG Group, a provider of financial spread betting and contract for differences ("CFD") was negatively impacted by the Financial Conduct Authority's ("FCA") proposal to tighten regulation around the provision of CFD products to UK retail customers. There has been no follow up from the initial FCA announcement. Meanwhile, the share price has started to recover following results which showed continued growth in customer numbers.
Indivior fell after an adverse ruling from a US court about the introduction of potential competition to its main product. The company appealed and, since then, announced US Food and Drug Administration Panel Backing of its new monthly injectable product. The end market of the treatment of opioid addiction remains a problem of epic proportions in the US.
Lastly, the holding in Dunelm detracted from relative performance. The market is adopting a wait-and-see approach with regard to the 2016 acquisition of online retailer Worldstores, a deal designed to make Dunelm more competitive online. Whilst the homewares market has been weak, it appears that Dunelm is continuing to take market share. It has set an ambitious £2bn sales target, in tandem with a strong Q1 trading update. Dunelm has an above average and well underpinned dividend yield.
Turning to stocks not held, the fund benefitted from avoiding Dixons Carphone and Carillion. Along with the AA and Tullow Oil, all four have relatively high levels of gearing, which has magnified the fall in equity value. Finally, security services company G4S was the main missed opportunity.
Portfolio activity
A number of new holdings were added to the portfolio, including services group Capita, cinema group Cineworld, industrial threads manufacturer Coats and telecoms operator TalkTalk.
We bought Capita shares after two years of poor performance following a series of profit warnings, culminating in the company's demotion to the FTSE 250 in the first quarter of 2017. In our opinion Capita will benefit over time from self-help measures being implemented, including steps to reduce balance sheet leverage. We initiated a position in Cineworld as we believe that the company can benefit from strong future growth from both the UK and Irish markets and its other less mature markets (mainly Israel, Poland and Romania). We started a position in industrial threads manufacturer Coats when it was outside the index as we saw the value in the company's reinvention. It has since been promoted to the FTSE 250.
We added Talk Talk Telecom to the portfolio after telecoms entrepreneur Charles Dunstone assumed the executive chairmanship and the dividend was cut to a more sustainable level.
Other new positions included oil and gas company Cairn Energy, where we see opportunities for growth in the North Sea as well as, potentially, Senegal, and as it begins to generate cash. Flexible workplace provider Workspace is, we believe, set to grow profitably from the burgeoning trend of co-working areas. Another addition was car auction company BCA Marketplace given an attractive valuation and long-term growth potential, in a scenario where winner may take all. We also have a new position in challenger bank Virgin Money, which has a high quality mortgage book and is free of the legacy issues of many other banking groups.
We sold out of holdings where we thought the investment case had played out or where recent developments meant the holding no longer fits with the investment strategy. These included soft drinks business A.G. Barr, as it faced further challenges to already weak top line growth in a contracting UK soft drinks market as a result of the introduction of the sugar tax, coupled with rising raw materials costs and unfavourable exchange rates.
Other sales included Halfords, which we believe faces a number of obstacles including long-term concerns of durability and saturation of the bicycle market; hotels operator Millennium & Copthorne following serial underperformance at the operating level, though we acknowledge that it has since been bid for; building materials group SIG, given our concerns over the length of time it might take management to turn the business around, and engineering company Senior over concerns around pricing power and an over-reliance on two customers.
We sold the holdings in property company Segro and packaging company Smurfit Kappa on their promotions to the FTSE 100, in line with the investment strategy.
As anticipated in the Half Year report, inbound bid activity continued to pick up. The sale of design, engineering and project management company WS Atkins to a Canadian peer marked the end of the position, and, a bid for Kennedy Wilson Europe by its US parent meant that we ceased to hold the shares after the period end.
Outlook
A whole raft of FTSE 250 constituents are also exposed to global trends, with significant profits from outside the UK. For the Company's portfolio companies nearly half of their revenue is generated abroad. These companies, a lot of them in the industrial sector (e.g. Diploma), are benefiting from a pickup in global activity while companies exposed to the international consumer (e.g. SSP) are also benefiting from rising wealth and an increasing propensity to spend in countries which were previously less consumer-led.
The Budget has confirmed that the Government is continuing to focus on growing GDP by supporting the UK economy. This is evidenced by the increase in funding for the Help to Buy scheme and its extension into the next decade. In addition, the removal of stamp duty for first time buyers for properties up to £300,000 should begin to reduce the proportion of young people renting property. People who own their own homes are more likely to spend money on home improvements, which should in turn boost consumer facing companies exposed to this market. High levels of employment are finally starting to generate wage inflation, and as currency-related inflation begins to fall, this should also add to spending power.
Investment strategy
We continue to seek organic growth and pricing power, and avoid companies with too much debt. The strategy remains one of being highly selective in light of structural change caused by the evolution of the internet and e-commerce, which is disrupting a lot of traditional business models by driving down prices and in some cases offering better product or service. We endeavour to be on the right side of this trend: as well as looking for the next mid cap disruptor, we are always looking to avoid or reduce exposure to what we think might be the next industry to be disrupted. The gearing facility is available for when we see new opportunities.
We believe that the portfolio holdings are well placed to continue to generate superior long-term returns. In line with the Company's strategy of investing in financially prudent, growing mid cap companies, many of the portfolio holdings are enjoying a virtuous circle of earnings and dividend growth (examples of which, outside the top five contributors listed previously, include Diploma, Intermediate Capital and Safestore) whereby a rising stream of earnings is underpinning progressive dividend policies and simultaneously supporting reinvestment into the business to drive future growth.
Schroder Investment Management Limited
19 December 2017
The securities shown above are for illustrative purposes only and are not to be considered recommendations to buy or sell.
Principal risks and uncertainties
The Board is responsible for the Company's system of risk management and internal control and for reviewing its effectiveness. The Board has adopted a detailed matrix of principal risks affecting the Company's business as an investment trust and has established associated policies and processes designed to manage and, where possible, mitigate those risks, which are monitored by the Audit Committee on an ongoing basis. This system assists the Board in determining the nature and extent of the risks it is willing to take in achieving the Company's strategic objectives. Both the principal risks and the monitoring system are also subject to robust review at least annually. The last review took place in November 2017.
Although the Board believes that it has a robust framework of internal control in place this can provide only reasonable, and not absolute, assurance against material financial misstatement or loss and is designed to manage, not eliminate, risk.
The principal risks and uncertainties faced by the Company have remained unchanged throughout the year under review, except in respect of cyber risk relating to the Company's service providers, which has now been extended beyond the custodian. Cyber risk relating to all of the Company's key service providers is considered an increased threat in light of the rising propensity and impact of cyber attacks on businesses and institutions. To address the risk, the Board is seeking enhanced reporting on cyber risk mitigation and management from its key service providers to ensure that it is managed and mitigated appropriately.
Actions taken by the Board and, where appropriate, its Committees, to manage and mitigate the Company's principal risks and uncertainties are set out in the table below.
Risk
| Mitigation and management
|
Strategic
The Company's investment objectives may become out of line with the requirements of investors, resulting in a wide discount of the share price to underlying NAV per share.
|
Appropriateness of the Company's investment remit periodically reviewed and success of the Company in meeting its stated objectives is monitored.
Share price relative to NAV per share monitored and use of buy back authorities considered on a regular basis.
Marketing and distribution activity is actively reviewed.
|
The Company's cost base could become uncompetitive, particularly in light of open ended alternatives.
| Ongoing competitiveness of all service provider fees subject to periodic benchmarking against competitors.
Annual consideration of management fee levels.
|
Investment management
The Manager's investment strategy, if inappropriate, may result in the Company underperforming the market and/or peer group companies, leading to the Company and its objectives becoming unattractive to investors. |
Review of: the Manager's compliance with agreed investment restrictions, investment performance and risk against investment objectives and strategy; relative performance; the portfolio's risk profile; and appropriate strategies employed to mitigate any negative impact of substantial changes in markets.
Annual review of the ongoing suitability of the Manager.
|
Financial
The Company is exposed to the effect of market fluctuations due to the nature of its business. A significant fall in equity markets could have an adverse impact on the market value of the Company's underlying investments.
|
Risk profile of the portfolio considered and appropriate strategies to mitigate any negative impact of substantial changes in markets discussed with the Manager.
|
Custody
Safe custody of the Company's assets may be compromised through control failures by the Depositary, including cyber hacking.
|
Depositary reports on safe custody of the Company's assets, including cash and portfolio holdings, independently reconciled with the Manager's records.
Review of audited internal controls reports covering custodial arrangements.
Annual report from the Depositary on its activities, including matters arising from custody operations.
|
Gearing and leverage
The Company utilises credit facilities. These arrangements increase the funds available for investment through borrowing. While this has the potential to enhance investment returns in rising markets, in falling markets the impact could be detrimental to performance.
|
Gearing is monitored and strict restrictions on borrowings imposed: gearing continues to operate within pre-agreed limits so as not to exceed 25% of total assets.
|
Accounting, legal and regulatory
In order to continue to qualify as an investment trust, the Company must comply with the requirements of Section 1158 of the Corporation Tax Act 2010.
Breaches of the UK Listing Rules, the Companies Act or other regulations with which the Company is required to comply, could lead to a number of detrimental outcomes.
|
Confirmation of compliance with relevant laws and regulations by key service providers.
Shareholder documents and announcements, including the Company's published Annual Report, subject to stringent review processes.
Procedures established to safeguard against disclosure of inside information. |
Service provider
The Company has no employees and has delegated certain functions to a number of service providers. Failure of controls, including as a result of cyber hacking, and poor performance of any service provider, could lead to disruption, reputational damage or loss.
|
Service providers appointed subject to due diligence processes and with clearly-documented contractual arrangements detailing service expectations.
Regular reporting by key service providers and monitoring of the quality of services provided.
Review of annual audited internal controls reports from key service providers, including confirmation of business continuity arrangements and IT controls. |
Risk assessment and internal controls
Risk assessment includes consideration of the scope and quality of the systems of internal control operating within key service providers, and ensures regular communication of the results of monitoring by such providers to the Audit Committee, including the incidence of significant control failings or weaknesses that have been identified at any time and the extent to which they have resulted in unforeseen outcomes or contingencies that may have a material impact on the Company's performance or condition. No significant control failings or weaknesses were identified from the Audit Committee's ongoing risk assessment which has been in place throughout the financial year and up to the date of this Report.
A full analysis of the financial risks facing the Company is set out in note 19 on pages 41 to 44 of the 2017 Annual Report.
Viability statement
The Directors have assessed the viability of the Company over a five year period to 30 September 2022, taking into account the Company's position at 30 September 2017 and the potential impacts of the principal risks and uncertainties it faces for the review period.
A period of five years has been chosen as the Board believes that this reflects a suitable time horizon for strategic planning, taking into account the investment policy, liquidity of investments, potential impact of economic cycles, nature of operating costs, dividends and availability of funding.
In its assessment of the viability of the Company, the Directors have considered each of the Company's principal risks and uncertainties detailed on pages 14 and 15 of the 2017 Annual Report and in particular the impact of a significant fall in UK equity markets on the value of the Company's investment portfolio. The Directors have also considered the Company's income and expenditure projections and the fact that the Company's investments comprise readily realisable securities which can be sold to meet funding requirements if necessary and on that basis consider that five years is an appropriate time period.
Based on the Company's processes for monitoring operating costs, the Board's view that the Manager has the appropriate depth and quality of resource to achieve superior returns in the longer term, the portfolio risk profile, limits imposed on gearing, counterparty exposure, liquidity risk and financial controls, the Directors have concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period of their assessment.
Going concern
Having assessed the principal risks and the other matters discussed in connection with the viability statement set out above, and the "Guidance on Risk Management, Internal Control and Related Financial and Business Reporting" published by the Financial Reporting Council ("FRC") in 2014, the Directors consider it appropriate to adopt the going concern basis in preparing the accounts.
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Annual Report and 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 they are required to prepare the financial statements in accordance with UK accounting standards, including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland.
Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of its profit or loss for that period. In preparing these financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements 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;
• assess the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and
• use the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and 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 are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and 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 Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies 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.
Responsibility statement of the Directors in respect of the annual financial report
We confirm that to the best of our knowledge:
• the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and
• the strategic report includes a fair review of the development and performance of the business and the position of the issuer, together with a description of the principal risks and uncertainties that they face.
We consider the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.
Income Statement
for the year ended 30 September 2017
2017 | 2016 | |||||
Revenue | Capital | Total | Revenue | Capital | Total | |
£'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
Gains on investments held at fair value | ||||||
through profit or loss | - | 35,316 | 35,316 | - | 7,975 | 7,975 |
Income from investments | 5,933 | 274 | 6,207 | 5,320 | 361 | 5,681 |
Other interest receivable and similar income | - | - | - | 3 | - | 3 |
Gross return | 5,933 | 35,590 | 41,523 | 5,323 | 8,336 | 13,659 |
Investment management fee | (442) | (1,030) | (1,472) | (387) | (904) | (1,291) |
Administrative expenses | (457) | - | (457) | (475) | - | (475) |
Net return before finance costs and taxation | 5,034 | 34,560 | 39,594 | 4,461 | 7,432 | 11,893 |
Finance costs | (3) | (6) | (9) | (6) | (13) | (19) |
Net return on ordinary activities before taxation | 5,031 | 34,554 | 39,585 | 4,455 | 7,419 | 11,874 |
Taxation on ordinary activities | - | - | - | - | - | - |
Net return on ordinary activities after taxation | 5,031 | 34,554 | 39,585 | 4,455 | 7,419 | 11,874 |
Return per share | 13.96p | 95.87p | 109.83p | 12.33p | 20.53p | 32.86p |
The "Total" column of this statement is the profit and loss account of the Company. The "Revenue" and "Capital" columns represent supplementary information prepared under guidance issued by The Association of Investment Companies. The Company has no other items of other comprehensive income, and therefore the net return on ordinary activities after taxation is also the total comprehensive income for the year.
All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the year.
Statement of Changes in Equity
for the year ended 30 September 2017
| Called-up | Capital | Share | |||||
share | Share | redemption | Merger | purchase | Capital | Revenue | ||
capital | premium | reserve | reserve | reserve | reserves | reserve | Total | |
£'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
At 30 September 2015 | 9,036 | 13,971 | 220 | 2,184 | 15,477 | 138,304 | 5,068 | 184,260 |
Net return on ordinary activities | - | - | - | - | - | 7,419 | 4,455 | 11,874 |
Dividends paid in the year | - | - | - | - | - | - | (3,416) | (3,416) |
At 30 September 2016 | 9,036 | 13,971 | 220 | 2,184 | 15,477 | 145,723 | 6,107 | 192,718 |
Net return on ordinary activities | - | - | - | - | - | 34,554 | 5,031 | 39,585 |
Repurchase of the Company's own shares into treasury | - | - | - | - | (1,543) | - | - | (1,543) |
Dividends paid in the year | - | - | - | - | - | - | (4,183) | (4,183) |
At 30 September 2017 | 9,036 | 13,971 | 220 | 2,184 | 13,934 | 180,277 | 6,955 | 226,577 |
Statement of Financial Position
at 30 September 2017
2017 | 2016 | |
£'000 | £'000 | |
Fixed assets | ||
Investments held at fair value through profit or loss | 225,659 | 194,912 |
Current assets | ||
Debtors | 1,063 | 1,088 |
Cash at bank and in hand | 1,020 | 1,193 |
2,083 | 2,281 | |
Current liabilities | ||
Creditors: amounts falling due within one year | (1,165) | (4,475) |
Net current assets/(liabilities) | 918 | (2,194) |
Net assets | 226,577 | 192,718 |
Capital and reserves | ||
Called-up share capital | 9,036 | 9,036 |
Share premium | 13,971 | 13,971 |
Capital redemption reserve | 220 | 220 |
Merger reserve | 2,184 | 2,184 |
Share purchase reserve | 13,934 | 15,477 |
Capital reserves | 180,277 | 145,723 |
Revenue reserve | 6,955 | 6,107 |
Total equity shareholders' funds | 226,577 | 192,718 |
Net asset value per share | 631.99p | 533.20p |
These accounts were approved and authorised for issue by the Board of Directors on 19 December 2017 and signed on its behalf by:
Eric Sanderson
Chairman
Notes to the Accounts
1. Accounting policies
Basis of accounting
The accounts are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice ("UK GAAP"), in particular in accordance with Financial Reporting Standard (FRS) 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland", and with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" (the "SORP") issued by the Association of Investment Companies in November 2014 and updated in January 2017. All of the Company's operations are of a continuing nature.
The accounts have been prepared on a going concern basis under the historical cost convention, as modified by the revaluation of investments held at fair value through profit or loss.
The accounts are presented in sterling and amounts have been rounded to the nearest thousand.
The accounting policies applied to these accounts are consistent with those applied in the accounts for the year ended 30 September 2016.
2. Taxation
The Company's effective corporation tax rate is nil, as deductible expenses exceed taxable income. Please refer to Note 7 on page 37 of the 2017 Annual Report.
3. Dividends
(a) Dividends paid and declared
| 2017 £'000 | 2016 £'000 |
2016 final dividend of 8.50p (2015: 6.70p) paid out of revenue profits | 3,072 | 2,422 |
Interim dividend of 3.10p (2016: 2.75p) paid out of revenue profits | 1,111 | 994 |
Total dividends paid in the year | 4,183 | 3,416 |
| 2017 £'000 | 2016 £'000 |
2017 final dividend declared of 10.00p (2016: 8.50p) to be paid out of revenue profits | 3,585 | 3,072 |
(b) Dividends for the purposes of Section 1158 of the Corporation Tax Act 2010 ("Section 1158")
The requirements of Section 1158 are considered on the basis of dividends declared in respect of the financial year as shown below. The revenue available for distribution by way of dividend for the year is £5,031,000 (2016: £4,455,000).
| 2017 £'000 | 2016 £'000 |
Interim dividend of 3.10p (2016: 2.75p) | 1,111 | 994 |
Final dividend of 10.00p (2016: 8.50p) | 3,585 | 3,072 |
4,696 | 4,066 |
4. Return per share
| 2017 £'000 | 2016 £'000 |
Revenue return | 5,031 | 4,455 |
Capital return | 34,554 | 7,419 |
Total return | 39,585 | 11,874 |
Weighted average number of shares in issue during the year | 36,043,409 | 36,143,690 |
Revenue return per share | 13.96p | 12.33p |
Capital return per share | 95.87p | 20.53p |
Total return per share | 109.83p | 32.86p |
5. Called up share capital
2017 | 2016 | |
£'000 | £'000 | |
Ordinary shares allotted, called up and fully paid: | ||
Opening balance of 36,143,690 (2016: 36,143,690) shares of 25p each | 9,036 | 9,036 |
Repurchase of 292,500 (2016: nil) shares into treasury | (73) | - |
Subtotal of 35,851,190 (2016: 36,143,690) shares | 8,963 | 9,036 |
292,500 (2016: nil) shares held in treasury | 73 | - |
Closing balance1 | 9,036 | 9,036 |
1Represents 36,143,690 (2016: 36,143,690) shares of 25p each, including 292,500 (2016: nil) shares held in treasury. During the year, the Company purchased 292,500 of its own shares, nominal value £73,000 to hold in treasury for a total consideration of £1,543,000 representing 0.81% of the shares outstanding at the beginning of the year. The reason for these share repurchases was to seek to manage the volatility of the share price discount to NAV per share.
6. Net asset value per share
| 2017 | 2016 |
Net assets attributable to the Ordinary shareholders (£'000) | 226,577 | 192,718 |
Ordinary shares in issue at the year end, excluding shares held in treasury | 35,851,190 | 36,143,690 |
Net asset value per share | 631.99p | 533.20p |
7. Disclosures regarding financial instruments measured at fair value
The Company's financial instruments within the scope of FRS 102 that are held at fair value comprise its investment portfolio.
FRS 102 requires financial instruments to be categorised into a hierarchy consisting of the three levels below. Note that the criteria used to categorise investments include an amendment to paragraph 34.22 of FRS 102, issued by the Financial Reporting Council in March 2016, and which the Company has early adopted.
Level 1 - valued using unadjusted quoted prices in active markets for identical assets.
Level 2 - valued using observable inputs other than quoted prices included within Level 1.
Level 3 - valued using inputs that are unobservable.
Details of the valuation techniques used by the Company are given in note 1(b) on page 34 of the 2017 Annual Report.
At 30 September 2017, all investments in the Company's portfolio are categorised as Level 1 (2016: same).
8. Status of announcement
2016 Financial Information
The figures and financial information for 2016 are extracted from the published Annual Report and Accounts for the year ended 30 September 2016 and do not constitute the statutory accounts for that year. The 2016 Annual Report and Accounts have been delivered to the Registrar of Companies and included the Report of the Independent Auditor which was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006.
2017 Financial Information
The figures and financial information for 2017 are extracted from the Annual Report and Accounts for the year ended 30 September 2017 and do not constitute the statutory accounts for the year. The 2017 Annual Report and Accounts include the Report of the Independent Auditor which is unqualified and does not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The 2017 Annual Report and Accounts will be delivered to the Registrar of Companies in due course.
Neither the contents of the Company's webpages nor the contents of any website accessible from hyperlinks on the Company's webpages (or any other website) is incorporated into, or forms part of, this announcement.