Svm Uk Emerg Regulatory News (SVM)

SVM UK Emerging Fund Plc - Annual Financial Report

PR Newswire

London, July 6

SVM UK EMERGING FUND PLC

(the “Fund”)

ANNUAL FINANCIAL RESULTS

FOR THE YEAR ENDED 31 MARCH 2018

The Board is pleased to announce the Annual Financial Results for the year ended 31 March 2018. The full Annual Report and Financial Statements, Notice of Annual General Meeting and Form of Proxy will be posted to shareholders and be available shortly on the Manager's website at www.svmonline.co.uk

Copies of the Annual Report have been submitted to the National Storage Mechanism and will shortly be available for inspection at www.morningstar.co.uk/uk/nsm

HIGHLIGHTS

\* The benchmark index for the Fund was changed to the IA UK All Companies Sector Average Index from 1 October 2013 prior to which the FTSE AIM Index was used.

*\* The Manager has waived its management fees for the year to 31 March 2018 and 2017.

***The gearing figure indicates the extra amount by which shareholders’ funds would change if total assets (including CFD position exposure and netting off cash and cash equivalents) were to rise or fall. A figure of zero per cent means that the Company has a nil geared position.

INVESTMENT OBJECTIVE

The investment objective of the Fund is long term capital growth from investments in smaller UK companies. Its aim is to outperform the IA UK All Companies Sector Average Index on a total return basis.

CHAIRMAN’S STATEMENT

Over the 12 months to 31 March 2018, the Company’s net asset value increased by 18.9% to 112.0p per share, compared to a gain of 2.7% in the benchmark, the IA UK All Companies Sector Average Index. Over the 12 months, the share price gained 33.3%. Since Margaret Lawson took over management of the portfolio in September 2012, net asset value has risen 134.2%, versus a benchmark return of 52.3% (total return). The Company’s share price and net asset value continued to make progress in the two months since the year end, being 94.5p and 121.96p, respectively at 31 May 2018.

Review of the year

Despite the background of the Brexit negotiations, the UK market has proved relatively resilient over the twelve months. The global economy also grew. Short term inflation in the UK appears to have peaked at the end of 2017, and should ease further as 2018 progresses. At the same time, the pick-up in wage growth from mid-2017 is continuing in the first half of 2018, reversing the consumer squeeze. This is a favourable development for many of the businesses in the portfolio. 

Since your Company focuses on investing in growing medium sized and smaller companies, it has little exposure to cyclical global businesses. Your Company has no direct investment in oil and commodity groups, which recovered sharply, but this did not hinder performance. The portfolio also has no exposure to banks, utilities, and telecoms. We remain particularly concerned at the longer term outlook for banks, which face competition from new entrants such as challenger banks and online services. The Fund has above average investment in technology, healthcare, consumer services, and business services.

Most companies in the portfolio are reporting good earnings progress, and investor interest has returned to recognise their inherent business strengths. The technology sector has performed particularly well. The portfolio not only has invested in a number of innovative technology businesses, but the investment strategy also recognises the impact of technology in other sectors. Some portfolio businesses are using technology to cut costs or service customers better. Technology is also enabling some companies to make their businesses more scalable and employ less capital. Key to future investment success is understanding the pervasiveness of technology and the economic change it drives.

The most significant contributions to performance came from Fevertree Drinks, Burford Capital, Learning Technologies, Blue Prism, Dechra Pharmaceuticals and GVC Holdings. Fevertree illustrates characteristics common to many portfolio holdings; a clear business strategy, excellent management, consistent growth, and limited use of internal capital. Litigation finance business, Burford, also grew strongly. Blue Prism designs and develops application software focused on robotic process automation. During the year, GVC purchased Ladbrokes Coral, creating one of the world’s biggest gaming groups. This should enhance its growth prospects, and the US appears to be moving towards the legalisation of sports betting. Hikma Pharmaceuticals was the main disappointment in the year, and the shares have been sold.

During the year, new investments were made in Zoo Digital, Keystone Law, Rentokil and carpet manufacturer, Victoria. Additional investments were made in Money Supermarket, BTG and Hilton Food. To fund these, Melrose, Crest Nicholson and STL were sold.

Annual General Meeting

The Annual General Meeting will be held on 14 September 2018 at SVM’s offices in Edinburgh. At the last General Meeting, shareholders approved powers for the Company to issue shares and to buy back for cancellation, or to hold in treasury. Your Board has directed the Manager to implement this arrangement, operating within Board guidelines and approvals. This aims to improve liquidity in our shares and, overall, your Board does not expect this to be dilutive to shareholders. 

Your Board has engaged State Street to perform investment accounting services and maintain the primary accounting records. There is no change to company secretarial and investment management services. This change should move the Company to best practice in segregation of duties, and enable the publication of estimated net asset value per share on a daily basis.

Outlook

Despite the uptick in global growth, debt has been increasing in many nations. This will bring disinflationary pressures in the medium term despite the current respite. With technology maintaining pressure on margins, there remain longer term headwinds for some cyclical sectors. The environment favours businesses with genuine organic growth and some pricing power. 

The portfolio emphasises scalable businesses operating in niches where they have an edge that can protect margins and deliver above average growth. Your Company remains fully invested.

Peter Dicks

Chairman

6 July 2018

MANAGER’S REVIEW

Summary

In the 12 months to 31 March 2018, the Fund continued its strong recovery since 2012.

Net asset value increased by 18.9%, versus 2.7% in the benchmark, the IA UK All Companies Sector Average. Since the current investment managers, Margaret Lawson (lead manager) and Colin McLean, assumed portfolio responsibility, net asset value has risen 134.2%, versus a benchmark return of 52.3% (total return). The Company’s share price and net asset value have continued to progress in the two months since year end.

Contributors to performance

Performance over the year was broadly based across a range of medium sized growth businesses. The most significant contributions to performance came from Fevertree Drinks, Burford Capital, Learning Technologies, Blue Prism, Dechra Pharmaceuticals and GVC Holdings. Fevertree and litigation finance business, Burford, grew strongly. Online travel business, On The Beach is growing market share as more business moves online. Dechra announced two acquisitions which are likely to enhance earnings from 2019 onwards. This will accelerate the compound growth rate as the product pipeline will be materially expanded. Dechra funded the acquisitions with 75% in cash, but its balance sheet is not stretched.

Portfolio changes

During the year, new investments were made in Zoo Digital, Keystone Law, Rentokil and carpet manufacturer, Victoria. Additional investments were made in Money Supermarket, BTG and Hilton Food. To fund these, Melrose, Crest Nicholson and SDL were sold. Sales were also made of Micro Focus, Eve Sleep and Ibstock.

The Managers aim to position the portfolio to benefit from major secular trends, such as the continuing disruption in many sectors. This is not purely technology-driven change; consumer trends in tastes are a factor in Western economies. These have brought a focus on experiences rather than goods, and are showing less respect for longstanding brands.

Additional investment was made in travel. Rising oil prices pose a challenge for airlines, but in other ways prospects for the travel sector are improving. Pricing discipline is being reinforced as some struggling airlines fail and capacity is rationalised. Surviving airlines have been able to acquire slots of the collapsed airlines. This consolidation reinforces prospects for efficient survivors, such as Ryanair and EasyJet. Not only are ticket prices likely to rise, but the surviving airlines are proving more adept at using their customer data to sell hotels, car hire and other travel services. The remaining businesses are creating an industry that looks much more attractive for shareholders.

Portfolio Review and Investment Strategy

Most companies in the portfolio are reporting good earnings progress, and the technology sector has performed particularly well. The portfolio not only has invested in a number of innovative technology businesses, but the investment strategy also recognises the impact of technology in other sectors. Some portfolio businesses are using technology to cut costs or service customers better. Technology is also enabling some companies to make their businesses more scalable and employ less capital. Key to future investment success is understanding the pervasiveness of technology and the economic change it drives.

The portfolio includes a number of the newer disruptive businesses with significant growth potential. There is a spread of holdings to recognise risks that individual companies may face in creating these new strategies. Not all disruptors that target an opportunity actually succeed. Even for the winners, it may take a few years and a lot of capital to establish the infrastructure and credibility needed. So, there can be risk in investing too early, even if a management team appears to have promise. Usually, there is a point at which it is clear the business is gaining traction and seeing accelerating sales growth. This might be evident in like-for-like numbers or in endorsements it gains through strategic partnerships. There is value in waiting for this timing, which may not be at the share price lows, but is before most of the potential has been secured. The Managers monitor these companies, using analysis of numbers and regular meetings to get clues to this traction, and identify the best entry point.

Outlook

The UK economy has proved relatively resilient, with the resumption of real wage growth signalling a reversal of the consumer squeeze. Inflation appears to have peaked at the end of 2017, and is likely to ease further this year. Already, it is falling faster than the consensus and Bank of England expected. Confidence in the UK is returning, but this has yet to transfer fully to shares. 

Cash rich overseas companies appear interested in UK acquisitions. Merger activity has been strong to date this year, and corporate buyers seem to see the value in the UK market, even if institutional investors do not. That is often an early indicator of value in a stockmarket.

Meetings with company managements continue to be encouraging, and portfolio companies are making good progress. We see considerable investment opportunity and accordingly the Fund is fully invested, with flexible borrow arrangements allowing a typical gearing of 120% of assets.

INVESTMENT PORTFOLIO

as at 31 March 2018

Market exposure for equity investments held is the same as fair value and for CFDs held is the market value of the underlying shares to which the portfolio is exposed via the contract. Further information is given in note 5 to the financial statements. A full portfolio listing as at 31 March 2018 is detailed on the website.

PRINCIPAL RISKS AND UNCERTAINTIES

The Directors review policies for identifying and managing the principal risks faced by the Fund.

Many of the Fund’s investments are in small companies and may be seen as carrying a higher degree of risk than their larger counterparts. These risks are mitigated through portfolio diversification, in-depth analysis, the experience of the Manager and a rigorous internal control culture. Further information on the internal controls operated for the Fund is detailed in the Report of the Directors.

The principal risks facing the Fund relate to the investment in financial instruments and include market, liquidity, credit and interest rate risk. An explanation of these risks and how they are mitigated is explained in note 9 to the financial statements. Additional risks faced by the Fund are summarised below:

Investment strategy – The risk that an inappropriate investment strategy may lead to the Fund underperforming its benchmark, for example in terms of stock selection, asset allocation or gearing. The Board has given the Manager a clearly defined investment mandate which incorporates various risk limits regarding levels of borrowing and the use of derivatives. The Manager invests in a diversified portfolio of holdings and monitors performance with respect to the benchmark. The Board regularly reviews the Fund’s investment mandate and long term strategy.

Discount – The risk that a disproportionate widening of discount in comparison to the Fund’s peers may result in loss of value for shareholders. The discount varies depending upon performance, market sentiment and investor appetite. The Board regularly reviews the discount and the Fund operates a share buy-back programme.

Accounting, Legal and Regulatory – Failure to comply with applicable legal and regulatory requirements could lead to a suspension of the Fund’s shares, fines or a qualified audit report. In order to qualify as an investment trust the Fund must comply with section 1158 of the Corporation Tax Act 2010 (“CTA”). Failure to do so may result in the Fund losing investment trust status and being subject to Corporation Tax on realised gains within the Fund’s portfolio. The Manager monitors movements in investments, income and expenditure to ensure compliance with the provisions contained in section 1158. Breaches of other regulations, including the Companies Act 2006, the Listing Rules of the UK Listing Authority or the Disclosure and Transparency Rules of the UK Listing Authority, could lead to regulatory and reputational damage. The Board relies on the Manager and its professional advisers to ensure compliance with section 1158 CTA, Companies Act 2006 and UKLA Rules.

Operational – The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Like most other Investment Trusts, the Fund has no employees and relies upon the services provided by third parties. The Manager has comprehensive internal controls and processes in place to mitigate operational risks. These are regularly monitored and are reviewed to give assurance regarding the effective operation of the controls.

Corporate Governance and Shareholder Relations – Details of the Fund’s compliance with corporate governance best practice, including information on relations with shareholders, are set out in the Directors’ Statement on Corporate Governance.

Financial – The Fund’s investment activities expose it to a variety of financial risks including market, credit and interest rate risk. These risks are explained in note 9 to the financial statements. The Board seeks to mitigate and manage these risks through continuous review, policy setting and enforcement of contractual obligations. The Board receives both formal and informal reports from the Manager and third party service providers addressing these risks. The Board believes the Fund has a relatively low risk profile as it has a simple capital structure; invests principally in UK quoted companies; does not use derivatives other than CFDs and uses well established and creditworthy counterparties.

The capital structure comprises only ordinary shares that rank equally. Each share carries one vote at general meetings.

STATEMENT OF DIRECTORS’ RESPONSIBILITIES

The Directors consider that the Annual Report and Financial Statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Fund’s performance, business model and strategy.

The Directors each confirm to the best of their knowledge that:

• the financial statements, prepared in accordance with the applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and gain or loss of the Fund and;

• the Strategic Report includes a fair review of the development and performance of the business and the position of the Fund together with a description of the principal risks and uncertainties that it faces.

By Order of the Board

Peter Dicks

Chairman

6 July 2018

Income statement

for the year to 31 March 2018

for the year to 31 March 2017

The Total column of this statement is the profit and loss account of the Fund. All revenue and capital items are derived from continuing operations. No operations were acquired or discontinued in the year. A Statement of Comprehensive Income is not required as all gains and losses of the Fund have been reflected in the above statement.

Balance sheet

as at 31 March 2018

Statement of Changes in Equity

for the year to 31 March 2018

for the year to 31 March 2017

Cash flow statement

for the year to 31 March 2018

Accounting policies

Basis of preparation

The Financial Statements have been prepared on a going concern basis in accordance with FRS 102, the “Financial Reporting Standards applicable in the UK and Republic of Ireland” and under the AIC’s Statement of Recommended Practice “Financial Statements of Investment Trust Companies and Venture Capital Trusts” (SORP) issued in 2014.

Significant judgements and estimates

Preparation of financial statements can require management to make significant judgements and estimates. There are no significant judgements or sources of estimation uncertainty the Board considers need to be disclosed.

Income

Income is included in the Income Statement on an ex-dividend basis. Income on fixed interest securities is included on an effective interest rate basis. Deposit interest is included on an accruals basis.

Expenses and interest

Expenses and interest payable are dealt with on an accruals basis.

Investment management fees

Investment management fees, if any, are allocated 100 per cent to capital. The allocation is in line with the Board’s expected long-term return from the investment portfolio. Due to the size of the Fund, the Manager has waived its management fee. The terms of the investment management agreement are detailed in the Report of the Directors.

Taxation

Current tax is provided at the amounts expected to be paid or received. Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more or a right to pay less tax in the future have occurred at the balance sheet date measured on an undiscounted basis and based on enacted tax rates. This is subject to deferred tax assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the underlying timing differences can be deducted. Timing differences are differences arising between the taxable profits and the results as stated in the financial statements which are capable of reversal in one or more subsequent periods.

Investments

The investments have been categorised as ‘‘fair value through profit or loss’’. All investments are held at fair value. For listed investments this is deemed to be at bid prices. Contracts for Differences are synthetic equities and are valued with reference to the investment’s underlying bid prices. Unlisted investments are valued at fair value based on the latest available information and with reference to International Private Equity and Venture Capital Valuation Guidelines. All changes in fair value and transaction costs on the acquisition and disposal of portfolio investments are included in the Income Statement as a capital item. Purchases and sales of investments are accounted for on trade date.

Financial instruments

In addition to the investment transactions described above, basic financial instruments are entered into that result in recognition of other financial assets and liabilities, such as investment income due but not received, other debtors and other creditors. These financial instruments are receivable and payable within one year and are stated at cost less impairment.

Foreign currency translation

Transactions involving foreign currencies are converted at the rate ruling as at the date of the transaction. Foreign currency monetary assets and liabilities are retranslated into sterling at the rate ruling on the financial reporting date.

Capital reserve

Gains and losses on realisations of fixed asset investments, and transactions costs, together with appropriate exchange differences, are dealt with in this reserve. All incentive fees and investment management fees, together with any tax relief, is also taken to this reserve. Increases and decreases in the valuation of fixed asset investments are dealt with in this reserve.

Notes to the financial statements

1. Income

Income from shares and securities

2. Other expenses

Revenue

Capital

3. Taxation

The tax assessed for the year is different from the standard small company rate of corporation tax in the UK. The differences are noted below:

At 31 March 2018, the Fund had unutilised management expenses and non trade loan relationship (“NTLR”) deficits of £1,019,000 (2017 – £957,000).

A deferred tax asset of £173,000 (2017 - £191,000) has not been recognised on the unutilised management expenses as it is unlikely that there would be suitable taxable profits from which the future reversal of the deferred tax asset could be deducted.

4. Returns per share

Returns per share are based on a weighted average of 6,005,000 (2017 – 6,005,000) ordinary shares in issue during the year.

Total return per share is based on the total gain for the year of £1,069,000 (2017 – gain of £768,000).

Capital return per share is based on the net capital gain for the year of £1,012,000 (2017 – gain of £710,000).

Revenue return per share is based on the revenue gain after taxation for the year of £57,000 (2017 – gain of £58,000).

The net asset value per share is based on the net assets of the Fund of £6,729,000 (2017 – £5,660,000) divided by the number of shares in issue at the year end as shown in note 8.

5. Investments at fair value through profit or loss

6. Debtors

7. Creditors: amounts falling due within one year

8. Share capital

As at the date of publication of this document, there was no change in the issued share capital and each ordinary share carries one vote.

9. Financial instruments

Risk Management

The Fund’s investment policy is to hold investments, CFDs and cash balances with gearing being provided by a bank overdraft. All investments are denominated in Sterling and are carried at fair value. Where appropriate, gearing can be utilised in order to enhance net asset value. It does not invest in short dated fixed rate securities other than where it has substantial cash resources. Fixed rate securities held at 31 March 2018 were valued at £nil (2017 – £nil). Investments, which comprise principally equity investments, are valued as detailed in the accounting policies.

The major risks inherent within the Fund are market risk, liquidity risk, credit risk and interest rate risk. It has an established environment for the management of these risks which are continually monitored by the Manager. Appropriate guidelines for the management of its financial instruments and gearing have been established by the Board of Directors. It has no foreign currency assets and therefore does not use currency hedging. It does not use derivatives within the portfolio with the exception of CFDs.

Market risk

The risk that the Fund may suffer a loss arising from adverse movements in the fair value or future cash flows of an investment. Market risks include changes to market prices, interest rates and currency movements. The Fund invests in a diversified portfolio of holdings covering a range of sectors. The Manager conducts continuing analysis of holdings and their market prices with an objective of maximising returns to shareholders. Asset allocation, stock selection and market movements are reported to the Board on a regular basis.

Liquidity risk

The risk that the Fund may encounter difficultly in meeting obligations associated with financial liabilities. The Fund is permitted to invest in shares traded on AIM or similar markets; these tend to be in companies that are smaller in size and by their nature less liquid than larger companies. The Manager conducts continuing analysis of the liquidity profile of the portfolio and the Fund maintains an overdraft facility to ensure that it is not a forced seller of investments.

Credit risk

The risk that the counterparty to a transaction fails to discharge its obligation or commitment to the transaction resulting in a loss to the Fund. Investment transactions are entered into using brokers that are on the Manager’s approved list, the credit ratings of which are reviewed periodically in addition to an annual review by the Manager’s board of directors. The Fund’s principal bankers are State Street Bank & Trust Company, the main broker for CFDs is UBS and other approved execution broker organisations authorised by the Financial Conduct Authority.

Interest rate risk

The risk that interest rate movements may affect the level of income receivable on cash deposits. At most times the Fund operates with relatively low levels of bank gearing, this has and will only be increased where an opportunity exists to substantially add to the net asset value performance.

10. The financial information contained within this announcement does not constitute statutory accounts as defined in sections 434 and 435 of the Companies Act 2006. The results for the years ended 31 March 2018 and 2017 are an abridged version of the statutory accounts for those years. The Auditor has reported on the 2018 and 2017 accounts, their reports for both years were unqualified and did not contain a statement under section 498 of the Companies Act 2006. Statutory accounts for 2017 have been filed with the Registrar of Companies and those for 2018 will be delivered in due course.

11. The Annual Report and Accounts for the year ended 31 March 2018 will be mailed to shareholders shortly and copies will be available from the Manager’s website www.svmonline.co.uk and the Fund’s registered office at 7 Castle Street, Edinburgh, EH2 3AH. 

The Annual General Meeting of the Fund will be held at 9.30am on Friday 14 September 2018 at 7 Castle Street, Edinburgh, EH2 3AH.

For further information, please contact:

Colin McLean SVM Asset Management 0131 226 6699

Roland Cross Four Broadgate 0207 726 6111

6 July 2018