Invesco Perpetual UK Smaller Co's Investment Trust Plc - Half-year Report
Half-Yearly Financial Report for the Six Months to
Investment Objective and Policies of the Company
The Company is an investment trust whose investment objective is to achieve long-term total return for shareholders primarily by investment in a broad cross-section of small to medium sized
The portfolio primarily comprises shares traded on the
The Company’s dividend policy is to distribute all available revenue earned by the portfolio in the form of dividends and the Board has approved the use of capital reserves to enhance dividend payments.
In normal circumstances, the dividend for the year is calculated to give a yield of 4% per annum based on the year end share price.
Full details of the Company’s investment and dividend policies, as well as the Company’s risk and investment limits, can be found in the annual financial report for the year ended
AT AT 31 JUL 31 JAN % Period End Date 2019 2019 Change Net asset value(1) (NAV) per share 546.4p 481.8p +13.4 Share price(2) 511.0p 465.0p +9.9 Discount(1) (6.5)% (3.5)% Gearing(1): – gross gearing(3) nil nil – net gearing(4) nil nil – net cash(5) 4.1% 6.6% Maximum authorised gearing(1) 8.4% 9.5%
Total return (with income reinvested) for the six months ended
NAV(1)(2) +15.8% Share price(1)(2) +12.4% Benchmark Index(1)(2)(6) +3.6% FTSE All-Share Index(2) +10.6%
Return and dividend per ordinary share SIX MONTHS ENDED
31 JUL 31 JUL 20192018 Return(1): – revenue 5.30p 5.65p – capital 70.58p 11.28p – total 75.88p 16.93p First interim dividend 3.75p 3.65p
(1) See Glossary of Terms and Alternative Performance Measures (APM) on pages 63 to 65 of the 2019 annual financial report for full details of the explanation and calculation of APMs.
(2) Source: Refinitiv.
(3) Gross gearing: borrowings ÷ shareholders’ funds.
(4) Net gearing: borrowings less cash ÷ shareholders’ funds.
(5) Net cash: net exposure to cash and cash equivalents ÷ shareholders’ funds.
(6) The Benchmark Index of the Company is the Numis Smaller Companies Index (excluding Investment Companies) with income reinvested.
CHAIRMAN’S STATEMENT INCORPORATING THE INTERIM MANAGEMENT REPORT
Over the six months to
The Company’s share price rose from 465p to 511p during the same period, an increase of 9.9% (12.4% on total return basis), and the discount to NAV ended the period at 6.5%, having been 3.5% as at
Since the Company’s half-year end to
In accordance with the Company’s dividend policy, on
The expected timetable for the remaining dividend payments is: second and third interim dividends in
During the year, the Nomination Committee carried out a review of the composition and skills of the Board and the Company’s succession plan. Following this, the Board appointed
As noted in the Portfolio Manager’s Report and in previous statements, the outcome of Brexit negotiations and clarity around international trading relations continue to create uncertainty and risk of significant economic set back.
The Company’s portfolio managers continue with their investment strategy to invest in good quality, growing and well managed companies and with the breadth and diversity of the smaller companies sector, they continue to find attractive investment opportunities. Your Board wholly supports the portfolio managers’ approach to stock selection in this difficult political and economic environment.
Portfolio Manager’s Report
The six months under review has provided another period of positive returns for equity investors, despite a widespread slowdown in economic growth. Smaller companies, as measured by the Numis Smaller Companies Index (excluding Investment Companies), saw gains of 3.6% on a total return basis. This performance lagged the wider
Portfolio Strategy and Review
Against this background, your Company saw an increase in its net asset value of 15.8% for the six months under review, in total return terms. The portfolio benefited from overweight positions in the media, technology and support services sectors, but was hurt by its exposure to the health care sector. Within the smaller company sector, the pub sector was helped by some takeover activity and defence stocks benefited from higher defence spending. The weakest area was consumer related stocks, such as retailers and leisure stocks, which suffered due to the outlook for consumer spending and increasing costs. The
Contributors to performance
At the individual stock level, the best performers included: Future (+106%), a publishing business which owns title such as TechRadar and What Hi-Fi, and is transitioning from printing magazines to a predominantly online business model. Management have significantly increased margins by generating new revenue streams via online advertising and e-commerce, augmented by earnings accretive acquisitions. CVS (+129%), one of the laggards over the previous year, re-rated strongly as it began to recover from a period of weaker trading. Takeover activity has been strong in the veterinary services sector and CVS is potential takeover candidate. Tarsus (+70%), an exhibition and trade show company, was taken over at an attractive premium. 4imprint (+46%), which sells promotional products in the US, saw a larger than expected uplift in trading from its decision to increase TV marketing spend to improve brand recognition. The company is now the market leader in the US but still has significant room to take market share.
Detractors from performance
Unfortunately, as is always the case when managing a portfolio, we had some disappointments. The most significant detractor to performance was Staffline (–80%), which had to delay results after a whistle blower made allegations of accounting irregularities. This was proven to be false, but the disruption to trading, combined with a back payment issue related to working practices, meant that the business had to issue shares to strengthen the balance sheet.
It was a much quieter period for new holdings than is typically the case. We have continued to appraise a significant number of potential investments but have in most cases reached the conclusion that our existing holdings have a greater potential to generate shareholder returns. Stocks that we have introduced to the portfolio include Loungers, which we bought as an IPO. It is a café bar operator with the potential for a significant roll-out of new sites. The concept is very popular and its all day trading format produces an attractive return on capital. We also added health care product and adhesive manufacturer Scapa to the portfolio. It is a business we have followed for some time and the decline in the share price offered us with an interesting entry point. Within the oil & gas sector, we started a position in Jadestone Energy which has producing assets off the coast of
The five largest holdings in the portfolio at the end of the six months under review were: Future, described above, which is successfully transitioning from publishing magazines to running a diverse range of niche interest websites. The business aims to produce relevant, high quality content and monetise it via subscriptions, advertising and ecommerce. Management have been successful in revitalising numerous brands, and the company has grown revenue and profit both organically and via acquisition. 4imprint gathers orders through online and catalogue marketing, which are then routed to their suppliers who print and dispatch the products to customers. As a result of outsourcing manufacture, the business has a relatively low capital requirement and can focus on marketing and customer service. Continual reinvestment of revenue into marketing campaigns has enabled the business to generate an enviable long term growth record whilst maintaining margins. Clinigen is a health care business which is a world leader in the specialist distribution of drugs to geographies where they haven’t been formally approved, experimental drugs to acutely ill patients and comparator drugs into medical trials. These activities give management insight into drugs that could potentially be used on a wider basis. This enables management to acquire the rights to compounds where they can increase profitability by achieving further approvals for new categories of patients. RWS is a language translation business with world leading positions in the translation of patents, scientific and technical texts. The specialist knowledge and requirement for precision in these kinds of areas allows the business to generate strong margins. Management have an excellent record of growing the business organically and via acquisition. Johnson Service is a linen hire business focussed on workwear and the hospitality sector in the
Our investment strategy remains unchanged. The current portfolio comprises 71 stocks. Sector weightings are determined by the purchase or sale of individual companies at any given time, rather than by any formal asset allocation. We continue to seek growing businesses, which have the potential to be significantly larger in the medium term. These tend to be companies that either have great products or services, that can enable them to take market share from their competitors, or companies that are exposed to higher growth niches within the
Our analysis remains focused on the sustainability of returns and profit margins, which are vital for the long term success of a company. We continue to look for businesses with ‘pricing power’ by assessing positioning within supply chains and having a clear understanding of how work is won and priced. It is also important to determine which businesses possess unique capabilities, in the form of intellectual property, specialist know-how or a scale advantage in their chosen market. We conduct around 350 company meetings and site visits a year, and these areas are a particular focus for us on such occasions.
At the time of writing, clarity around international trading relations looks no closer and most major economies are seeing slower growth or outright contraction. The trend for protectionist policies is unhelpful given the lengthy period of sub-par growth we’ve been experiencing since the financial crisis. However, we continue to hope that mutual economic self-interest will encourage a resolution to the current difficulties sooner rather than later. Although we believe the potential for a significant economic set-back has increased, it is more likely that the current situation will prove to be just a soft patch.
Whilst the outlook for profit growth has become more difficult, the resumption of monetary easing via lower interest rates and the potential for more creative forms of economic stimulus should continue to be supportive for equities. Bond yields are plumbing new depths, with investors showing appetite for negative yielding debt with durations as long as 30 years in some cases. Within in this context we believe that equities look very attractive.
In light of the uncertain backdrop, we continue to favour stocks with ‘self-help’ characteristics that enable them to grow independently of the economy. This can include the restructuring of underperforming businesses, sector consolidation, roll-out strategies or market share gains led by innovation. Equity valuations within the smaller companies sector are well below their 20 year average and we believe there is potential to make money even in this highly uncertain environment.
Portfolio Manager Deputy Portfolio Manager
Principal Risks and Uncertainties
– Market (Economic) Risk – factors such as general fluctuations in stock markets, interest rates and exchange rates may give rise to high levels of volatility in the share prices of investee companies, as well as affecting the Company’s own share price and discount to NAV.
– Investment Risk – the Company invests in small and medium-sized companies traded on the
– Shareholders’ Risk – The value of an investment in the Company may go down as well as up and an investor may not get back the amount invested.
– Borrowings – the Company may borrow money for investment purposes. If the investments fall in value, any borrowings (or gearing) will magnify any loss. If the borrowing facility could not be renewed, the Company might have to sell investments to repay any borrowings made under it.
– Reliance on the Manager and other Third Party Providers – failure by any third party provider to carry out its obligations to the Company could have a materially detrimental impact on the operation of the Company and could affect the ability of the Company to successfully pursue its investment policy.
– Regulatory Risk – the Company is subject to various laws and regulations by virtue of its status as an investment trust. Control failures by any of the third party providers may result in operational or reputational problems, erroneous disclosures or loss of assets through fraud, as well as breaches of regulations.
A detailed explanation of these principal risks and uncertainties can be found on pages 9 and 10 of the Company’s 2019 annual financial report, which is available on the Company’s section of the Manager’s website at: www.invesco.co.uk/ipukscit
In the view of the Board, these principal risks and uncertainties are as much applicable to the remaining six months of the financial year as they were to the six months under review.
The financial statements have been prepared on a going concern basis. The Directors consider this is the appropriate basis, as the Company has adequate resources to continue in operational existence for the foreseeable future. In considering this, the Directors took into account the diversified portfolio of readily realisable securities which can be used to meet funding commitments, and the ability of the Company to meet all of its liabilities, including any bank overdraft, and ongoing expenses.
Related Party Transactions and transactions with the manager
Note 21 of the 2019 annual report gives details of related party transactions and transactions with the Manager. This report is available on the Company’s section of the Manager’s website at www.invesco.co.uk/ipukscit.
DIRECTORS, ADVISERS AND PRINCIPAL SERVICE PROVIDERS
Company Secretary and Correspondence Address
020 3753 1000
Company Secretarial contact:
Invesco Client Services
Invesco’s Client Services Team is available from
Please note no investment advice can be given.
0800 085 8677
Depositary, Custodian and Banker
If you hold your shares directly and not through a savings scheme or ISA and have queries relating to your shareholding you should contact the Registrar on: 0371 664 0300. Calls are charged at the standard geographic rate and will vary by provider.
Calls from outside the
Shareholders holding shares directly can also access their holding details via Link’s website www.signalshares.com
Information relating to the Company can be found on the Company’s section of the Manager’s website, which can be located at www.invesco.co.uk/ipukscit.
The contents of websites referred to in this document, or accessible links within those websites, are not incorporated into, nor do they form part of, this financial report.
General Data Protection Regulation
The Company’s privacy notice can be found at www.invesco.co.uk/ipukscit
THIRTY LARGEST HOLDINGS AT
Ordinary shares unless stated otherwise
MARKET VALUE % OF ISSUER SECTOR £’000 PORTFOLIO Future Media 7,775 4.5 4imprint Media 5,801 3.4 ClinigenAIM Pharmaceuticals & Biotechnology 5,074 2.9 RWSAIM Support Services 4,498 2.6 Johnson ServiceAIM Support Services 4,397 2.6 CVSAIM General Retailers 4,254 2.5 Aptitude Software Software & Computer Services 4,062 2.4 Ultra Electronics Aerospace & Defence 4,044 2.3 Tarsus Media 4,019 2.3 James Fisher and Sons Industrial Transportation 3,839 2.2 Keywords StudiosAIM Support Services 3,739 2.2 RestoreAIM Support Services 3,705 2.1 Sanne Support Services 3,632 2.1 JTC Financial Services 3,437 2.0 Equiniti Support Services 3,434 2.0 Polypipe Construction & Materials 3,373 2.0 Energean Oil & Gas Oil & Gas Producers 3,294 1.9 St. Modwen Properties Real Estate Investment & Services 3,209 1.9 Hill & Smith Industrial Engineering 3,153 1.8 Consort Medical Health Care Equipment & Services 3,148 1.8 Coats General Industrials 3,101 1.8 Arrow Global Financial Services 3,091 1.8 Hilton Food Food Producers 2,939 1.7 Robert Walters Support Services 2,869 1.7 NCC Software & Computer Services 2,747 1.6 JD Wetherspoon Travel & Leisure 2,608 1.5 Brooks MacdonaldAIM Financial Services 2,604 1.5 ScapaAIM Chemicals 2,585 1.5 Essentra Support Services 2,577 1.5 CLS Real Estate Investment & Services 2,566 1.5 109,574 63.6 Other Investments (41) 62,613 36.4 Total Investments (71) 172,187 100.0
AIM Investments quoted on AIM.
Condensed Statement of Comprehensive income
SIX MONTHS TO 31 JUL 2019 SIX MONTHSTO 31 JUL 2018 Revenue Capital
Total Revenue CapitalTotal £’000 £’000 £’000 £’000 £’000 £’000 Profit on investments held — 23,749 23,749 — 4,582 4,582 at fair value Income – note 2 2,021 — 2,021 2,145 — 2,145 2,021 23,749 25,770 2,145 4,582 6,727 Investment management fees (98) (556) (654) (86) (486) (572) – note 3 Performance fee – note 3 — — — — (385) (385) Other expenses (182) (3) (185) (202) (1) (203) Profit before finance 1,741 23,190 24,931 1,857 3,710 5,567 costs and taxation Finance costs – note 3 (1) (3) (4) (1) (5) (6) Profit before taxation 1,740 23,187 24,927 1,856 3,705 5,561 Taxation – note 4 — — — — — — Profit after taxation 1,740 23,187 24,927 1,856 3,705 5,561 Return per ordinary share 5.30p 70.58p 75.88p 5.65p 11.28p 16.93p Weighted average number of 32,851,929 32,851,929 ordinary shares in issue
The total column of this statement represents the Company’s statement of comprehensive income, prepared in accordance with International Financial Reporting Standards as adopted by the
Condensed Balance Sheet
Registered number 2129187
AT AT 31 Jul 31 Jan 2019 2019 £’000 £’000 Non-current assets Investments held at fair value through profit or loss 172,187 149,211 Current assets Amounts due from brokers — 54 Prepayments and accrued income 205 384 Cash and cash equivalents 7,299 10,399 7,504 10,837 Total assets 179,691 160,048 Current liabilities Amounts due to brokers (3) (695) Performance fee accrued – note 3 — (901) Other accruals (188) (167) (191) (1,763) Net assets 179,500 158,285 Capital and reserves Share capital 10,642 10,642 Share premium 21,244 21,244 Capital redemption reserve 3,386 3,386 Capital reserve 142,488 121,880 Revenue reserve 1,740 1,133 Total shareholders’ funds 179,500 158,285 Net asset value per ordinary share 546.4p 481.8p Number of 20p ordinary shares in issue at the period end – 32,851,929 32,851,929 note 6
Condensed Statement of Cash Flow
Six Six months to months to 31 Jul 31 Jul 2019 2018 £’000 £’000 Cash flow from operating activities Profit before finance costs and taxation 24,931 5,567 Adjustments for: Purchases of investments (20,405) (15,137) Sales of investments 20,540 20,398 135 5,261 Profit on investments held at fair value (23,749) (4,582) Decrease/(increase) in receivables 179 (30) Decrease in payables (881) (1,429) Net cash inflow from operating activities after taxation 615 4,787 Cash flow from financing activities Finance cost paid (3) (21) Dividends paid – note 5 (3,712) (4,501) Net cash outflow from financing activities (3,715) (4,522) Net (decrease)/increase in cash and cash equivalents (3,100) 265 Cash and cash equivalents at the beginning of the period 10,399 5,500 Cash and cash equivalents at the end of the period 7,299 5,765 Reconciliation of cash and cash equivalents to the Balance Sheet is as follows: Cash held at custodian 39 195 Short-Term Investment Company (Global Series) plc, money 7,260 5,570 market fund Cash and cash equivalents 7,299 5,765 Cash flow from operating activities includes: Dividends received 2,205 2,119
Condensed statement of changes in equity
Capital Share Share Redemption Capital Revenue Capital Premium Reserve Reserve reserve Total £’000 £’000 £’000 £’000 £’000 £’000 For the six months ended 31 July 2019 At 31 January 2019 10,642 21,244 3,386 121,880 1,133 158,285 Total comprehensive income — — — 23,187 1,740 24,927 for the period Dividends paid – note 5 — — — (2,579) (1,133) (3,712) At 31 July 2019 10,642 21,244 3,386 142,488 1,740 179,500 For the six months ended 31 July 2018 At 31 January 2018 10,642 21,244 3,386 142,058 1,241 178,571 Total comprehensive income — — — 3,705 1,856 5,561 for the period Dividends paid – note 5 — — — (3,260) (1,241) (4,501) At 31 July 2018 10,642 21,244 3,386 142,503 1,856 179,631
Notes to the Condensed Financial Statements
1. Basis of Preparation
Accounting Standards and Policies
The condensed financial statements have been prepared using the same accounting policies as those adopted in the 2019 annual financial report. They have been prepared on an historical cost basis, in accordance with the applicable International Financial Reporting Standards (IFRS), as adopted by the
31 Jul 31 Jul 2019 2018 SIX MONTHS ENDED £’000 £’000 Income from listed investments: UK dividends 1,791 1,829 Overseas dividends 188 105 Special dividends 42 211 2,021 2,145
3. Management and Performance Fees and Finance Costs
Investment management fees and finance costs are allocated 15% to revenue and 85% to capital.
With effect from
4. Taxation and Investment Trust Status
No tax liability arises on capital gains because the Company has been accepted by HMRC as an approved investment trust and it is the intention of the Directors to conduct the affairs of the Company so that it continues to satisfy the conditions for this approval.
5. Dividends paid on Ordinary Shares
31 JUL 2019 31 JUL 2018 SIX MONTHS ENDED RATE £’000 RATE £’000 Third interim 3.65p 1,199 3.55p 1,166 Final 7.65p 2,513 10.15p 3,335 Total 11.30p 3,712 13.70p 4,501
The first interim dividend of 3.75p per ordinary share (2018: 3.65p) was paid on
6. Share capital
SIX MONTHS YEAR TO TO 31 JUL 31 JAN 2019 2019 Share capital: Ordinary shares of 20p each (£’000) 6,570 6,570 Treasury shares of 20p each (£’000) 4,072 4,072 10,642 10,642 Number of ordinary shares in issue: 32,851,929 32,851,929
7. Classification Under Fair Value Hierarchy
Note 17 of the 2019 annual financial report sets out the basis of classification.
8. Status of Half-Yearly Financial Report
The financial information contained in this half-yearly financial report, which has not been reviewed or audited by an independent auditor, does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006. The financial information for the half years ended
By order of the Board
statement of directors’ responsibilities
in respect of the preparation of the half-yearly financial report.
The Directors are responsible for preparing the half-yearly financial report using accounting policies consistent with applicable law and International Financial Reporting Standards.
The Directors confirm that to the best of their knowledge:
– the condensed set of financial statements contained within the half-yearly financial report have been prepared in accordance with the International Accounting Standards 34 ‘Interim Financial Reporting’;
– the interim management report includes a fair review of the information required by 4.2.7R and 4.2.8R of the UKLA’s Disclosure Guidance and Transparency Rules; and
– the interim management report includes a fair review of the information required on related party transactions.
The half-yearly financial report has not been audited or reviewed by the Company’s auditor.
Signed on behalf of the Board of Directors.