Source - LSE Regulatory
ABERFORTH SMALLER COMPANIES TRUST plc Audited Final Results for the year to 31 December 2008 The following is an extract from the Company's Annual Report and Accounts for the year to 31 December 2008. The Annual Report is expected to be posted to shareholders on 30 January 2009. Members of the public may obtain copies from Aberforth Partners LLP, 14 Melville Street, Edinburgh EH3 7NS or from its website at www.aberforth.co.uk. This will shortly be available for inspection at the authority's document viewing facility at 25 The North Colonnade, Canary Wharf, London, E14 5HS. FEATURES Net Asset Value Total Return -39.6% Benchmark Index Total Return -40.8% Increase in Dividends per Ordinary Share +25.0% The objective of Aberforth Smaller Companies Trust plc (ASCoT) is to achieve a net asset value total return (with dividends reinvested) greater than on the Hoare Govett Smaller Companies Index (Excluding Investment Companies) over the long term. ASCoT is managed by Aberforth Partners LLP. CHAIRMAN'S STATEMENT TO SHAREHOLDERS REVIEW OF 2008 PERFORMANCE Last year I reflected on how difficult 2007 had been for small company share prices. The year to 31 December 2008 has proved even more challenging with the obvious stresses in the financial system generating a sharp slow down in the global economy. Global equity markets have fallen significantly. Reflecting this, Aberforth Smaller Companies Trust plc (ASCoT) produced a negative total return of 39.6%, compared with a negative total return of 40.8% for the Hoare Govett Smaller Companies Index (Excluding Investment Companies), your Company's investment benchmark. Larger companies, as represented by the FTSE All-Share Index, registered a negative total return of 29.9%. Your Managers' Report provides greater insight into ASCoT's performance, including that of small and large companies. GEARING In my Half Yearly Report I commented on the significant and rapid adjustment to valuations that had taken place between the stock market peak (around May 2007 for small companies) and the middle of 2008. At that time your Managers had begun to employ a modest level of borrowing to gear the portfolio, ever conscious that timing 'the bottom' of the market with accuracy is near impossible. Although valuations have continued to decline since the decision was made, your Board and Managers believe that the introduction of gearing will be beneficial in the longer term. At the year end the level of gearing was 109.5%. Your Board and Managers review the level of gearing regularly and, whilst subject to many factors, it is likely that gearing will increase slowly from its current level. DIVIDENDS Your Board is pleased to declare a second interim dividend, in effect a final dividend, of 13.0 pence per share, which produces total dividends for the year of 19.0 pence per share representing an increase of 25.0% on the total for the previous year. The increase year-on-year reflects good underlying growth in dividends from ASCoT's portfolio particularly in the first half of the year; the beneficial impact of gearing on the revenue account; and the non-recurring recovery of VAT and associated interest. It is very unlikely that dividend growth from the portfolio in 2009 will be as good as it has been in the past year. The near term outlook for corporate dividends is increasingly challenging. Indeed, many financial commentators are of the view that, in aggregate, UK dividends will fall in 2009. In this context, the Board does have a degree of flexibility given the level of the Company's revenue reserves which, after adjusting for payment of the second interim dividend, amount to 26.9 pence per share. The second interim dividend of 13.0 pence per share will be paid on 27 February 2009 to Shareholders on the register at the close of business on 6 February 2009. The last date for submission of Forms of Election for those Shareholders wishing to participate in ASCoT's Dividend Reinvestment Plan (DRiP) is 6 February 2009. Details of the DRiP are available from Aberforth Partners LLP on request or from their website, www.aberforth.co.uk. VALUE ADDED TAX (VAT) Shareholders will recall from previous reports that VAT is no longer imposed on management fees and that your Board had reached agreement with your Managers for recovery of all VAT paid by ASCoT since 2001 plus any sums recovered by your Managers from HMRC in relation to earlier periods. As reported in the Half Yearly Report, a total of #6.4 million has been received in the last two years, comprising #5.4 million of VAT plus associated interest of #1.0 million. This represents a very satisfactory outcome to date for Shareholders. Any further recovery is subject to various legal cases, the outcome and timing of which remain uncertain at this stage. Whilst ASCoT is not directly involved in these cases, your Managers continue to monitor developments in this regard. CONTINUATION VOTE At the Annual General Meeting held on 4 March 2008, Shareholders passed all the resolutions. Of particular note was the resolution, proposed every three years, that ASCoT should continue as an investment trust. SHARE BUY BACK AUTHORITY AND TREASURY SHARES At the same Annual General Meeting, the authority to buy-in up to 14.99% of ASCoT's Ordinary Shares was renewed. Under that authority 1,909,788 shares have been bought in to the end of December at a total cost of #11.1 million. All shares bought in have been cancelled rather than held in treasury. Shares bought in to date have enhanced ASCoT's net asset value by approximately #2.2 million by virtue of the weighted average discount on purchases being 16.2%. Your Board will be seeking a renewal of this authority at the Annual General Meeting to be held on 4 March 2009. Your Board keeps under careful review the circumstances under which the buy-in authority is used in the context of its overall objective of seeking to sustain a low discount. It is your Board's policy to cancel, rather than hold in treasury, any such shares. SUMMARY AND OUTLOOK 2008 has been a very difficult year for UK smaller companies with a steep decline in the level of their share prices. If ever a reminder was needed that equity investment requires a long term perspective it has been given to us in this last year. Whilst it would be folly to suggest that there is no further pain to come, your Managers are of the view that UK small company equities currently represent attractive value. Your Board remains confident that the Managers' experience and consistency of approach will benefit the Company in these difficult times. David R Shaw Chairman 27 January 2009 MANAGERS' REPORT PERFORMANCE The total return of ASCoT's benchmark, the HGSC (XIC), was negative 40.8% in 2008. This was the second worst result in nominal terms over the index's 54 year history. The FTSE All-Share performed less poorly but nevertheless experienced a negative total return of 29.9%. Against this background of extremely weak equity markets, ASCoT's modest gearing position proved unhelpful: its total return was negative 39.6%, slightly ahead of the benchmark. The performance at the investment portfolio level, after costs but excluding the effect of the gearing, was better, with a decline of 37.8%. Recent stockmarket weakness has been so severe that the FTSE All-Share has now registered a total return of just 12.4% cumulatively over the past ten years, a negative outcome in real terms. Small companies have performed rather more respectably, with a 61.5% return over the same period, while ASCoT's total return has been 153.4%. INVESTMENT BACKGROUND Last year's horrible performance from equities was not confined to the UK. Stockmarkets around the world declined precipitously, with 50% drops not uncommon in both established and emerging markets. Nor was the weakness of these returns confined to equities: any asset class perceived as risky suffered in 2008 as the credit markets moved from crunch to crisis. By default, as it were, government debt has been the beneficiary of such extreme risk aversion: in the US, treasury bill yields have at times dropped below zero and ten year government bonds ended the year yielding close to 2%. And, of course, bank deposits were caught up in the maelstrom: at certain points through the year, equities certainly looked a less risky proposition. After the relative calm of the first half of the year, the credit crisis intensified in the third quarter. The process of de-leveraging, which started over a year ago when US subprime problems were exposed, gathered pace and was punctuated by large downward lurches. Of these, the most spectacular and deep- reaching was the failure of Lehman, which brought home the reality of counterparty risk. The reluctance or inability of the banks to make new loans was obvious in extended spreads between LIBOR and base rates. The consequent dearth of funding compromised what has become known as the `shadow-banking system', which is the complex of hedge funds, prime brokers, money market funds and securitisation markets that facilitated the build-up of debt in Western economies over recent years. The forced unwinding of leveraged investment positions has intensified the cycle of de-leveraging that is at the heart of the credit crisis. Meanwhile, real economic conditions deteriorated through the year, to the extent that recession is with us, whether officially as in the US and Germany or de facto as in the UK. Housing has been the principal transmission mechanism of credit market problems to the real economy. On both sides of the Atlantic, falling house prices, together with the difficulty in securing new mortgage financing, have tempered consumers' willingness to spend, while rampant commodity prices earlier in the year eroded disposable income. Additional pressure is coming from rising unemployment, with many large redundancy programmes making the headlines towards the end of the year as businesses, particularly those close to the troubled automotive industry, adjusted to the environment of weaker demand. Importantly, however, some relief was forthcoming later in the year from the remarkable reversal in fortune for commodities. Built on hopes that the emerging world could decouple from Western economies and continue to grow through internally generated demand, the prices of commodities, together with the share prices of the companies exploiting them, reached extravagant levels earlier in the year. These hopes were undermined as it became clear that the ructions in credit markets would feed back to affect real economic activity and that the `China phenomenon' depended substantially on Western, predominantly American, spending. The extraordinary journey of the oil price, which rose by almost 51% in the first half before plummeting to end 54% down for the year, is illustrative of the wider commodity arena. With the bursting of this latest bubble, the concern about stagflation that was so prevalent less than six months ago has vanished. Expectations for inflation have hurtled downwards: at the end of June, the difference between ten year conventional and index linked gilt yields - a proxy for anticipated inflation - was over 4%; by the end of the year, this had dropped to almost 1.5%. Similar movements are observable in the US and European bond markets. With the stagflationary chimaera exposed, financial markets are again confronted by deflation, with which they last flirted six years ago. The Bank of England's November inflation report introduced the prospect of CPI inflation dropping into negative territory at some time in 2009, having been running at over 5% in the third quarter, as the commodities boom works its way out of the system. So, the Chancellor may be receiving more letters in 2009, albeit rather different in tone. Relenting inflationary pressures have afforded monetary authorities, even the ECB, the excuse to cut interest rates, though, given the disinflationary nature of the de-leveraging process and of recession itself, such an excuse was hardly required. In December, the Fed took US rates to zero. Meanwhile, UK base rates ended the year at 2% and early in 2009 were cut again to 1.5%, their lowest level since the foundation of the Bank of England. It is worth remembering that at the half year futures markets were anticipating a rise by the year end from the then prevailing level of 5%. As interest rates approach zero, other remedial measures have been deployed by monetary and fiscal authorities. Echoing Ben Bernanke's speeches back in 2002, these unconventional steps include public ownership of swathes of the financial system and the extension of the range of collateral accepted by the central banks. Most significantly, as the year drew to a close the Fed confirmed that it had embraced `quantitative easing', which is the expansion of the central bank's balance sheet and thus of money supply. The newly printed money is to be used to purchase government debt together with mortgage and other consumer loans. These various actions have had some success in bringing interbank rates to levels more consistent with prevailing base rates, though they have yet to filter through the extended credit market. Such measures nevertheless risk encountering the phenomenon of `pushing on a string': deluged by cheap money, banks may opt to repair balance sheets rather than lend; similarly, consumers may prefer saving over spending. In order to deal with this conflict of individual rationality and the collective `good', governments are stepping up to play their part, with half an eye to the political capital apparently available from playing `my TARP's bigger than yours'. In the UK, a combination of partial or full nationalisations, tax cuts and a commitment to government spending programmes has seen projections for public sector borrowing rise to around 8% of GDP over the next year or so. The consequent probability of rising gilt issuance must exert an upwards drag on gilt yields, though this has so far been overwhelmed by the flight to safety. So far, the more tangible effects of the UK's difficult economic circumstances have been sterling's falls of 26% and 23% against the dollar and euro respectively over the course of 2008. INVESTMENT PERFORMANCE Against this background of stress in the real economy, dysfunctional credit markets and general risk aversion, the share prices of small companies struggled. As already noted, the HGSC (XIC)'s total return of negative 40.8% was the second worst since its inception in 1955. With the FTSE All-Share's 29.9% decline, large companies fared relatively well: a much greater exposure than their smaller peers to the high-profile casualties in banks and commodities was offset by the benefit of higher weightings in resilient parts of the market such as utilities and pharmaceutical companies. The subsequent paragraphs, together with the table, provide an analysis of ASCoT's relative performance. * The weakness within the small company universe was widespread: the HGSC (XIC) entered 2008 with 509 constituents; of those, only 68 managed a positive total return in 2008. In order to achieve this feat, it helped to be on the receiving end of M&A activity: 34 of these companies received bids, mostly in the first half of the year before credit markets seized up in the third quarter. ASCoT, which entered the year with 100 companies in its portfolio, had holdings in 18 of the 68 companies noted above. Benefiting from active management, it had holdings in another nine companies that achieved a positive total return. As described in greater detail below, ASCoT did well from M&A activity. PERFORMANCE ATTRIBUTION ANALYSIS 12 Months to 31 December 2008 Basis Points Stock Selection 23 Sector Selection 350 ---- Attributable to the portfolio of investments 373 (calculated on a mid-price basis) Impact of mid-price to bid-price (32) Purchase of Ordinary Shares 29 Cash/gearing (186) Management Fee charged (net of the VAT refund) (59) Other expenses (7) ---- Total Attribution 118 Note: 100 basis points = 1%. Total attribution is the difference between the total return of the net asset value and the Benchmark Index (i.e. net asset value = -39.65%; Benchmark Index = -40.83%; difference is 1.18% being 118 basis points). * The negative returns from equities in 2008 clearly formed an unfavourable backdrop for a geared investment trust. A precise quantification of the drag to ASCoT's relative performance from its gearing is given in the `Cash/gearing' line in the preceding table. From a very short term viewpoint, the utilisation of even a modest amount of debt may be considered ill-timed. However, your Managers contend that decision should be assessed over a longer period of time and within the context of their value investment philosophy. By the late second quarter, small companies' valuations were already at levels that appeared attractive in relation to their own history, to large companies and to bonds. At that stage, your Managers were already anticipating a decline in earnings, consistent with a recession, but believed that much of this had already been built into valuations. However, through the second half of the year, the fundamental outlook has seen further deterioration and prices have adjusted further. The valuations now on offer are examined in detail in the `Investment Outlook' section of this report. * Stock selection made a small positive contribution, though this was overshadowed by a strong showing from sector selection to produce ASCoT's overall out-performance at the portfolio level. Your Managers have not given up on their fundamentally driven, bottom-up approach to investment! Behind the contribution from sector selection was a large under-weight position in the commodities sectors (Industrial Metals, Mining and Oil & Gas), which performed extremely poorly. Within the small company universe, the constituents of these sectors are typically involved in exploration and development of resources and, consequently, seldom generate cash. This positioning was motivated less by an insight into the commodities prices themselves, which would have been a top-down consideration, than by the lofty valuations of the individual stocks on offer within these sectors. These stocks were frequently priced for an improbable rate of exploration success, on top of some potentially heroic assumptions about the underlying commodity price. So, this positioning is essentially driven by bottom-up considerations, although the attribution calculation drags most of the benefit into sector selection. * At the interim stage, the portfolio's bias to businesses with overseas profit streams was noted. This proved advantageous, but the benefit was substantially confined to the first half. Through the third quarter, the logic was undermined as it became clear that the implications of the credit crisis were not confined to the US and UK: the global economy, if not entering recession, is at least undergoing a meaningful deceleration. The problems facing the capital goods arena were highlighted by a spate of trading statements from companies around the world that warned of an extremely sharp contraction in demand in the fourth quarter. From the portfolio's point of view, the valuations of its capital goods holdings in many cases appear already to be discounting a sharp decline in profits. However, at the margin, your Managers have been tilting the portfolio back towards the domestic economy, adding to holdings in the Media, Household Goods, Construction & Materials and General Retailers sectors. Behind this shift, which has been undertaken tentatively, are the low valuations of businesses within these sectors together with a contention that these businesses will be among the first to see a pick-up in profitability, when the recovery comes. * In a diversified collection of small companies, it is inevitable that during recession some will see their profitability decline to a level that will challenge banking covenants. Reflecting this risk, the portfolio retains the bias to companies with strong balance sheets that was noted in the interim report. This defensive positioning, which is influenced by the parlous state of the credit markets, has been beneficial to ASCoT's performance and remains very much in place: 34% of the portfolio is invested in companies with net cash on their balance sheets; at the other extreme, 9% of the portfolio sits in companies whose net debt to EBITDA ratios exceed three times. Where net debt is a feature, the current emphasis is on the tenure of funding from the banks, rather than the interest rate margin payable over LIBOR. Margins have been rising extravagantly as banks seek to restore their own profitability: 100 basis points a year ago might now be 300 basis points. The alternative to accepting these new terms would be worse for shareholders. * As already noted, M&A activity was prevalent in the first half of the year but tailed off substantially in the second. The credit markets in effect closed during the third quarter and those companies with sufficiently strong balance sheets to contemplate acquisitions are often being discouraged from doing so for the time being by investors, your Managers included. Therefore, with rescue rights issues becoming common, de-equitisation, which describes the replacement of equity financing with debt financing and which has provided an underpinning to UK equity valuations in recent years, has run out of steam. ASCoT benefited from the completion of nine bids for its holdings over the year, though all those were completed before October's turmoil. Exit valuations were on the whole high, typically over 15x EV/EBIT, though trended downwards as the year wore on. Two holdings received bids in the second half; these had yet to complete at the year end. As an indication of the change in attitudes, ten companies within the portfolio received approaches through the year but subsequently saw the talks ended. * As described in the `Investment Outlook' section of this report, your Managers believe that dividend yield will make a crucial contribution to forthcoming equity returns. Despite last year's deteriorating trading environment and rising uncertainty, the dividend payments from ASCoT's investments were robust. Of ASCoT's 93 holdings at the year end, it was the policy of 15 not to pay a dividend, while another two had started paying a dividend only in 2008, rendering year on year comparisons meaningless. Of the remaining 76, nine cut their dividends, a further seven held them unchanged and 60 reported increases. The median company within the 76 raised its dividend payment by 10%. This rate of growth is considerably ahead of that achieved by UK equities over the longer term and given present economic challenges is extremely unlikely to be sustained in 2009. It should be noted that the median figure does not necessarily reflect ASCoT's actual receipts, since the portfolio is actively managed and a specific rate of dividend growth is not targeted. INVESTMENT OUTLOOK Coming out of a year of wrenching declines in equity prices, it is difficult but necessary to take a step back in order to survey the opportunity base with a degree of objectivity. The easiest observation to make is that the de- leveraging process has to continue and that the present recession is, regrettably, an essential part of it. Trading conditions are therefore set to worsen in 2009, and it will take time for banks to repair their balance sheets and pass on the benefit of lower interest rates to the private sector. Despite the fillip of a weak sterling, profits will therefore fall. A decline of at least 40% is not out of the question, which would put the present downturn roughly on a par with that of the early 1990s. Gloomier scenarios are being painted by some commentators, with a replay of the 1930s depression sometimes cited. Given the extraordinary breadth and depth of remedial actions taken by monetary and fiscal authorities, your Managers suspect that a re-run of the deflationary 1930s is unlikely. However, this is not to say that policy errors have not been made: for example, a different sleuth of bears reckons that the extreme monetary easing is foisting a substantial inflation problem in the future, which would conveniently erode the present burden of debt and ask serious questions of currently very low government bond yields. At the very least, it would seem sensible to expect lower returns on equity in the future in an environment of scarcer debt funding, greater regulation and, eventually, higher taxes. Profits probably commenced their decline in the second half of 2008. It will in all likelihood not fit conveniently into one calendar year, so it makes sense to plan for a trough in profitability some time in 2010. Meetings with company management teams can throw little light on the timing of the inevitable recovery. Instead, the focus has to be on attempting to assess whether the businesses will be around to benefit from the upturn. Scope to cut costs and balance sheet resilience, preferably to the extent of having net cash, are therefore crucial. Also important is the concept of being `paid to wait'. Given the uncertain duration of the downturn, investors can be rewarded for their faith in a company through the consistent payment of a dividend. Dividend yields have accounted for the majority of the real return from UK equities of around 5.1% over the long term. High yields presently abound in the small company universe, with the average from the HGSC (XIC) being 5.9%, the first time that it has exceeded the yield on ten year gilts since 1974. Some of these yields will prove illusory as cuts to underlying dividends are made. It is a focus for your Managers at the current time to minimise the effects of such reductions, and to persuade company boards that cuts motivated by fashion, or by the argument that the market expects double-digit yields to be cut, are unacceptable. The historic yield from ASCoT's portfolio at the year end was 5.3%. In planning for 2009, your Managers have anticipated a number of dividend cuts. Importantly, the portfolio is not reliant on a small number of particularly high yielding companies to generate its income: double-digit yielders on a forecast basis account for less than 4% of the portfolio, while 38% is invested in companies with forecast yields between 2.5% and 5%. Another 15% of ASCoT's portfolio is represented by companies that do not currently pay a dividend. With the top ten income contributors accounting for less than 30% of total forecast income for 2009, your Managers are hopeful that ASCoT's dividend experience may prove relatively resilient in what will be a very difficult year. Equity market valuations are presently very low against government bonds and against their own history. The FTSE All-Share ended 2008 valued on a yield of 4.5% and a PE of 7.3x. Valuations in the small company world are more extreme. At 6.4x, the historic PE ratio is back to the levels of the early 1980s. The average PE over the last 30 years, a period covering two other recessions, has been almost 13x. So, profits could halve and equities would still look reasonably valued against their history. The other dimension to take into account is recovery: the stockmarket will anticipate a pick-up before profits themselves start to grow. Thus it can take stocks to high multiples of depressed historic earnings. A relevant example is 1993, when the HGSC (XIC) rose by almost 42%, moving the historic PE up to over 18x, despite earnings continuing to fall in that year. 31 December 31 December 2008 2007 Characteristics ASCoT Benchmark ASCoT Benchmark Number of Companies 93 495 100 509 Weighted Average Market #259m #442m #439m #577m Capitalisation Price Earnings Ratio 6.0x 6.4x 13.1x 11.7x (Historic) Net Dividend Yield 5.3% 5.9% 2.6% 2.9% (Historic) Dividend Cover (Historic) 3.1x 2.6x 2.9x 2.9x As the table above demonstrates, the portfolio offers better value than the HGSC (XIC). Perhaps the most notable aspect of its valuation is that it could quite easily have been brought down further had your Managers not chosen to eschew a grouping of often sizeable companies within the benchmark that trade on exceptionally low multiples, driven by high levels of debt and substantial defined benefit pension schemes. At some point it will be appropriate to embrace these highly geared businesses, but with the trading environment still under pressure it seems appropriate not to pursue both operational and financial gearing. Another indication of value within the portfolio comes from its average EV/EBIT multiple, a measure used in the context of corporate activity. At 5.6x, it is at a significant discount to the multiples of around 15x at which deals were being done earlier in the year. To be fair such levels of valuation may be considered an aberration, born of an M&A culture that had become too reliant on cheap and freely available debt. Nevertheless, the portfolio stands at a significant discount to the longer run average of around 10x that has been more typical over ASCoT's lifetime. So, when the M&A market opens again, your Managers are confident that ASCoT can benefit. To state the obvious, to a value investor at least, the probability of securing a good return from equities over the medium term is increased when starting from depressed valuations. Your Managers are thus optimistic on the basis of prevailing valuations but acknowledge that stockmarkets can overshoot in either direction. Therefore, the duration of the present bear market is tough to call. That said, sentiment can turn remarkably swiftly once there is the whiff of recovery in the air. Timing that change in sentiment to the month or even the quarter requires a large dose of luck. Accordingly, given the characteristics of the small company universe, it is necessary to start positioning the portfolio early. This pragmatism was an important motivation in ASCoT's decision to deploy a modest amount of gearing earlier in the year and, indeed, in the more recent cautious reorientation of the portfolio to domestic cyclical sectors. There is, however, a balance to be struck. Strong balance sheets and a conservatively structured income profile afford ASCoT resilience, which allows it to look beyond the short term and be in a position to benefit from the upturn when it comes. Aberforth Partners LLP Managers 27 January 2009 DIRECTORS' RESPONSIBILITY STATEMENT Each of the Directors confirm to the best of their knowledge that: (a) the financial statements, which have been prepared in accordance with applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and (b) the Annual Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties it they faces. On behalf of the Board David R Shaw Chairman 27 January 2009 PORTFOLIO INFORMATION Thirty Largest Investments Valuation % of as at Total 31 December Net 2008 Assets Business Activity No Company #'000 1 Hiscox 18,065 4.3 Insurance 2 Greggs 16,836 4.0 Retailer of sandwiches, savouries and other bakery products 3 Hampson Industries 16,496 3.9 Aerospace and automotive 4 Robert Wiseman 11,919 2.8 Processing and distribution of milk Dairies 5 Beazley Group 11,696 2.8 Insurance 6 e2v technologies 11,607 2.7 Manufacture of electronic components and sub-systems 7 Domino Printing 11,454 2.7 Manufacture of industrial printing Sciences equipment 8 BSS Group 11,144 2.6 Distribution of plumbing supplies & tools 9 Brown (N.) Group 9,874 2.3 Home shopping catalogue retailer 10 RPC Group 9,325 2.2 Manufacture of rigid plastic packaging Top Ten Investments 128,416 30.3 11 Spectris 9,210 2.2 Manufacture of precision instrumentation and controls 12 Delta 9,133 2.2 Galvanising, manganese products and industrial supplies 13 Wilmington Group 9,040 2.1 B2B publishing and training 14 Spirax-Sarco 8,795 2.1 Engineering Engineering 15 Interserve 8,745 2.1 Facilities, project & equipment services 16 Phoenix IT Group 8,662 2.0 IT services 17 Axis-Shield 8,433 2.0 in-vitro diagnostic testing 18 Halfords Group 8,388 2.0 Retailer of auto, leisure and cycling products 19 Anite 8,080 1.9 Software and related services 20 CSR 7,544 7.8 Fabless semiconductors Top Twenty Investments 214,446 50.7 21 Kofax 7,383 1.7 Software and related services 22 Bellway 7,377 1.7 Housebuilder 23 RM 7,352 1.7 IT services for schools 24 Keller Group 7,274 1.7 Ground and foundation engineer 25 Headlam Group 6,759 1.6 Distribution of floorcoverings 26 Collins Stewart 6,647 1.6 Stockbroker and private client fund manager 27 Holidaybreak 6,569 1.6 Holiday, travel and educational services 28 Evolution Group 6,474 1.5 Stockbroker and private client fund manager 29 Communisis 6,341 1.5 Marketing communication services 30 Shanks Group 6,089 1.4 Waste management Top Thirty Investments 282,711 66.7 Other Investments (63) 181,716 42.8 Total Investments 464,427 109.5 Net Current (40,312) (9.5) Liabilities Total Net Assets 424,115 100.0 The Income Statement, Balance Sheet, Reconciliation of Movements in Shareholders' Funds and summary Cash Flow Statement are set out below:- INCOME STATEMENT For the Year ended 31 December 2008 (audited) 12 months to 12 months to 31 December 2008 31 December 2007 Revenue Capital Total Revenue Capital Total # 000 # 000 # 000 # 000 # 000 # 000 Realised (losses)/gains - (9,027) (9,027) - 111,634 111,634 on sales Decrease in fair value - (297,703) (297,703) - (209,320)(209,320) ------ ------- ------- ------ ------- ------ Net losses on investments - (306,730) (306,730) - (97,686) (97,686) Dividend income 23,684 7,387 31,071 19,477 877 20,354 Interest income 1,152 - 1,152 258 - 258 Other income 54 - 54 15 - 15 Investment management (1,636) (2,727) (4,363) (1,094) (1,823) (2,917) fee Other expenses (489) (2,880) (3,369) (438) (4,052) (4,490) ------ ------- ------- ------ ------- ------ Return on ordinary 22,765 (304,950) (282,185) 18,218 (102,684) (84,466) activities before finance costs and tax Finance costs (526) (877) (1,403) (60) (99) (159) ------ ------- ------- ------ ------- ----- Return on ordinary 22,239 (305,827) (283,588) 18,158 (102,783) (84,625) activities before tax Tax on ordinary activities (16) - (16) - - - ------ ------- ------- ------ ------- ------ Return attributable to equity shareholders 22,223 (305,827) (283,604) 18,158 (102,783) (84,625) ====== ======= ======= ====== ======= ====== Returns per Ordinary 22.75p (313.12p) (290.37p) 18.38p (104.03p) (85.65p) Share The Board declared on 27 January 2009 a second interim dividend of 13.0p per Ordinary Share (2007 - 10.5p). The Board also declared on 18 July 2008 a first interim dividend of 6.0p per Ordinary Share (2007 interim dividend of 4.7p). NOTES 1. The total column of this statement is the profit and loss account of the Company. All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the period. A Statement of Total Recognised Gains and Losses is not required as all gains and losses of the Company have been reflected in the above statement. 2. The calculations of revenue return per Ordinary Share are based on net revenue of #22,223,000 (2007 - #18,158,000) and on Ordinary Shares of 97,670,037 (2007 - 98,809,788). The calculations of capital return per Ordinary Share are based on net capital losses of #305,827,000 (2007 - net capital losses of #102,783,000) and on Ordinary Shares of 97,670,037 (2007 - 98,809,788). 3. The 2008 investment management fee expense incorporates the repayment of VAT paid on investment management fees amounting to #707,000 (2007 - #4,689,000), of which #265,000 (2007 - #1,758,000) has been credited to revenue and #442,000 (2007 - #2,931,000) has been credited to capital. ? SUMMARY RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS For the year ended 31 December 2008 (audited) 2008 2007 # 000 # 000 Opening shareholders' funds 735,021 833,331 Return on ordinary activities after (283,604) (84,625) taxation Equity dividends paid (16,189) (13,685) Purchase of Ordinary Shares (11,113) - -------- -------- Closing shareholders' funds 424,115 735,021 ======= ======= NOTES 1. The movements in this statement represent the profit and loss of the Company and the equity dividends paid. BALANCE SHEET As at 31 December 2008 (audited) 31 December 31 December 2008 2007 # 000 # 000 Fixed assets: Investments at fair value through 464,427 710,966 profit or loss -------- -------- Current assets Debtors 2,278 6,354 Cash at bank - 18,018 -------- -------- 2,278 24,372 Creditors (amounts falling due (42,590) (317) within one year) -------- -------- Net current assets (40,312) 24,055 -------- -------- Total Net Assets 424,115 735,021 ======= ======= Capital and reserves: equity interests Called up share capital (Ordinary Shares) 969 988 Reserves: Capital redemption reserve 19 - Special reserve 186,192 197,305 Capital reserve 198,224 504,051 Revenue reserve 38,711 32,677 -------- -------- Total Shareholders' Funds 424,115 735,021 ======= ======= Net Asset Value per Ordinary Share 437.68p 743.87p NOTES As at 31 December 2008, the Company had 96,900,000 Ordinary Shares (2007 - 98,809,788). During the year, the Company bought in and cancelled 1,909,788 shares (2007: nil) at a total cost of #11,113,000 (2007: nil). No further shares have been bought back for cancellation between 31 December 2008 and 27 January 2009. SUMMARY CASH FLOW STATEMENT For the year ended 31 December 2008 (audited) 12 months to 12 months to 31 December 2008 31 December 2007 # 000 # 000 # 000 # 000 Net cash inflow from operating 31,520 12,296 activities Taxation (16) - Returns on investment and (1,381) (152) servicing of finance Capital expenditure and financial investment Payments to acquire investments (260,020) (311,732) Receipts from sales of 198,007 300,737 investments -------- ------- Net cash outflow from capital expenditure and financial investment (62,013) (10,995) -------- ------- (31,890) 1,149 Equity dividends paid (16,189) (13,685) -------- ------- (48,079) (12,536) Financing Purchase of Ordinary Shares (11,113) - -------- ------- Decrease in cash (59,192) (12,536) ======== ======= NOTES TO THE FINANCIAL STATEMENTS 1. ACCOUNTING STANDARDS????????? The financial statements have been prepared under the historical cost convention, as modified to include the revaluation of investments and in accordance with applicable accounting standards and the AIC's Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trust' issued in January 2009. The total column of the Income Statement is the profit and loss account of the Company. All revenue and capital items in the Income Statement are derived from continuing operations. No operations were acquired or discontinued in the period.????????? The same accounting policies used for the year ended 31 December 2007 have been applied.? 2. INVESTMENT MANAGEMENT FEE For the year to 31 December 2008 Revenue Capital Total # 000 # 000 # 000 Investment management fee 1,901 3,169 5,070 VAT paid thereon - - - VAT refund (265) (442) (707) ------ ------ ------ Total for the year to 31 December 1,636 2,727 4,363 2008 ====== ====== ====== For the year to 31 December 2007 Revenue Capital Total # 000 # 000 # 000 Investment management fee 2,516 4,194 6,710 VAT paid thereon 336 560 896 VAT recoverable (1,758) (2,931) (4,689) ------ ------ ------ Total for the year to 31 December 1,094 1,823 2,917 2007 ====== ====== ====== The VAT recovered during the year to 31 December 2008 above represents the repayment of VAT incurred in respect of management fees paid between 1991 and 1996. The VAT recoverable recognised during the year to 31 December 2007 above represents the repayment of all VAT paid on investment management fees since 1 January 2001 (including all VAT previously offset by the Managers). 3.DIVIDENDS????????? Year to Year to 31 December 2008 31 December 2007 ????? #000 #000 Amounts recognised as distributions to equity holders in the period: Second interim dividend of 10.50p for the year ended 10,375 9,041 31 December 2007 (2006: 9.15p) First interim dividend of 6.00p for the year 5,814 4,644 ended 31 December 2008 (2007: 4.70p) ------- ------ 16,189 13,685 ====== ====== The second interim dividend of 13.0p will be paid on 27 February 2009 to shareholders on the register on 6 February 2009. 4. RETURNS PER ORDINARY SHARE??????? The returns per Ordinary Share are based on: Year to Year to 31 December 2008 31 December 2007 ?????? #000? #000 Returns attributable to Ordinary Shareholders (283,604) (84,625) Weighted average number of shares in issue during the period 97,670,037 98,809,788 5. NET ASSET VALUES????????? The net assets and the net asset value per share attributable to the Ordinary Shares at each period end are calculated in accordance with their entitlements in the Articles of Association and were as follows:??? 31 December 31 December 2008 2007 ?????? #000 #000 Net assets attributable??? 424,115 735,021 ?????? Pence? Pence Net asset value attributable per Ordinary Share? 437.68? 743.87? ????????? As at 31 December 2008, the Company had 96,900,000 Ordinary Shares in issue (31 December 2007 - 98,809,788). During the year to 31 December 2008, the Company bought in and cancelled 1,909,788 shares at a total cost of #11,113,000.??????? 6. FURTHER INFORMATION The foregoing do not comprise statutory accounts (as defined in section 240(5) of the Companies Act 1985) of the Company. The statutory accounts for the year to 31 December 2007, which contained an unqualified Report of the Auditors under section 235 of the Companies Act, have been lodged with the Registrar of Companies and did not contain a statement required under section 237(2) or (3) of the Companies Act 1985. Certain statements in this announcement are forward looking statements. By their nature, forward looking statements involve a number of risks, uncertainties or assumptions that could cause actual results or events to differ materially from those expressed or implied by those statements. Forward looking statements regarding past trends or activities should not be taken as representation that such trends or activities will continue in the future. Accordingly, undue reliance should not be placed on forward looking statements. CONTACT: David Ross/Alistair Whyte, Aberforth Partners LLP, 0131 220 0733 Aberforth Partners LLP, Secretaries - 27 January 2009 ANNOUNCEMENT ENDS
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