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Black Rock investment trust

BlackRock Smaller Companies Trust plc Trading Update and second interim dividend

BlackRock Smaller Companies Trust plc (LON:BRSC) has today provided the following trading update and announcement of second interim dividend.

CHAIRMAN’S UPDATE

The Company’s annual results are normally released in May, with a final dividend paid in June.  For the year to 29 February 2020, the release of the Company’s audited results has been delayed due to a historic technical issue that has been identified in the Company’s Articles of Association. Whilst the issue should be of no significance in the context of the Company’s net asset value or financial position, your Board is consulting with its advisers to determine what, if any,  would be the appropriate remedial action to take.   Once the Board reaches a conclusion on this matter, the Company’s full results will be published, which is expected to occur on or around 30 June 2020.

In the meantime, I wanted to take this opportunity to provide some key financial metrics in respect of the year to 29 February 2020 and to update shareholders about the final dividend. I have also set out below the actions that your Board has taken since the financial year end to protect shareholder interests and maintain operational resilience through the extreme market volatility that has plagued investors in markets around the world as the COVID-19 crisis evolves.

OPERATIONAL SECURITY AND WELL BEING
The Board has been working closely with BlackRock and the Company’s key suppliers to minimise the risk that COVID-19 poses to the health and wellbeing of all those working on the management and administration of the Company. We have developed a series of regular updates to ensure that the Company’s operations are not affected and that established business continuity plans are appropriate and effective.

GEARING
The Board has reviewed the Company’s current range of borrowings and debt facilities which comprise the existing £15 million debenture which is due to expire in 2022; £25 million senior unsecured fixed rate private placement notes issued in May 2017 at a coupon of 2.74% maturing in 2037; and the new notes issued in December 2019 at a coupon of 2.41% maturing in 2044. Shorter-term variable rate funding consists of a £35 million three-year revolving loan facility with Sumitomo Mitsui Banking Corporation Europe Limited and an uncommitted overdraft facility of £10 million with Bank Of New York Mellon (International) Limited.

It continues to be the Board’s intention that net gearing will not exceed 15% of the net assets of the Company at the time of the drawdown of the relevant borrowings. Under normal operating conditions it is envisaged that gearing will be within a range of 0%-15% of net assets. The Company’s net gearing stands at 8.8% of net assets as at 2 June 2020. At the year end, the Company’s net gearing was 5.7% of net assets (2019: 4.9%).

Despite recent market falls, the Company has remained compliant with all financial covenants and still maintains ample headroom above the relevant thresholds. The Company’s borrowings are well within the range of gearing limits set by the Company’s investment guidelines and will, in our view, allow us to take advantage of emerging investment opportunities.

INVESTMENT PORTFOLIO CONSTRUCTION
Board members have maintained a regular dialogue with our portfolio manager to monitor the resilience of the portfolio and the actions that have been taken since the outbreak of the pandemic. Monthly updates by the portfolio manager continue to be provided and can be found on the Company’s website at www.blackrock.co.uk/brsc.

FOCUS ON WELL GOVERNED COMPANIES
Your Company’s investment team is very experienced and has available a wide range of resources dedicated to the UK smaller companies universe. Their history of investing in this sector has shown that one of the best strategies to deal with adverse economic and market conditions is to populate the portfolio with well-capitalised companies that have strong balance sheets and experienced, effective management teams. We believe that the Company’s portfolio is well diversified by sector and geography, with around half of the revenues from portfolio companies being generated from overseas.

THE FINANCIAL YEAR ENDED 29 FEBRUARY 2020
While it is understandable that we should be focused on recent market events, it is also important to look back over the year just passed. Your Company’s remarkable record continued last year as it outperformed the benchmark on an annual basis for over fifteen years. Over that period, the net asset value (NAV) per share has increased by over 600%, greatly outdistancing the benchmark increase of just over 145% (all calculations with income reinvested). The Company has also increased its dividends every year for over fifteen years; the compound annual increase in dividends paid over the last fifteen years has been 14% per annum.

PERFORMANCE
In the year under review the Company’s Net Asset Value per share increased by 11.7%1,2,3, outperforming its benchmark, the Numis Smaller Companies plus AIM (excluding Investment Companies) Index, which decreased by 1.4%1. Over the same period your Company’s share price increased by 11.6%1 to 1,484.00p per share compared with the FTSE AIM All Share Index which fell by 5.8%1, the FTSE 250 Index which rose by 0.8%1 and the FTSE 100 Index which fell by 7.0%1.

The table below demonstrates your Company’s consistent outperformance of its benchmark over the last fifteen years.



Performance to 29 February 2020
1 Year 
change 
3 Years 
change 
5 Years 
change 
10 Years 
change 
15 Years 
change 
NAV per share1, 2,311.7 26.1 66.1 317.7 458.4 
Benchmark1-1.4 -2.0 12.8 79.0 67.5 
Share price111.6 40.0 82.8 405.2 548.0 
NAV per share2,3 (with income reinvested)14.1 33.3 81.4 389.7 605.1 
Benchmark (with income reinvested)1.4 6.2 29.1 131.4 145.2 
Share price3 (with income reinvested)14.0 48.6 101.6 504.5 748.3 

1.    Percentages in Sterling terms without income reinvested.

2.    Debt at par.

3.    Alternative Performance Measure. An Alternative Performance Measure is a measure of performance or financial position that is not defined in applicable accounting standards and cannot be directly derived from the financial statements.

RETURNS AND DIVIDENDS
The Company’s revenue return per share for the year ended 29 February 2020 increased by 10.3% to 37.13p per share compared with 33.67p per share for the previous year.

Regular dividends from portfolio companies rose by 11.0%, while special dividends received were 4.2% higher than in the previous year.

In November 2019 the Board declared an interim dividend of 12.80p per share (November 2018: 12.00p per share). In normal operating circumstances, the Board would declare a final dividend in respect of the year ended 29 February 2020; however, given the rescheduled release date for our annual results and the delayed Company AGM which will now not be held before July 2020, the Board has decided to declare a second interim dividend in lieu of a final dividend. This will ensure that the payment timetable anticipated by shareholders can be met despite a later AGM date.  Accordingly, the Directors are pleased to announce the payment of a second interim dividend of 19.70p per share (2019: 19.20p per share), making a total for the year of 32.50p per share, an increase of 4.2% over the total dividends of 31.20p per share paid in the previous year. In determining the level of dividend the Board is mindful of ensuring that the Company retains a buffer of revenue reserves for future years. Your Company has now increased its annual dividend every year since 2003.

The second interim dividend will be paid on 29 June 2020 to shareholders on the register on 12 June 2020; the ex-dividend date is 11 June 2020.

DISCOUNT
The Board monitors the Company’s share rating closely, and recognises the importance to shareholders that the Company’s shares do not trade at either a significant premium or discount to the underlying NAV per share.  Over the course of the year the Company’s discount narrowed steadily, with its shares eventually moving to trade at a premium for significant periods of time, and trading at an average discount of 2.9% to NAV (with debt at fair value) over the full year (compared to an average discount of 7.9% for the year to 28 February 2019). As markets descended into turmoil following the outbreak of COVID-19, the Company’s shares again moved to trade at a discount, which was 2.7% as at 1 June 2020.

SHARE ISSUANCE
During the financial year ended 29 February 2020, the Company issued 950,000 ordinary shares at an average price of 1,686.84p per share for a total consideration of £16 million.  The shares were issued at a premium to NAV with the objective of maintaining the Company’s share rating within a sensible range, and providing ongoing market liquidity in a manner that was accretive to shareholders. Since 29 February 2020, and up to the close of business on 2 June 2020, no additional shares have been issued.

At the forthcoming Annual General Meeting the Company will be seeking the authority to allot new ordinary shares, or sell ordinary shares from treasury, representing up to 10% of the Company’s issued ordinary share capital. 

OUTLOOK
Since the financial year end the Company’s NAV per share (as at 1 June 2020) has decreased by 10.8%1, against a decrease in the benchmark of 9.7%1, and the share price has fallen by 9.4%1.

The COVID-19 outbreak, and its rapid spread beyond China, has caused mounting concerns over global growth leading to a significant drop in stock markets around the world.  This volatility has created dislocations in market valuations that are not consistent with the long-term fundamentals of the stocks in which we invest; our portfolio management team remains attuned to the investment opportunities that may be presented by these dislocations in pricing. 

These are unprecedented times. The impact of COVID-19 is unpredictable and it is impossible at this stage to estimate its scale and duration. However, we believe that things will improve in time.   Whilst the outlook remains uncertain, the Investment Manager’s focus on financially strong businesses with robust balance sheets provides us with confidence that the Company’s portfolio is well placed to weather the storm. The Company’s investment strategy remains focused on quality growth investment opportunities in smaller companies, a style that has demonstrably worked for the long-term, and historically periods of sudden underperformance, such as this, have proven to be excellent investment opportunities.

RONALD GOULD
Chairman
3 June 2020

PERFORMANCE RECORD FOR THE YEAR ENDED 29 FEBRUARY 2020 (UNAUDITED)

29 February 2020 28 February 2019 Change % 
Performance
Net asset value per share (debt at par value)1,41,572.55p 1,407.88p +11.7 
Net asset value per share (debt at par value, capital only)1,41,548.57p 1,386.21p +11.7 
Net asset value per share (debt at fair value)1,2,41,556.41p 1,400.57p +11.1 
Numis Smaller Companies plus AIM (excluding Investment Companies) Index15,159.73 5,231.98 -1.4 
Ordinary share price1,484.00p 1,330.00p +11.6 
Year ended 
29 February 2020 
Year ended 
28 February 2019 
Change 
Revenue and dividends
Revenue return per share37.13p 33.67p +10.3 
Interim dividend per share12.80p 12.00p +6.7 
Second Interim/Final dividend per share19.70p 19.20p +2.6 
————— ————— ————— 
Total dividends paid and payable32.50p31.20p +4.2 
======== ======== ======== 
Assets
Total assets less current liabilities (£’000)847,423 716,287 +18.3 
Equity shareholders’ funds (£’000)767,873 674,089 +13.9 
Ongoing charges ratio3,40.7% 0.7% – 
Dividend yield42.2% 2.3% 
Gearing45.7% 4.9% 

1     Without income reinvested.

2      The basis of calculation for the fair value of the debt is as follows. The fair value of the 7.75% debenture stock using the last available quoted offer price from the London Stock Exchange as at 29 February 2020 was 121p per debenture (2019: 125p), a total of £18,150,000 (2019: £18,750,000). The fair value of the 2.74% loan note has been determined based on a comparative yield for UK Gilts for similar duration maturity and spreads, and as at 29 February 2020 equated to a valuation of 112.21p per note (2019: 97.78p), a total of £28,053,000 (2019: £24,445,000). The fair value of the 2.41% loan note has been determined based on a comparative yield for UK Gilts for similar duration maturity and spreads, and as at 29 February 2020 equated to a valuation of 106.14p per note (2019: nil), a total of £21,228,000 (2019: £nil).

3     Ongoing charges ratio calculated as a percentage of average shareholders’ funds and using operating expenses, finance costs, transaction costs and taxation, in accordance with AIC guidelines.

4     Alternative Performance Measure. An Alternative Performance Measure is a measure of performance or financial position that is not defined in applicable accounting standards and cannot be directly derived from the financial statements.

Sources: BlackRock and Datastream.

To learn more about the BlackRock Smaller Companies Trust plc please follow this link: blackrock.com/uk/brsc

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Disclaimer: Statements in this article should not be considered investment advice, which is best sought directly from a qualified professional.