Chelverton Growth Trust PLC

LEI: 213800I86P8BAE6UVI83

Half Yearly Report

For the six months ended 28 February 2022

The Directors announce the unaudited Half Yearly Report for the period 1 September 2021 to 28 February 2022.

Investment Objective and Policy

The Company's objective is to provide capital growth through investment in companies listed on the Official List and traded on the Alternative Investment Market ("AIM") with a market capitalisation at the time of investment of up to £50 million, which the Manager believes to be at a "point of change". The Company will invest in unquoted investments where it is believed that there is a likelihood of the shares becoming listed or traded on AIM or the investee company being sold. Its investment objective is to increase the net asset value per share at a higher rate than other quoted smaller company trusts and the MCSI Small Cap UK Index.

It is the Company's policy not to invest in any listed investment companies (including listed investment trusts).

At the Annual General Meeting held on 12 December 2019, Shareholders voted to amend the Company's Investment Policy to state that the Company:

•            may participate in a CEPS placing (if it were to have one);

•            will liquidate its various other investments when it is felt appropriate to do so;

•            will repay the outstanding Jarvis Loan; and

•            will pay all outstanding liabilities.

Investment Strategy

Investments are selected for the portfolio only after extensive research which the Investment Manager believes to be key. The whole process through which equity must pass in order to be included in the portfolio is very rigorous. Only a security where the Investment Manager believes that the price will be significantly higher in the future will pass the selection process. The Investment Manager believes the key to successful stock selection is to identify the long-term value of a company's shares and to have the patience to hold the shares until that value is appreciated by other investors. Identifying long-term value involves detailed analysis of a company's earnings prospects over a five-year time horizon.

The Company's Investment Manager is Chelverton Asset Management Limited ("CAM"), an investment manager focusing exclusively on achieving returns for investors based on UK investment analysis of the highest quality. The founder and employee owners of CAM include experienced investment professionals with strong investment performance records who believe rigorous fundamental research allied to patience is the basis of long-term investment success.

Chairman's Report

In the six months to 28 February 2022, the Net Asset Value per share increased by just under 1% to 58.02p. Although this performance shows only a modest uplift in value since my last report, relative to our benchmark MSCI Small Cap UK Index which declined by 15.42% it represents another period of outperformance.

On the 24 February Russia invaded Ukraine. As far as we are aware, this distressing situation has led to no material change in trading for the businesses we are invested in. Realistically, the combination of geo-political instability, inflationary pressures and higher interest rates will inevitability depress valuations in the short term. The assumption made is that this year will see a subdued level of macro-economic growth and investment.

I had expected that we would now be in a position to put forward plans as to how we proposed to return value to Shareholders.  However, with the heightened level of uncertainty, the Board feel that any proposals would severely undervalue the underlying assets of the Company.  We continue to review the situation and will produce our proposals when we are confident that the sensible value can be extracted. 

The Board believe that there is significant potential for improvement in the underlying investments and do not believe that it is in the Shareholders' interests to forego this upside for the convenience of resolving the future of the Company at this moment.   

I remain grateful to Chelverton Asset Management, the Investment Manager of the Company, who are waiving their management fee in its entirety, in addition, Ian Martin and I have also waived part of our fees.  The collective effect of these actions means that the expense ratio, whilst still high, a consequence of a very small sized Company, is much lower than it could have been. 

Financial Performance

Prior to the Russian invasion of Ukraine, the underlying performance of the investments had been encouraging with strong market sentiment towards UK publicly quoted equites, and in particular the small companies and micro-cap value companies, which were recovering well after the "Covid Period". Almost all this increase was eliminated by the invasion when sentiment turned negative reflecting the higher level of uncertainty.     

Over the same period, the AIM All-share index has declined by 19.54% and the share price has decreased from 59.5p to 43.0p. At the period end, the shares were trading at a discount of 25.89%.

Investments

CEPS is the largest investment in the Company and to remind Shareholders this is a diversified AIM traded holding company that owns majority shareholdings in three subsidiaries, and a significant minority in a fourth.  My fellow Board member, David Horner is Chairman of CEPS and has a similar sized shareholding as the Company.  CEPS is being built up by the growth of the underlying companies and by strategic "bolt-on" acquisitions.  

·      With the new management in place at Aford Awards for some 18 months there has been significant activity.  With a "self-help" programme of revamping the warehouse and production areas the business is now much more efficient and more importantly, can deliver more product from the same premises with the same staff.  This was important as three bolt-on acquisitions were made last year which have been relocated to the company's premises and integrated.  An additional much larger purchase has just been made which will make a significant contribution in the current year.   

·     Hickton Group, the fast-growing property services group, continues to develop and is highly cash generative and is therefore expected to repay its acquisition loans. 

·      Friedmans and Milano are starting to enjoy a return to normal trading as the economy and society begins to unlock.

·    The merger of Davis Odell and Vale Brothers has now been completed with one banking arrangement and a single accounting system.

All the CEPS businesses, in common with all other enterprises in the United Kingdom are experiencing rapidly increasing prices of materials.  In addition, a severe shortage, and a consequent rise in labour costs is also proving to be challenging.      

Touchstar has made further progress in the past six months with a positive trading statement at the end of January.  The company now has a very strong balance sheet with some 40% of its market value represented by cash. 

Petards is also expected to shortly produce its 2021 annual accounts showing a return to profitability.  A recent large buy-back and cancellation of its own shares demonstrates that the company has a strong balance sheet and that its Board considers the shares to be materially undervalued.  

Universe was taken over at 12p per share which represented a very healthy premium of 129%.  The purchaser was a business based in the United States. 

The saga at Main Dental Partners unfortunately continues with the appeal being brought by the previous managing director, James Main, being postponed until later this year.  This relates to a material claim for employment compensation that was judged in favour of the company.

La Salle Education ("La Salle"), a business involved in supplying schools with the modern mathematics syllabus via the internet has been deeply involved in providing services to many schools.  After a slow start, there are signs that market awareness is increasing leading to rising revenue streams.

Outlook

As I mention in the introduction, the trading climate is very uncertain due to the invasion of Ukraine, while China continues to grapple with containing the Coronavirus. The impact of these events is being closely felt all over Europe and the United States due to the globalisation of business over the past 30 years.  It might well be that we see a reversal of this trend over the next period which may well lead to price rises as the cost of securing supply chains increases.

We believe that the UK economy will recover once these macro themes become factored into business thinking.  The pressure on labour supply will be resolved over the medium term, via a drive towards increased productivity.  As part of the resolution of the labour shortage, employing older workers might be mutually beneficial for people struggling with low pensions and companies struggling to recruit.

Kevin Allen

Chairman

14 April 2022

Interim Management Report

The important events that have occurred during the period under review and the key factors influencing the financial statements are set out in the Chairman's Report. The Board considers that the principal risks and uncertainties facing the Company, remain the same as those disclosed in the Annual Report for the year ended 31 August 2021 on pages 14 and 15 and pages 55 and 56. These risks include, but are not limited to, market risk, discount volatility risk, regulatory risk, financial risk and liquidity risk.

Responsibility Statement

The Directors are responsible for preparing the unaudited Half Yearly Report in accordance with applicable law and regulations. The Directors confirm that to the best of their knowledge:

·      The condensed set of financial statements for the six months to 28 February 2022, has been prepared in accordance with FRS 104 "Interim Financial Reporting", gives a fair view of the assets, liabilities, financial position and profit of the Company; and

·      this Half Yearly Report includes a fair review of the information required by;

a)     rule 4.2.7R of the Disclosure and Transparency Rules being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

b)     rule 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the Company during that period; and any changes in the related party transactions described in the last Annual Report that could do so.

This Half Yearly Report was approved by the Board of Directors on 14 April 2022 and the above Responsibility Statement was signed on its behalf by:

Kevin Allen

Chairman

Portfolio Review

as at 28 February 2022

The Company's portfolio is set out below.

Portfolio Holdings

as at 28 February 2022

*  Sold during the period

Portfolio breakdown by sector and by index

as at 28 February 2022

Income Statement (unaudited)

for the six months to 28 February 2022

The total column of this statement is the Statement of Total Comprehensive Income of the Company prepared in accordance with Financial Reporting Standards ("FRS"). The supplementary revenue return and capital return columns are prepared in accordance with the Statement of Recommended Practice issued in April 2021 by the Association of Investment Companies ("AIC SORP").

All revenue and capital items in the above statement derive from continuing operations.

The revenue column of the Income Statement includes all income and expenses. The capital column includes the realised and unrealised profit or loss on investments and 75% of the management fee and finance costs charged to capital.

* With effect from 1 September 2020, the Investment Manager agreed to waive the entitlement to a fee.

** The return per Ordinary share is based on 5,460,301 (31 August 2021: 5,460,301; 28 February 2021: 5,460,301) shares, being the weighted average number of shares in issue during the period.

Statement of Changes in Equity (unaudited) 

for the six months to 28 February 2022

Statement of Financial Position (unaudited)

as at 28 February 2022

Statement of Cash Flows (unaudited)

for the six months to 28 February 2022

1 Accounting Policies

a) Statement of compliance

The Company's Financial Statements for the period ended 28 February 2022 have been prepared under UK Generally Accepted Accounting Practice (UK GAAP) and the Statement of Recommended Practice, 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' issued in April 2021 ('the SORP') by the Association of Investment Companies.

The Financial Statements have been prepared in accordance with the accounting policies set out in the statutory accounts for the year ended 31 August 2021.

b) Financial information

The financial information contained in this report does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The financial information for the period ended 28 February 2022 and 28 February 2021 have not been audited or reviewed by the Company's Auditor pursuant to the Auditing Practices Board guidance on such reviews. The information for the year to 31 August 2021 has been extracted from the latest published Annual Report and Financial Statements, which have been lodged with the Registrar of Companies, contained an unqualified auditors' report and did not contain a statement required under Section 498 (2) or (3) of the Companies Act 2006.

c) Going concern

The Company's assets consist mainly of equity shares in companies which, in most circumstances are realisable within a short timescale. The Directors believe that the Company has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the accounts. In assessing the Company's ability to continue as a going concern, the Board has fully considered the impact of the war in Ukraine and the continuing impact of the Covid-19 pandemic.

2 Income

3 Taxation

The tax charge for the six months to 28 February 2022 is nil (year to 31 August 2021: nil; six months to 28 February 2021: nil).

The Company has an effective tax rate of 0% for the year ending 31 August 2022. The estimated effective tax rate is 0% as investment gains are exempt from tax owing to the Company's status as an Investment Trust and there is expected to be an excess of management expenses over taxable income.

4 Investments

Fair value hierarchy

In accordance with FRS 102 and FRS 104 the Company must disclose the fair value hierarchy of financial instruments.

The fair value hierarchy consists of the following three classifications:

Level 1 - Valued using quoted prices in active markets for identical assets or liabilities. This is usually the bid price.

Level 2 - Valued by reference to valuation techniques using observable inputs other than quoted prices included within  Level 1.

Level 3 - Valued by reference to valuation techniques using inputs that are not based on observable market data.

Details of the Company's financial instruments are shown in the Portfolio Review including financial instruments which fall into Level 3 shown under the section heading "Unquoted".  A summary reconciliation of the fair value movements of Level 3 investments is shown in the table above.

Financial assets at fair value through profit or loss 

5 Short term loans

On 4 June 2018, the Company entered in to a £600,000 loan agreement with Jarvis Securities plc. Interest is payable monthly in arrears at the rate of 4.5% above the Bank of England base rate.

The loan was drawn down on 4 June 2018. Partial repayments were made on 11 May 2020 of £280,000, on 2 March 2021 of £220,000 and on 7 February 2022 of £50,000. At the period end a balance of £50,000 was outstanding. The loan is secured on the assets of the Company and is repayable on demand.

On 16 September 2021, the Company entered in to a £165,000 unsecured interest free loan agreement with Chelverton Asset Management Limited. At the period end a balance of £165,000 was outstanding.

6 Net asset value

The basic net asset value per Ordinary share is based on net assets of £3,168,000 (31 August 2021: £3,146,000; 28 February 2021: £2,708,000) and on 5,460,301 Ordinary shares (31 August 2021: 5,460,301; 28 February 2021: 5,460,301) being the number of Ordinary shares in issue at the period end. No shares are held in Treasury.

7 Related party transactions

Under the terms of the agreement dated 28 June 2001, the Company has appointed Chelverton Asset Management Limited to be the Investment Manager. Mr Horner, a Director of the Company, is also a director of Chelverton Asset Management Limited and chairman of CEPS in which the Company holds an investment as set out above. Mr Martin is the chairman of Touchstar in which the Company holds an investment as set out above.

At 28 February 2022, there was £nil (31 August 2021: £nil; 28 February 2021: £nil) payable to the Investment Manager.

As stated in note 5, on 16 September 2021, the Company entered in to a £165,000 unsecured interest free loan agreement with Chelverton Asset Management Limited. At the period end a balance of £165,000 was outstanding.

The three Directors also have individual holdings in Chelverton Asset Management Holdings, a company which has Mr Horner as a director. The Directors' holdings are detailed below.

Information about the Company can be obtained at the Investment Manager's website at www.chelvertonam.com.  Neither the contents of the manager's website nor the contents of any website accessible from hyperlinks on this announcement (or any other website incorporated into, or forms part of this announcement.