BlackRock Smaller Companies Trust Plc - Half-year Report

BLACKROCK SMALLER COMPANIES TRUST plc

(LEI: 549300MS535KC2WH4082)

Half yearly financial announcement of results in respect of the six months ended 31 August 2024

Performance Record

1 Without dividends reinvested.

2 Total return basis with dividends reinvested.

3 The change in equity shareholders’ funds represents the portfolio movements during the period and dividends paid.

4 Alternative Performance Measures, see Glossary contained within the Half Yearly Financial Report. Full details setting out how calculations with dividends reinvested are performed are set out in the Glossary contained within the Half Yearly Financial Report.

5 Ongoing charges ratio calculated as a percentage of average daily net assets and using the management fee and all other operating expenses, excluding finance costs, direct transaction costs, custody transaction charges, VAT recovered, taxation, prior year expenses written back and certain non-recurring items in accordance with AIC guidelines.

Chairman’s Statement for the six months ended 31 August 2024

Dear Shareholder

I am pleased to present to shareholders the half yearly financial report for the six months ended 31 August 2024.

Performance
Investor sentiment and risk appetite, appear to have improved during the six month period ended 31 August 2024 and UK equity markets continued their upward trend. Market performance has been supported by a more benign economic backdrop of falling inflation, lower cost of borrowing, rising consumer confidence, high employment and strong wage growth. These factors have been positive for our asset class and this momentum has been reflected in the performance of our portfolio in the first six months of our financial year.

The Company’s net asset value (NAV) rose by 13.9%1,2,3 over the period under review, to 1,684.43p per share, outperforming the Company’s benchmark, the Deutsche Numis Smaller Companies plus AIM (excluding Investment Companies) Index, which rose by 13.2%1,3 over the same period. The Company’s share price rose by 17.0%1,3 to 1,524.00p per share over the same period. Looking at the broader market environment, the FTSE 100 Index rose by 12.5%1 over the period, the FTSE 250 Index rose by 12.6%1 and the FTSE All Share Index rose by 12.6%1. The performance of both the NAV and share price over the longer term are illustrated in the table below.

1 Percentages in Sterling terms with dividends reinvested.

2 Debt at fair value.

3 Alternative Performance Measure, see Glossary contained within the Half Yearly Financial Report.

Returns and dividends
Dividend revenue from portfolio companies increased this period, with the Company’s revenue return per share for the six months ended 31 August 2024 up by 9.7% to 27.54p per share (compared to 25.11p revenue return per share for the six months to 31 August 2023). After adjusting for the impact of special dividends received, which amounted to 1.45p per share (31 August 2023: 2.02p per share), regular dividend income from portfolio companies increased by 11.4% compared to 2023 levels.

The Board is mindful of the importance of our dividend to shareholders. The Board is also cognisant of the benefits of the Company’s investment trust structure which enables it to retain up to 15% of total revenue each year to build up reserves which may be carried forward and used to pay dividends during leaner times. The Company has substantial distributable reserves (£703.3 million as at 31 August 2024, including revenue reserves of £18.9 million). To put this into context, the current level of annual dividend distribution based on dividends declared in respect of the year ended 29 February 2024 amounted to £19.9 million. Accordingly, the Board is pleased to declare an interim dividend of 15.50p per share (2023: 15.00p per share) representing an increase of 3.3% over the previous interim dividend. The interim dividend will be paid on 4 December 2024 to shareholders on the Company’s register on 1 November 2024. The Board continues to monitor the Company’s income levels and projected future dividend income streams closely as the year proceeds and will make an assessment in respect of the final dividend in due course, noting that it has the ability to utilise revenue reserves should it deem this appropriate.

Gearing
The Company had the following borrowing facilities in place: long-term fixed rate funding in the form of a £25 million senior unsecured fixed rate private placement notes issued in May 2017 at a coupon of 2.74% with a 20 year maturity, £20 million senior unsecured fixed rate private placement notes issued in December 2019 at a coupon of 2.41% with a 25 year maturity and £25 million senior unsecured fixed rate private placement notes issued in September 2021 at a coupon of 2.47% with a 25 year maturity. Shorter-term variable rate funding consisted of an uncommitted overdraft facility of £60 million with The Bank of New York Mellon (International) Limited with interest charged at SONIA plus 100 basis points.

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. During the period net gearing ranged between 10.5% to 12.8%. The Company’s net gearing stands at 10.9% of net assets as at 22 October 2024, well within our target range.

Management of share rating
During the period, the Company’s shares traded at an average discount to NAV (with debt at fair value) of 10.5%. The discount ranged between 5.7% and 14.1% and ended the period at 9.5%. The Company’s shares were trading at a discount of 12.7% to NAV (with debt at fair value) as at close of business on 22 October 2024. During the period the Company bought back a total of 220,000 ordinary shares for a total consideration of £2,968,000 to be held in treasury.

The Board believes that the share buyback activity undertaken has helped reduce the volatility in our share rating, which currently stands at 12.7% compared to an AIC UK Smaller Companies sector average of 12.2%. As we navigate these more volatile and uncertain markets, your Board will continue to monitor the Company’s share rating and may deploy its powers to buyback the Company’s shares where it believes that it is in shareholders’ long-term best interests to do so. Shares are only bought back at a discount to NAV which ensures that these transactions are accretive to the NAV per share and enhance NAV returns for shareholders.

Since the period end and as at the date of this report, the Company has not bought back any shares. The share buyback activity undertaken from 1 March 2024 contributed 0.1% to the NAV per share return over this period.

Outlook
Since the period end, and up until the close of business on 22 October 2024, the Company’s NAV per share fell by -4.4%1,2 and the share price decreased by -7.7%, whilst the benchmark fell by -2.6%1.

The smaller company landscape in the UK is truly diverse, with a wide range of sectors represented and a large number of companies within our target universe. Given our bottom-up investment approach, this is a fertile environment for active stockpickers investing for long-term growth.

There are clearly a range of uncertainties impacting the current business outlook, economic, political and geopolitical. While these uncertainties make portfolio decisions more challenging, they also give our managers opportunities to identify and select portfolio companies they see as strong performers for the future. Lower interest rates are already helping an improvement in business confidence while better economic policy clarity will be important for short-term market sentiment.

Unemployment remains low, balance sheets remain strong, inflation is falling (slower than we would like) and consumer confidence is improving. This backdrop gives us more confidence that the earnings outlook for our portfolio of companies is broadly positive although not with the level of robustness we had originally hoped. The new government’s policies are unfortunately proving to be less clear than expected and all eyes are on the upcoming budget and the associated tax changes that may emerge. In the short term at least, this is limiting the rate of improvement we had hoped in sectors that have been important to our portfolio. Investor flows into the UK had markedly improved after the July election but those flows have since fallen away as investor confidence has receded, at least temporarily. Despite the hopes of many investors, the new government has committed too many “own goals” and markets will need more substantive information on developing policies before they again show signs of real confidence.

Our Portfolio Manager’s focus on financially strong companies with innovative and disruptive business models and market leading offerings should, over time, see a return of the strong and consistent investment performance to which our shareholders have become accustomed. But the current environment is unsettled and there have been some earnings disappointments as well. Your Board remains supportive of our current approach but the near-term road ahead, like the real world, will have some tricky potholes.

If shareholders would like to contact me, please write to BlackRock Smaller Companies Trust plc, Exchange Place One, 1 Semple Street, Edinburgh EH3 8BL marked for the attention of the Chairman.

RONALD GOULD
Chairman
24 October 2024

Investment Manager’s Report for the six months ended 31 August 2024

Market Review
I always find the start of these reports difficult to write; where should the emphasis be, what are the important events that have shaped markets, are there one or two key facts that should be discussed before all others in order to set the scene? The first six months of this financial year have offered so much that it is even more challenging than normal to find a pithy introduction. Focusing solely on markets we have seen the oscillation in expectations between a hard and soft landing scenario, often pivoting on the back of one single data point. We have seen interest rates start to reduce in major economies, resulting in an enormous amount of intellectual capital spent on whether it will be two or three cuts before the end of the year (newsflash it doesn’t really matter as long as rates are heading down). The geopolitical situation continues to worsen, with no end in sight to the conflict in Ukraine, and new fronts opening up in the Middle East. The oil price has fallen and risen in the face of changing demands expectations, to then fall again on news the Saudis will pump all they can, and then rise again on further Middle East tension. We have seen Biden’s campaign fall apart in 90 minutes of painful debate, Trump survives not one but two assassination attempts, and the Labour party sweep to power with an overwhelming majority, only to then have their first 100 days of power dominated by the £22 billion black hole and plummeting popularity largely on the back of some sartorial questions. In bond markets the initial decline in UK gilt yields, itself a reflection of inflation being under control and interest rates beginning their downward path, has now been scuppered over fears the new government will bend fiscal rules and raise more debt than the market had expected. Whilst all of these events are shaping daily news flow, the underlying themes of artificial intelligence (“AI”) and climate change continue to spark debate globally, and at points having a significant impact on market moves.

Performance Review
The Company has modestly outperformed its benchmark, producing an overall return of 13.9% vs an index return of 13.2%.

On the positive side a number of the core holdings performed well. Investment platform provider IntegraFin rallied in the period as positive sentiment returned to financial markets, and the company reassured the market the issues with their cost base were consigned to history. Publisher Bloomsbury Publishing continued the recent run of upgrades, this time augmenting their operating momentum with an accretive acquisition. Funding Circle, who provide loans to Small and Medium-sized Enterprises (SMEs) in the UK announced the disposal of their loss making US operations, and a significant return of capital. The volatility within financial markets has been a boon to pension consultant XPS Pensions, who have seen significant demand for their services from pension trustees looking to understand the impact shifting yields are having on their fund assets and liabilities.

In terms of the shares that have negatively impacted on performance, there are three clear groups; the ones where trading has disappointed, the stocks we didn’t own, and the stocks that are significant benchmark positions that have performed well. With regard to stocks that suffered trading issues, the main disappointment was media firm YouGov, which has seen competition in one division leading to pricing pressure. Veterinary services provider CVS Group has been impacted not by demand weakness, but by the announcement of a Competition and Markets Authority (CMA) investigation into the industry. The second group, stocks that we didn’t own that were beneficiaries of the spike in M&A activity for UK listed companies and therefore hurt relative performance, including video game service provider Keywords, and media business Ascential. The final group, the large index constituents we didn’t own that have done well, include the likes of ground services firm Keller, spread betting provider Plus500, gaming software provider Playtech, and Bank of Cyprus.

Transaction Activity
The UK consumer continues to see an improvement in disposable income, as wage growth is running ahead of inflation. The Asda income tracker is currently showing double digit year-on-year increases to household income, although currently this is resulting in a higher savings ratio. As consumers become more confident in the economic outlook we should see this manifest in increased spending. In anticipation of this we have added to a number of names within the leisure sector, including Dominos Pizza, Wetherspoons and Loungers. The latter two of these have recently given positive updates on trading.

The new Labour government has a clear policy to build one and a half million houses over five years. Whilst there has to be considerable risk with regards to this number given the repeated failure of government policy to reach these levels, to get anywhere close there will have to be significant improvements in planning, and substantial investment in the supply chain. In conjunction with lower interest rates spurring banks to become more competitive with regard to mortgage pricing, we see a positive multi year backdrop for the housebuilding and building product sectors. We have added to our position in housebuilder MJ Gleeson, brick manufacturer Ibstock, paving supplier Marshalls, and plumbing supplier Genuit.

The IPO (initial public offering) market has been frustratingly quiet in the period, with the Company only taking part in Raspberry Pi, the designer and manufacturer of Single Board Computers, and Rosebank, the new venture from the former management team of Melrose. Given the timing of the budget it feels unlikely we will see much issuance in the period to the end of this calendar year, but are hopeful the New Year will see a more conducive environment for capital market activity.

Whilst this year has seen an increase in takeover activity, the Company has only benefitted from self-storage provider Lok’n Store Group, telecom equipment supplier Spirent, and financial services firm Mattioli Woods.

We also sold positions in shipping broker Clarkson, where we felt near-term operating momentum has possibly peaked, media business YouGov, which is seeing increased competition leading to pricing pressure, and defence business QinetiQ, where we had become concerned about the cash flow.

Outlook
It is almost impossible to address the outlook without addressing the change of government in the UK. The Labour party swept to power with an overwhelming majority, a mandate for change, and an ability to set long-term economic policy. With the Labour party claiming to offer a more business-friendly outlook this should have been a perfect set up for a market friendly environment. Sadly, their early statements have instead generated increased uncertainty as the market tries to understand how the government will shape policy to fill the “£22 billion black hole”. With potential changes to inheritance tax, pensions, and capital gains tax, investors are doing what they traditionally do in the face of an information vacuum, selling. We, like everyone else with exposure to the UK stock market, await budget day with keen interest, and hope that once everyone has the certainty the budget will bring, they will be able to position for the long term. And this long term is where we have more conviction. As a consequence of the current uncertainty, consumer confidence has recently weakened. However, in the background real wages are rising, unemployment remains low, and household disposable income is increasing, all suggesting that as confidence returns the consumer maintains an ability to spend. Survey data suggests UK corporations are still positive and are themselves awaiting clarity before deciding to invest. And that clarity could (and should) come from the Labour Party, as they move away from the budget and start to enact their agenda; developing the framework to build one and a half million homes, investing in infrastructure and public services whilst at the same time reducing waste, lifting the skills and education of the workforce, and fostering innovation. On a global basis the more recent economic data suggests a soft landing is still the likely outcome. Finally, and importantly, the valuation of UK small and mid-cap companies is attractive on an historic basis. As we move through this near-term noise, the opportunity presented by the UK small and mid-cap market should be revealed, and maybe we will finally see investors looking to allocate back to an asset class that has historically been a profitable one.

ROLAND ARNOLD
BLACKROCK INVESTMENT MANAGEMENT (UK) LIMITED
24 October 2024

Twenty Largest Investments as at 31 August 2024

Details of the full portfolio are available on the Company’s website at www.blackrock.com/uk/brsc.

Portfolio holdings in excess of 3% of issued share capital
At 31 August 2024, the Company did not hold any equity investments comprising more than 3% of any company’s share capital other than as disclosed in the table below:

Investment exposure as at 31 August 2024

Investment size

Source: BlackRock.

Analysis of portfolio value by sector

Sources: BlackRock and LSEG Datastream.

Interim Management Report and Responsibility Statement

The Chairman’s Statement and the Investment Manager’s Report above give details of the important events which have occurred during the period and their impact on the financial statements.

Principal risks and uncertainties
The principal risks faced by the Company can be divided into various areas as follows:

· Investment performance;

· Market;

· Income/dividend;

· Legal and compliance;

· Operational;

· Financial; and

· Marketing.

The Board reported on the principal risks and uncertainties faced by the Company in the Annual Report and Financial Statements for the year ended 29 February 2024. A detailed explanation can be found in the Strategic Report on pages 33 to 37 and note 17 on pages 99 to 106 of the Annual Report and Financial Statements which is available on the website maintained by BlackRock at www.blackrock.com/uk/brsc.

The Board and the Investment Manager continue to monitor investment performance in line with the Company’s investment objectives, and the operations of the Company and the publication of net asset values are continuing.

In the view of the Board, there have not been any changes to the fundamental nature of the principal risks and uncertainties since the previous report and these are equally applicable to the remaining six months of the financial year as they were to the six months under review.

Going concern
The Board is mindful of the risk that unforeseen or unprecedented events including (but not limited to) heightened geopolitical tensions such as the wars in Ukraine and Middle East, their longer-term effects on the global economy, high inflation and the current cost of living crisis could have a significant impact on global markets. Notwithstanding this significant degree of uncertainty, the Directors, having considered the nature and liquidity of the portfolio, the Company’s investment objective, the Company’s projected income and expenditure, are satisfied that the Company has adequate resources to continue in operational existence for the foreseeable future and is financially sound.

Related party disclosure and transactions with the AIFM and Investment Manager
BlackRock Fund Managers Limited (BFM) was appointed as the Company’s Alternative Investment Fund Manager (AIFM) with effect from 2 July 2014. BFM has (with the Company’s consent) delegated certain portfolio and risk management services, and other ancillary services, to BlackRock Investment Management (UK) Limited (BIM (UK)). Both BFM and BIM (UK) are regarded as related parties under the Listing Rules. Details of the management and marketing fees payable are set out in notes 4 and 5 respectively and note 14 below. The related party transactions with the Directors are set out in note 15 below.

Directors’ Responsibility Statement
The Disclosure Guidance and Transparency Rules (DTR) of the UK Listing Authority require the Directors to confirm their responsibilities in relation to the preparation and publication of the Interim Management Report and Financial Statements.

The Directors confirm to the best of their knowledge and belief that:

· the condensed set of financial statements contained within the Half Yearly Financial Report has been prepared in accordance with the applicable UK Accounting Standard FRS 104 Interim Financial Reporting; and

· the Interim Management Report together with the Chairman’s Statement and Investment Manager’s Report, include a fair review of the information required by 4.2.7R and 4.2.8R of the Financial Conduct Authority’s (FCA) Disclosure Guidance and Transparency Rules.

The Half Yearly Financial Report has not been audited or reviewed by the Company’s Auditor.

The Half Yearly Financial Report was approved by the Board on 24 October 2024 and the above Responsibility Statement was signed on its behalf by the Chairman.

RONALD GOULD
FOR AND ON BEHALF OF THE BOARD
24 October 2024

Income Statement for the six months ended 31 August 2024

The total columns of this statement represent the Company’s profit and loss account. The supplementary revenue and capital accounts are both prepared under guidance published by the Association of Investment Companies (AIC). All items in the above statement derive from continuing operations. No operations were acquired or discontinued during the period. All income is attributable to the equity holders of the Company.

The net profit/(loss) for the period disclosed above represents the Company’s total comprehensive income/(loss).

Statement of Changes in Equity for the six months ended 31 August 2024

1 Final dividend paid in respect of the year ended 29 February 2024 of 27.00p per share was declared on 14 May 2024 and paid on 27 June 2024.

2 Final dividend paid in respect of the year ended 28 February 2023 of 25.50p was declared on 9 May 2023 and paid on 27 June 2023.

3 Interim dividend paid in respect of the year ended 29 February 2024 of 15.00p was declared on 26 October 2023 and paid on 4 December 2023. Final dividend paid in respect of the year ended 28 February 2023 of 25.50p was declared on 9 May 2023 and paid on 27 June 2023.

For information on the Company’s distributable reserves, please refer to note 12.

Balance Sheet as at 31 August 2024

Statement of Cash Flows for the six months ended 31 August 2024

1 Cash Fund represents funds held on deposit with the BlackRock Institutional Cash Series plc – Sterling Liquid Environmentally Aware Fund.

Notes to the Financial Statements for the six months ended 31 August 2024

1. Principal activity
The principal activity of the Company is that of an investment trust company within the meaning of Section 1158 of the Corporation Tax Act 2010.

2. Basis of preparation
The financial statements of the Company are prepared on a going concern basis in accordance with Financial Reporting Standard 104 Interim Financial Reporting (FRS 104) applicable in the United Kingdom and Republic of Ireland and the revised Statement of Recommended Practice – Financial Statements of Investment Trust Companies and Venture Capital Trusts (SORP), issued by the Association of Investment Companies (AIC) in October 2019 and updated in July 2022, and the provisions of the Companies Act 2006.

The accounting policies and estimation techniques applied for the condensed set of financial statements are as set out in the Company’s Annual Report and Financial Statements for the year ended 29 February 2024.

3. Income

1 UK and overseas dividends are disclosed based on the country of domicile of the underlying portfolio company.

Special dividends of £798,000 have been recognised in capital during the period ended 31 August 2024 (six months ended 31 August 2023: £782,000; year ended 29 February 2024: £782,000).

Dividends and interest received in cash during the period amounted to £13,289,000 and £nil (six months ended 31 August 2023: £12,413,000 and £231,000; year ended 29 February 2024: £21,699,000 and £447,000).

4. Investment management fee

The investment management fee is based on a rate of 0.6% of the first £750 million of total assets (excluding current year income) less the current liabilities of the Company (the “Fee Asset Amount”), reducing to 0.5% above this level. The fee is calculated at the rate of one quarter of 0.6% of the Fee Asset Amount up to the initial threshold of £750 million, and one quarter of 0.5% of the Fee Asset Amount in excess thereof, at the end of each quarter. The investment management fee is allocated 25% to the revenue account and 75% to the capital account of the Income Statement.

5. Other operating expenses

1 No expenses have been written back during the six month period ended 31 August 2024 (six months ended 31 August 2023: depositary fees and miscellaneous fees; year ended 29 February 2024: miscellaneous fees).

2 For the six month period ended 31 August 2024, expenses of £14,000 (six months ended 31 August 2023: £14,000; year ended 29 February 2024: £21,000) were charged to the capital account of the Income Statement. These relate to transaction costs charged by the custodian on sale and purchase trades.

The direct transaction costs incurred on the acquisition of investments amounted to £887,000 for the six months ended 31 August 2024 (six months ended 31 August 2023: £708,000; year ended 29 February 2024: £1,393,000). Costs relating to the disposal of investments amounted to £159,000 for the six months ended 31 August 2024 (six months ended 31 August 2023: £113,000; year ended 29 February 2024: £249,000). All direct transaction costs have been included within capital reserves.

6. Finance costs

Finance costs have been allocated 25% to the revenue account and 75% to the capital account of the Income Statement.

7. Dividends
In accordance with FRS 102, Section 32 Events After the End of the Reporting Period, the interim dividend payable on the ordinary shares has not been included as a liability in the financial statements, as interim dividends are only recognised when they have been paid.

The Board has declared an interim dividend of 15.50p per share (31 August 2023: 15.00p per share), payable on 4 December 2024 to shareholders on the Company’s register as at 1 November 2024; the ex dividend date is 31 October 2024. The total cost of this dividend, based on 47,099,792 shares in issue at 22 October 2024, is £7,300,000 (31 August 2023: £7,238,000).

8. Returns and net asset value per share
Revenue earnings, capital loss and net asset value per share are shown below and have been calculated using the following:

9. Borrowings