Portfolio Update

The information contained in this release was correct as at 31 May 2023.  Information on the Company’s up to date net asset values can be found on the London Stock Exchange Website at

https://www.londonstockexchange.com/exchange/news/market-news/market-news-home.html.

BLACKROCK SMALLER COMPANIES TRUST PLC (LEI:549300MS535KC2WH4082)
 

All information is at 31 May2023 and unaudited.
Performance at month end is calculated on a Total Return basis based on NAV per share with debt at fair value
 

	One month %	Three months %	One  year %	Three  years %	Five  years %
Net asset value	-2.4	-6.1	-12.8	17.0	3.5
Share price	-0.3	-3.7	-9.1	10.8	-0.6
Numis ex Inv Companies + AIM Index	-3.5	-6.4	-11.1	22.2	-0.1

Sources:  BlackRock and Datastream

At month end

Net asset value Capital only (debt at par value):	1,412.05p
Net asset value Capital only (debt at fair value):	1,463.90p
Net asset value incl. Income (debt at par value)1:	1,426.74p
Net asset value incl. Income (debt at fair value)1:	1,478.59p
Share price:	1,304.00p
Discount to Cum Income NAV (debt at par value):	8.6%
Discount to Cum Income NAV (debt at fair value):	11.8%
Net yield2:	3.1%
Gross assets3:	£763.0m
Gearing range as a % of net assets:	0-15%
Net gearing including income (debt at par):	10.9%
Ongoing charges ratio (actual)4:	0.7%
Ordinary shares in issue5:	48,609,792

1. Includes net revenue of 14.69p
2. Yield calculations are based on dividends announced in the last 12 months as at the date of release of this announcement and comprise the interim dividend of 14.50 pence per share (announced on 3 November 2022, ex-dividend on 10 November 2022, and paid 9 December 2022) and the final dividend of 25.50 pence per share (announced on 05 May 2023, ex-date on 18 May 2023, and pay date 27 June 2023).
3. Includes current year revenue.
4. The Company’s ongoing charges are 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 and certain non-recurring items for year ended 28 February 2023.
5. Excludes 1,383,731 ordinary shares held in treasury.

Sector Weightings % of portfolio Industrials 34.1 Consumer Discretionary 20.6 Financials 13.4 Basic Materials 7.9 Technology 7.8 Consumer Staples 5.2 Health Care 3.5 Telecommunications 2.8 Energy 2.3 Communication Services 1.4 Real Estate 0.8 Utilities 0.2 ----- Total 100.0 ===== Country Weightings % of portfolio United Kingdom 98.4 United States 1.0 Ireland 0.6 ----- Total 100.0 =====

Ten Largest Equity Investments Company	% of portfolio
Gamma Communications	2.8
CVS Group	2.7
4imprint Group	2.6
Watches of Switzerland	2.1
Oxford Instruments	2.0
Hill & Smith	1.8
YouGov	1.8
Workspace Group	1.7
Breedon Group	1.7
Bloomsbury Publishing	1.7

Commenting on the markets, Roland Arnold, representing the Investment Manager noted:

During May the Company’s NAV per share fell by -2.4% to 1,478.59p on a total return basis, while our benchmark index fell -3.5%. For comparison the large cap FTSE 100 index underperformed small & mid-caps, falling -4.9%.

UK equities delivered negative returns in May with UK inflation falling more slowly than expected, increasing the need for the Bank of England to continue tightening. Globally, economic growth weakened, whilst sentiment wasn’t helped by the uncertainties surrounding the US debt ceiling negotiations or the pace of recovery in China.. In the UK, businesses confidence fell in May due to factors such as higher wage pressures, despite the IMF (International Monetary Fund) announcing that Britain is no longer heading for recession and upgrading its forecasts for UK economic growth. In Europe the European Central Bank raised interest rates by 25bps amid stubbornly high inflation and stagnating growth, highlighting the acute trade-off faced by central banks in balancing the impact of  higher interest rates on economic stability.

Overall, market performance in the UK and Europe declined as a result of ongoing concerns over global growth, while the US produced a positive return, driven almost exclusively by the tech sector as a result of the rapid rise and hype around Generative AI (Artificial Intelligence).

The largest contributor was YouGov, which rallied strongly after an investor day that confirmed a strong growth outlook and laid out a plan to double revenues over the medium term. We have owned the shares for many years and continue to think that the size and duration of the growth opportunity offered by YouGov’s unique platform of consumer insights and data remains under appreciated by the market even after its share price run this month. Shares in 4imprint finished the month higher, with order intake during the first four months of 2023 up by 22% compared to the same period last year. Alfa Financial Software reported excellent revenue growth during the first quarter of the year, currently running ahead of management’s expectations. Positive sales momentum has continued into 2023 and the strength of their late-stage pipelines provides confidence in the outlook for the remainder of the year.

Watches of Switzerland (WOSG) was the largest detractor during the month. Despite reporting strong full-year results with revenue growth of 25% year on year, there was a small downgrade driven by rising cost of interest free credit products, which notably are not available on luxury watches. While disappointing, we do not see this development as derailing the long-term investment case for WOSG. Demand remains robust, the waitlist continues to grow, and the industry backdrop remains favourable with demand for luxury watches continuing to outweigh supply. The shares now trade on around 12x earnings, which we think offers tremendous value for this company. Shares in travel company, On The Beach, fell in response to half year results which highlighted increasing passenger bookings, however the company’s large marketing spend continued to impact profitably and investors were clearly nervous about the company’s ability to meet consensus expectations for the full year. Other detractors included Aston Martin and Carnival, which we do not own but which represent relatively large weightings in the benchmark. As a result, the strength in these shares during the month was a relative detractor to performance. 

2023 has seen a continuation of the themes of uncertainty, Russia/Ukraine war, China, supply chains and inflation. However, we are closer to the end of monetary tightening and we think inflation is peaking, albeit this is happening more slowly than we would have expected. As the year-on-year impact on inflation starts to roll over, we could see the environment turn to disinflation quite quickly. Generally speaking, financial conditions are not too stretched; corporates and consumers are reasonably well capitalised, and banks have plenty of capital. As such the path of employment will dictate the consumer outlook but we continue to expect the trough to be shallower than in previous recessions.

Industrial activity is likely to decline as excess inventory works through the system, but given major markets such as automotive and aerospace were already seeing choked demand through supply chain issues, again we expect a shallower trough. Housebuilding and RMI (Repair, Maintenance, Investment) will have a tough H1, but we still believe the outlook isn’t as bad as it was in September. Valuations have corrected quickly and looking back it appears all consumer orientated stocks overshot to the downside during the chaotic period around the Truss budget.

Whilst there is much that can be discussed with regards to the economic outlook, one thing is irrefutable; the valuation of UK small and mid-sized companies is more attractive than it has been for some time, and if that valuation is not recognized by the stock market, it will be recognized by others. As stated in recent updates, we expected to see M&A (Mergers and Acquisitions) picking up through the course of the year and this certainly spiked in the last month, with approaches for several companies in the UK as Private Equity have decided to start deploying their substantial cash piles.

We are not out of the woods yet, but the recent round of trading updates from our investments have generally been in line or better than expectations. However, with oil and gas prices lower year on year, China re-opening, US$ weakening, shipping / logistics / factory gate prices dropping, much of the inflation pressure of last year could become deflationary during the course of this year, and we have tentatively started to utilise more of our gearing facilities

Against this difficult backdrop, we remind ourselves that many equity markets (Europe, UK) are structurally under owned and could benefit as sentiment turns and investors begin to reduce these underweights. We remain focused on bottom-up company specific analysis to identify high quality, nimble businesses, operated by entrepreneurial management teams, with strong market positions and resilient cash-flows. These are the types of businesses that we believe will be best placed to manage and thrive in the current environment. Historically these periods have been followed by strong returns for the strategy and presented excellent investment opportunities.

We thank shareholders for your ongoing support.

     ¹Source: BlackRock as at 31 May 2023

22 June 2023

ENDS
 

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