Final Results

RNS Number : 6940K

Henderson Smaller Cos Inv Tst PLC

23 August 2012

 



THE HENDERSON SMALLER COMPANIES INVESTMENT TRUST PLC

Annual Financial Report for the year ended 31 May 2012

23 August 2012

This announcement contains regulated information

MANAGEMENT REPORT

FINANCIAL HIGHLIGHTS	31 May 2012	31 May 2011
Total net assets	£280 million	£298 million
Net asset value per ordinary share	374.5p	398.1p
Net asset value per ordinary share on an alternative basis *	367.9p	392.5p
Market price per ordinary share	284.3p	319.4p
Total (loss)/ return per ordinary share	(19.6)p	124.6p
Revenue return per ordinary share	6.1p	4.9p
Dividend per ordinary share	5.5p	4.2p
Gearing †	8.7%	9.5%

*Calculated by deducting from the net assets the debt at its market value.

†Defined here as the total market value of the Company's investments less shareholders' funds as a percentage of shareholders' funds.

CHAIRMAN'S STATEMENT

This year has been difficult and although I am pleased to report that the company has again outperformed on a relative basis, despite being geared, and that there has been substantial growth in the portfolio's revenue allowing us to increase the dividend by 30%, the company's second-half gains could not counter the first-half losses and therefore the net asset value (NAV) declined by 5.2% in the year.

This relative outperformance is testimony to good stock picking and I am pleased to report that we have outperformed the benchmark in eight of the nine full financial years in which Neil Hermon has been our portfolio manager. In that period the Company has produced an NAV total return of 228.3%, resulting in a compounded annual return of 14.1%. Such a return demonstrates that a long term approach is the appropriate one to take when investing in smaller companies.

I would like to pay tribute to all the Henderson staff and my Board for their efforts throughout the year on behalf of shareholders. They do battle with an ever-growing jungle of legislation, and I thank them all for the tremendous contribution which they have made.

Revenue and dividend

The revenue return per share is significantly up at 6.1p, compared with 4.9p for the previous year. We expect the dividend growth from our investment portfolio to continue in the coming year and therefore propose a notable increase in the final dividend for the year to 5.5p per share (2011: 4.2p). This is of course subject to shareholder approval at the Annual General Meeting in October. If approved this would be an elevenfold increase over these past 9 years, and a compounded annual growth rate of 30%.

Share buy-backs and discount

During the year the smaller companies sector as a whole traded at an average discount of 15.7% with highs and lows of 18.9% and 7.4% respectively. The Company's discount ranged from 11.9% to 25.2% with the average discount over the year being 20.8%. This offered a compelling investment opportunity and therefore we bought back 165,000 shares at an average discount of 23.0% and average price of 286.35p. The Board continues to keep a close eye on the discount and will from time to time buy back shares. However we do not believe that share buy-backs have a significant effect on the discount other than in the short term.

Outlook

As I stated in my interim statement, markets are going to continue to be volatile whilst the world endures the struggle with deficits and the continuing saga of the Euro. As Benjamin Graham said, equities "are subject to irrational and excessive price fluctuations in both directions, as the consequence of the ingrained tendency of most people to speculate or gamble". This tends to be exaggerated in the smaller companies sector, where coverage and research are poor, but there lies the opportunity. It is vitally important that we don't forget some simple principles:  understand the businesses you are investing in, take advantage when the market is either too optimistic or depressed and always look for a margin of safety while taking a longer term view. These basic ideas are enduring and essential for long-term success. I believe that Neil Hermon is well equipped to face these challenges and to build upon his performance to date.

Annual General Meeting

Our Annual General Meeting will be held at 10:30am on Friday, 5 October 2012 at the Registered Office, 201 Bishopsgate, London EC2M 3AE. The Notice of Meeting is set out in the accompanying circular to shareholders. We would encourage as many shareholders as possible to attend for the opportunity to meet the Board and to watch a presentation from Neil Hermon reviewing the year and looking forward to the year ahead.

J M B Cayzer-Colvin

Chairman

23 August 2012

FUND MANAGER'S REVIEW

Analysis of the portfolio by sector	31 May 2012 %	31 May 2011 %
Support Services	18.2	18.2
Electronic & Electrical Equipment	12.8	11.8
Software & Computer Services	7.8	7.5
Chemicals	7.3	7.2
Media	6.7	6.9
Financial Services	5.5	6.8
Oil & Gas Producers	5.5	4.3
Household Goods & Home Construction	4.7	4.8
Real Estate	4.6	4.6
Industrial Engineering	3.8	3.3
General Retailers	3.3	4.2
Construction & Materials	3.3	3.8
Technology Hardware & Equipment	3.2	3.1
Aerospace & Defence	3.1	4.5
Travel & Leisure	3.0	2.5
Oil Equipment, Services & Distribution	2.4	1.3
Health Care Equipment & Services	1.7	1.4
Mining	1.5	1.9
Industrial Metals & Mining	0.6	0.9
Pharmaceuticals & Biotechnology General Industrials	0.5 0.3	0.7 -
Food Producers	0.2	0.3
	______	______
	100.0	100.0
	______	______

Market - year in review

The year under review was, as you say in football parlance, 'a game of two halves'.The first 6 months of our year was extremely difficult with the net asset value falling sharply. This was caused by a rating downgrade in the US, continued political wrangling over the US budget deficit and the mounting European sovereign credit crisis. Equity markets, however, enjoyed a sharp rally in the second half of our year as investors focused on better economic news from the US, hopes of a 'soft landing' in China and the relative attractiveness of equities over other asset classes. Even concerns over the Eurozone were temporarily forgotten. Indeed we might well have ended the year with a positive net asset value performance were it not for May being a poor month for equities. Although macro-economic conditions remained volatile, the fundamentals of the corporate sector continued to improve. Profit growth was strong, balance sheets continued to strengthen and merger and acquisition activity continued at a reasonable pace. Foreign corporates were particularly active in looking to acquire UK companies with strong domestic or international market niche positions.

Smaller companies marginally outperformed larger companies over the year. In fact the Numis Smaller Companies Index has now outperformed the FTSE All-Share Index for the last four years consecutively (and in 11 of the last 12 years).

Fund performance

The Company had a mixed year in performance terms - outperforming its benchmark but falling in absolute terms. The net asset value fell 5.2%, on a total return basis. This compares to a decline of 7.7% (total return) from the Numis Smaller Companies Index (excluding investment companies) and a decline of 9.4% (total return) from the FTSE Small Cap Index (excluding investment companies). The outperformance came from a combination of underlying positive portfolio performance offset by a negative contribution from gearing in the Company. The year under review is the eighth year of outperformance of our benchmark, the Numis Smaller Companies Index (excluding investment companies), since I have been the Fund Manager.

Gearing

Gearing started the year at 9.5% and ended it at 8.7%. The majority of the gearing is provided by the £20 million 10.5% 2016 debenture with the remainder by short term bank borrowings. Gearing was a negative contributor to performance in theyear as markets declined but has been a significant positive over the 9 years I have managed the investment portfolio.

Attribution analysis

The tables below show the top five contributors to, and the bottom five detractors from, the Company's relative performance.

Principal contributors	12 month return %	Relative contribution %
Oxford Instruments	+53.0	+1.0
Croda	+18.0	+0.9
Anite	+63.3	+0.7
Melrose	+33.2	+0.7
Spectris	+5.7	+0.5

Oxford Instruments produces advanced instrumentation equipment for industrial and scientific research markets. The company has benefited from a recovery in its end markets and substantial growth in Asia Pacific. China has been particularly strong with it now representing Oxford's largest end market. Margins have expanded significantly and the outlook is promising for further strong growth.

Croda manufactures a range of chemicals, including oleo-chemicals and industrial chemicals. The company has an excellent track record over many years benefiting from pricing power, exposure to robust and growing end markets, a strong acquisitive record and excellent management. With strong profit growth forecast, the future continues to look bright for Croda.

Anite is an IT software and services business supplying into the telecommunications and travel industry. Its success in the last year has been based on its telecommunication business. Its testing software is seeing rapid growth on the back of strong demand from network operators, handset and chipset manufacturers who are investing heavily in the new 4G telecommunication networks. As a world leader in this area Anite is well placed to enjoy strong growth as investment in 4G increases.

Melrose is a diversified engineering group. Its raison d'etre is to acquire under-performing companies and then turn round their performance through application of strict financial controls, better management practices and investment in growth areas leading to significant expansion in margins and cash generation. When this has been achieved and significant value created Melrose will sell the business on to a trade or private equity buyer. This has been done to great effect with the acquisitions of Dynacast, McKechnie and FKI.

Spectris manufactures, designs and markets products for the electronic control and process instrumentation sectors. The company has a number of subsidiaries which are market leaders in global market niches. Cash generation is very sound, the management team is well respected and the balance sheet is strong. Recovering industrial markets mean profit growth is forecast to be robust.

Principal detractors	12 month return %	Relative contribution %
Northgate	-46.7	-0.6
Logica*+	+84.7	-0.5
WSP	-20.1	-0.5
Premier Oil	-28.6	-0.4
Ophir Energy+#	+101.5	-0.4
* Included in the benchmark but not owned by the Company + Joined the benchmark index on 1 January 2012; share price return shown since that date. # Purchased for the Company during the year to 31 May 2012.

Northgate is a provider of commercial vehicles for rent with operations in the UK and Spain. The poor economic conditions in these two countries has affected demand and meant a contraction in Northgate's fleet on hire. Earnings have therefore been under some pressure even though the company has been restructuring and improving business processes which have taken significant cost out of the business. Although the outlook remains difficult Northgate is de-leveraging rapidly and trades at a substantial discount to its tangible net asset value, which is primarily made up of second-hand commercial vehicles that are selling at above book value. The shares are a deep value situation and will bounce sharply when markets recover.

Logica is an IT services business. The share price rose significantly after CGI Group, a Canadian business, made an agreed bid for the company. The Company had no holding in Logica.

WSP is an international engineering consultant, principally in the built environment. Although market conditions are tough, profits have held up well as the company has adjusted its cost base to match revenues. The share price underperformed the market as investors were frustrated by the lack of profit progress, the uncertain outlook for growth and the cut-backs in UK Government spending. We continued to hold the company as we felt that although trading conditions were tough recovery potential was significant when markets recovered and there was a high chance of the company being acquired in a consolidating global industry. This patience paid off as WSP was acquired for a near 70% premium by the Canadian company, Genivar, subsequent to our year-end.

Premier Oil is an international oil explorer and producer. The company has expanded through acquisition and bought Encore Oil, a North Sea specialist, in the year. Although production is ramping up to plan and oil prices have been relatively strong in the year the shares have performed poorly. This is due to some indigestion from new equity issued to buy Encore and a perception that Premier has been unsuccessful in its exploration programme. We believe this assessment is harsh and the shares look very cheap trading at a discount to its core net asset value even before we take into account potential upside from exploration wells planned in the coming year.

Ophir Energy is an oil and gas explorer predominantly exposed to offshore East Africa. The shares have performed particularly well as this part of the world has become the 'hottest' area for oil and gas exploration with significant new gas finds in the region. Ophir has substantial acreage and has already made some highly promising discoveries of its own. Interest in the shares has also been increased by the bidding war for Cove Energy, a peer with similar interests in East Africa. We took a position in Ophir during the year.

Portfolio activity

Trading activity in the portfolio was consistent with an average holding period of over 5 years. Our approach is to consider our investments as long term in nature and to avoid unnecessary turnover. The focus has been on adding stocks to the portfolio that have good growth prospects, sound financial characteristics and strong management, at a valuation level that does not reflect these strengths. Likewise we have been employing strong sell discipline to cut out stocks that fail to meet these criteria.

In the year we have added a number of new positions to our portfolio. We increased our exposure to the oil and gas sector. We targeted companies that have the ability to add significant value through exploration. Acquisitions in this area included Afren, with operations in Africa and Kurdistan, Ophir Energy, which has substantial acreage in East Africa, a current 'hot' area with substantial new gas discoveries and Faroe Petroleum, a North Sea producer and explorer. We also took a small position in Borders & Southern, which is currently undertaking high impact drilling in the South Atlantic, near to the Falkland Islands. To finance these acquisitions we disposed of our holdings in Valiant Petroleum, Bowleven and Oilex where drilling results had not lived up to our expectations.

Other new additions to our portfolio included:

RPS, an international environmental, planning and oil and gas consultancy. RPS has been particularly successful in evolving its business to gain exposure to strong growth areas. In recent years it has significantly expanded its oil and gas consultancy to the point where it represents over 50% of earnings. With the moratorium on Gulf of Mexico drilling over and 2011 acquisitions to kick in, 2012 and beyond are set for positive earnings growth.

Hunting, an oil services company which has re-invented itself in recent years. Post the disposal of its Canadian oil transportation business it has re-invested the proceeds into down-hole oil and gas well technology. The explosion of demand generated by the exploitation of shale oil and gas reserves in the USA is driving strong growth. Longer term Hunting is likely to be a takeover target for a larger American company, given the history of US companies buying UK technology based oil service companies.

St Modwen, a property developer and investor with a particular skill in brownfield development and housing land. This acquisition, in some ways, was opportunistic in that the share price had sunk to a near 60% discount to its asset value and was absurdly cheap. However even though valuation was one of the attractions, St Modwen has a strong long-term track record in creating value by taking brownfield land through the planning process, substantially enhancing values in the process. Although we have already made over 40% on our initial investment we believe the share price has further to go.

Spirit, a UK pub group. Spirit is the managed house arm of Punch Taverns and was de-merged from this business in August 2011. During its ownership under Punch, the business had been under-managed and under-invested due to the balance sheet constraints of its parent. However under a new impressive management team, lead by its CEO, Mike Tye, the company is re-investing in its business, with new systems, a significantly strengthened operational team and improved branding. This is leading to operating margins and return on capital increasing to more industry norms driving strong earnings growth.

To balance the additions to our portfolio we have disposed of positions in companies which we felt were set for poor price performance. We disposed of our holding in Chemring, the defence products business, where weak markets and the withdrawal of troops from Afghanistan and Iraq are putting profitability and cashflow under pressure. We also disposed of our holding in Carillion, the international contracting and support services group, where the acquisition of Eaga has proved to be strategically unsound and expensive. Earnings growth will be anaemic at best for at least the next two years. Other disposals included Hansteen, the property investor, as we are concerned for

the outlook for European industrial property markets, Halfords, the automotive accessories retailer, as it is facing increasing competition in core product markets which is leading to margin pressure and Phoenix IT, the IT services business, where even though the shares look cheap, growth has been minimal for the last few years with little prospect of this changing in the future due to competitive pressure.

We benefited from a level of takeover activity in the year.  The level was down on the previous year as the macro-economic uncertainty meant corporates were unwilling to be overly aggressive in leveraging their balance sheets to acquire competitors. Within our portfolio takeover bids were received for Globe-Op Financial Services, a hedge fund back office administrator, from SS&C Technologies, Kalahari Minerals, a uranium miner with operations in Namibia, from Guangdong Nuclear, a Chinese company and Encore Oil, a North Sea oil explorer, from Premier Oil.

We participated in only one IPO (initial public offering) in the year. This reflects a very quiet market for new issues.  The IPO we participated in was NMC Health, a Middle East based distribution and healthcare provider. The company has a strong track record of growth and has ambitious plans to expand its private healthcare operations in the United Arab Emirates with a number of new facilities planned in the short to medium term. With increasing healthcare spend per population and supportive government legislation NMC is well placed to display healthy earnings growth.

Portfolio outlook

The following table shows the Company's key stock positions versus the Numis Smaller Companies Index (excluding investment companies) at 31 May 2012:

Top ten active positions	Holding %	Index Weight %	Active Weight %
Spectris	3.2	-	3.2
Croda	3.2	-	3.2
e2v technologies	3.1	0.2	2.9
Informa	2.7	-	2.7
Oxford Instruments	2.9	0.5	2.4
WSP	2.3	0.1	2.2
Melrose	2.0	-	2.0
Rotork	1.8	-	1.8
Domino Printing Sciences	2.2	0.4	1.8
Victrex	2.5	0.8	1.7

Brief descriptions of Spectris, Croda, WSP, Melrose and Oxford Instruments have been included earlier. A brief description of the remaining largest active positions follows:

e2v technologies manufactures high technology electronic components. The company had a difficult recession as weakening demand and an over-leveraged balance sheet forced it into a rescue rights issue. With a strengthened management team, substantial cost reduction and improving end markets, profit recovery has been rapid. The company has now rationalised its manufacturing base and established a credible long term growth plan. With the company now establishing a record for under-promising and over delivering the shares remain too cheap and have further re-rating potential.

Informa is a leading business to business information group. Its activities include the provision of academic journals, books, data services, trade exhibitions, conferences and training services.  The company produced a very resilient profit performance during the downturn, helped by aggressive cost cutting.  Additionally the balance sheet has been strengthened and the company is set for a return to growth in coming years. Given its low valuation, we believe the share price is set for further gains.

Rotorkdesigns and manufactures actuators and related products for use in the valve industry. Its products are principally used in the oil and gas, power and water industries. It is a global leader in its industry and has consistently grown through high levels of quality and investment in new product development. The company has a fantastic long term track record and has consistently grown faster than its peer group. Margins are high, the balance sheet is very strong, sales exposure is geared towards growing industries and emerging economies and management are high quality. Although the shares are on a reasonably high valuation Rotork has been and will continue to be an attractive long term investment.

Domino Printing Sciences is a manufacturer of industrial printing equipment. It is one of the leaders in its global market and a major exporter. As with many other UK companies, management responded quickly and aggressively to the downturn and took significant costs out of the business. As demand recovered, profits have seen a sharp recovery. Combined with a strong balance sheet, a well respected management team and a strong new product pipeline, we believe the shares will continue to outperform. A new Joint Venture in the USA, TEN Media, which is involved in the coding of eggs for food safety, opens up a potentially lucrative growth opportunity for Domino in future years.

Victrex is a manufacturer of a speciality thermoplastic PEEK. It is the world leader in its field with a 90%+ market share. Victrex has shown consistent long term growth as demand for PEEK has grown as customers look to replace metals with lighter plastics with similar thermal properties. This is best evidenced by the aerospace industry where the most technologically advanced large commercial jet in the world, the Boeing 787, uses one tonne of PEEK per plane compared to minimal use in jets of a decade ago. Although demand for PEEK is subject to the vagaries of the economic cycle, longer term its use will continue to increase and drive Victrex's profitability upwards. Additionally Victrex has developed a very successful medical business with PEEK used particularly in spinal and arthroscopy operations which is growing independent of the economic cycle.

Market outlook

The year under review has seen equity markets dogged by a number of macro-economic concerns - from the US politicking over the budget deficit, the sovereign debt crisis in Europe, a slowing Chinese economy, slow or even negative economic growth in Western Europe and politicians' inability to deal with the threats to the viability of the Euro.

The UK economy has shown at best minimal growth and indeed has lurched back into negative territory recently. The need to rein in public spending and reduce the public sector deficit is forcing large cuts in government spending. This combined with weak economies of our major trading partners in Europe has dampened economic recovery. In this environment, with rising unemployment, a high debt burden, low wage growth and a rising cost of living, the resilience of the UK consumer is being tested and making conditions for domestically focused businesses very challenging.

Despite these negative factors, there are plenty of reasons to be positive about equity markets. Valuations are low by historic standards and compare well to other asset classes. Corporate profitability has proved remarkably robust and earnings look set to see reasonable growth in the coming year. M&A activity has continued at a respectable level with foreign corporates prominent in attempting to pick up cheap UK assets. With a weak currency, liberal markets and low valuations, UK assets are attractive to overseas companies. This is a trend which will help smaller companies in particular as mergers and acquisition activity tends to be focused in this area.

In conclusion, the year under review has been a difficult one for the equity market and which, on balance, the Company has dealt with reasonably well. Relative performance was good and our portfolio companies have, overall, performed robustly. Our investments are generally trading well, are soundly financed and attractively valued. Additionally, the small cap market continues to throw up exciting growth opportunities in which the Company can invest.

Neil Hermon

Fund Manager

23 August 2012

INVESTMENT PORTFOLIO

As at 31 May 2012

Company	Main Activity	Valuation £'000	% of portfolio
Spectris	electronic control and process instrumentation	9,791	3.22
Croda	speciality chemicals	9,727	3.20
e2v technologies	electronic components	9,520	3.13
Oxford Instruments	advanced instrumentation equipment	8,732	2.87
Informa	business to business information	8,186	2.69
Victrex	speciality chemicals	7,522	2.48
WSP	business support services	6,980	2.29
Domino Printing Sciences	industrial printing equipment	6,776	2.22
Bellway	house building	6,368	2.09
Taylor Wimpey	house building	6,227	2.04
		______	______
10 largest		79,829	26.23
Senior	aerospace and automotive products	6,027	1.98
Melrose	diversified engineering	6,006	1.98
Interserve	international contractor	5,485	1.80
Rotork	process control solutions	5,481	1.80
Intermediate Capital	mezzanine finance	5,311	1.75
Anite	telecom software	5,299	1.74
WS Atkins	engineering consultancy	5,244	1.72
AZ Electronic Materials	speciality chemicals	4,938	1.62
Premier Oil	oil and gas exploration and production	4,694	1.54
Ashtead	hire of plant	4,491	1.48
		______	______
20 largest		132,805	43.64
John Menzies	news distributor and aviation services	4,459	1.46
Babcock International	defence outsourcer	4,420	1.45
Paragon	buy to let mortgage provider	4,221	1.38
Euromoney Institutional Investor	business to business information	4,045	1.33
Renishaw	precision measuring and calibration equipment	4,012	1.32
Restaurant Group	restaurants	3,919	1.29
Filtrona	speciality plastic and fibre producer and distribution	3,884	1.28
Ultra Electronics	specialised defence contractor	3,527	1.16
Ophir Energy	oil and gas explorer	3,492	1.15
Laird	electronic products	3,480	1.14
		______	______
30 Largest		172,264	56.60
Aveva Group	design software	3,332	1.09
Spirent Communications	telecoms testing	3,276	1.07
Fidessa	financial software	3,234	1.06
Balfour Beattie	international contractor	3,215	1.06
*RWS	patent translation services	3,159	1.04
NCC	IT security	3,137	1.03
Howden Joinery	manufacturer and retailer of kitchens	3,079	1.01
Northgate	commercial vehicle hire	3,067	1.01
Shaftsbury	West End property investor	3,030	1.00
Greene King	pub operator	2,935	0.97
		______	______
40 Largest		203,728	66.94

* quoted on the Alternative Investment Market

INVESTMENT PORTFOLIO (continued)

As at 31 May 2012

Company	Main Activity	Valuation £'000	% of portfolio
Synergy Healthcare	healthcare support services	2,812	0.92
Grainger	residential property investor	2,773	0.91
Dunelm	homewares retailer	2,743	0.90
Aberdeen Asset Management	fund manager	2,722	0.90
Perform	online media information	2,606	0.86
Hunting	oil equipment and services	2,463	0.81
Afren	oil and gas production and exploration	2,432	0.81
Kentz	oil and gas contractor	2,377	0.78
*Lupus Capital	building products	2,322	0.76
ITE Group	exhibition organiser	2,292	0.75
		______	______
50 largest		229,270	75.34
Telecity	internet infrastructure	2,250	0.74
LSL Property Services	retail property investor	2,233	0.73
Debenhams	department stores	2,227	0.73
RPS Group	business support services	2,225	0.73
CSR	semiconductors	2,196	0.72
*Playtech	internet gaming software	2,126	0.70
Hyder Consulting	engineering consultancy	2,034	0.67
SIG	builders merchant	2,033	0.67
Costain	contractor	1,988	0.65
Kenmare Resources	titanium dioxide mining	1,935	0.64
		______	______
60 largest		250,517	82.32
Chime communications	advertising and marketing services	1,875	0.62
Kofax	electronic capture software	1,872	0.62
*London Mining	iron ore mining	1,839	0.60
Ted Baker	clothing retailer	1,837	0.60
*Majestic Wines	wine retailer	1,791	0.59
Tribal Group	health and education support services and software	1,748	0.57
*Rockhopper Exploration	oil and gas explorer	1,665	0.55
Capital Regional	retail property investor	1,659	0.55
F&C Asset Management	investment management company	1,564	0.51
St Modwen Properties	real estate holding & investment	1,560	0.51
		______	______
70 Largest		267,927	88.04
John Wood	oil and gas services	1,540	0.50
Consort Medical	healthcare products	1,518	0.50
Rathbone Brothers	private client asset management	1,495	0.49
*Nautical Petroleum	oil and gas explorer	1,495	0.49
Keller	ground engineering	1,490	0.49
*LXB Retail Properties	retail property investor	1,480	0.49
*Abcam	internet retailer of antibodies	1,475	0.48
Avocet Mining	gold mining	1,402	0.46
Spirit Pub	restaurants and bars	1,390	0.46
*Digital Barriers	digital security	1,324	0.44
		______	______
80 Largest		282,536	92.84

* quoted on the Alternative Investment Market

INVESTMENT PORTFOLIO (continued)

As at 31 May 2012

Company	Main Activity	Valuation £'000	% of portfolio
Carphone Warehouse	mobile telephone retailer	1,322	0.44
Jupiter Fund Management	investment management company	1,320	0.43
Unite Group	retail property investor	1,186	0.39
Norcos	shower and tile manufacturer	1,116	0.37
*Faroe Petroleum	oil and gas exploration and production	1,108	0.36
*WYG	engineering consultancy	1,095	0.36
RM	education software	1,062	0.35
Persimmon	house building	1,051	0.35
*Enteq Upstream	oil and equipment services	1,043	0.34
*Next Fifteen Communications	PR and media services	1,043	0.34
		______	______
90 Largest		293,882	96.57
Speedy Hire	tool hire	1,040	0.34
RPC	containers and packaging manufacturer	966	0.32
NMC Health	healthcare provider	927	0.30
*Goals Soccer Centres	five-a-side soccer centres	907	0.30
*IQE	semiconductor manufacturer	890	0.29
*Borders & Southern Petroleum	oil and gas explorer	696	0.23
*Asian Plantations	palm oil plantations	672	0.22
*Metminco	copper mining	629	0.21
CPP Group	credit card and identity protection insurance	609	0.20
Heritage Oil	oil and gas exploration and production	607	0.20
		______	______
100 largest		301,825	99.18
Aga Rangemaster	heating and stove manufacturer	586	0.19
Premier Farnell	industrial supplies	453	0.15
Tarsus Group	exhibition organiser	405	0.13
*Bullabulling Gold	gold mining	353	0.12
*Falkland Oil & Gas	oil and gas explorer	286	0.09
*Chariot Oil & Gas	oil and gas explorer	246	0.08
*Ncondezi Coal	coal explorer	179	0.06
		______	______
Total Investments		304,333	100.00
		______	______

There were no convertible or fixed interest securities at 31 May 2012

* quoted on the Alternative Investment Market

PRINCIPAL RISKS AND UNCERTAINTIES

The principal risks and uncertainties facing the Company relate to the activity of investing in the shares of smaller companies that are listed (or quoted) in the United Kingdom. Although the Company invests almost entirely in securities that are quoted on recognised markets, share prices may move rapidly and it may not be possible to realise an investment at the Manager's assessment of its value. The companies in which investments are made may operate unsuccessfully, or fail entirely, such that shareholder value is lost. The Company is also exposed to the operational risk that one or more of its suppliers may not provide the required level of service. The Board considers regularly the principal risks facing the Company in order to mitigate them as far as practicable. A fuller description of the principal risks and uncertainties follows.

With the assistance of the Manager, the Board has drawn up a risk matrix which identifies the key risks to the Company. These key risks fall broadly under the following categories:

Investment activity and strategy

An inappropriate investment strategy (for example, in terms of asset allocation or the level of gearing) may lead to under performance against the Company's benchmark and the companies in its peer group; it may also result in the Company's shares trading at a wider discount to the net asset value per share. The Board manages these risks by ensuring a diversification of investments and a regular review of the extent of borrowings. The Manager operates in accordance with investment limits and restrictions determined by the Board; these include limits on the extent to which borrowings may be used. The Board reviews its investment limits and restrictions regularly and the Manager confirms its compliance with them each month. The Manager provides the directors with management information, including performance data and reports and shareholder analysis. The Board monitors the implementation and results of the investment process with the Fund Manager, who attends all Board meetings, and reviews regularly data that monitors risk factors in respect of the portfolio. The Board reviews investment strategy at each Board meeting.

Accounting, legal and regulatory

In order to qualify as an investment trust the Company must comply with section 1158 of the Corporation Tax Act 2010. A breach of section 1158 could result in the Company losing investment trust status and, as a consequence, capital gains realised within the Company's portfolio would be subject to Corporation Tax. The section 1158 criteria are monitored by the Manager and the results are reported to the directors at each Board meeting. The Company must comply with the provisions of the Companies Act 2006 ('the Companies Act'), and, as the Company's shares are listed for trading on the London Stock Exchange, the Company must comply with the UK Listing Authority's Listing Rules and Disclosure and Transparency Rules ('UKLA Rules'). A breach of the Companies Act could result in the Company and/or the directors being fined or becoming the subject of criminal proceedings. Breach of the UKLA Rules could result in the suspension of the Company's shares which would in turn lead to a breach of section 1158. The Board relies on its company secretary and its professional advisers to ensure compliance with the Companies Act and UKLA Rules.

Operational

Disruption to, or failure of, the Manager's accounting, dealing or payment systems or the Custodian's records could prevent the accurate reporting and monitoring of the Company's financial position. The Manager has contracted some of its operational functions, principally those relating to trade processing, investment administration and accounting, to BNP Paribas Securities Services. Details of how the Board monitors the services provided by the Manager and its other suppliers, and the key elements designed to provide effective internal control are explained further in the internal control section of the Corporate Governance Statement contained in the Annual Report.

Financial instruments and the management of risk

By its nature as an investment trust, the Company is exposed in varying degrees to market risk (comprising market price risk, currency risk and interest rate risk), liquidity risk and credit and counterparty risk. An analysis of these financial risks and the Company's policies for managing them are set out in the Annual Report.

Going Concern

The Company's shareholders are asked every three years to vote on the continuation of the Company. An ordinary resolution to this effect was put to the Annual General Meeting on 24 September 2010 and passed by a substantial majority of the shareholders. A similar resolution will be put in 2013. The assets of the Company consist almost entirely of securities that are listed (or quoted on AIM) and, accordingly, the directors believe that the Company has adequate financial resources to continue in operational existence for the foreseeable future. For these reasons, the Board has decided that it is appropriate for the financial statements to be prepared on a going concern basis. In reviewing the position as at the date of this report, the Board has considered the guidance on this matter issued by the Financial Reporting Council.

Future Developments

The future success of the Company is dependent primarily on the performance of its investments, which will to a significant degree reflect the performance of the stock market and the Manager. Although the Company invests in companies that are listed or quoted in the United Kingdom, the underlying businesses of those companies are affected by various economic factors, many of an international nature. The Board's intention is that the Company will continue to pursue its investment objective in accordance with its investment policy. Further comment on the outlook for the Company is given in the Chairman's Statement and in the Fund Manager's Review.

Related Party Transactions

Investment management, accounting, administrative and company secretarial services are provided to the Company by Henderson Group plc ('Henderson' or the 'Manager'). Some of the administration and accounting services are carried out, on behalf of Henderson, by BNP Paribas Securities Services. The relationship with Henderson is the only related party arrangement currently in place. Other than fees payable by the Company in the ordinary course of business, there have been no material transactions with this related party affecting the financial position or performance of the Company during the year under review.

STATEMENT OF DIRECTORS' RESPONSIBILITIES (UNDER DTR 4.1.12)

Each of the directors confirm that to the best of their knowledge:

·     the financial statements, which have been prepared in accordance with IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Company; and

·     the directors' report in 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 that it faces.

For and on behalf of the Board

J M B Cayzer-Colvin

Chairman

23 August 2012

STATEMENT OF COMPREHENSIVE INCOME

for the year ended 31 May 2012

		Year ended 31 May 2012			Year ended 31 May 2011
Notes		Revenue Return £'000	Capital Return £'000	Total £'000	Revenue Return £'000	Capital Return £'000	Total £'000
2	Investment income	8,195	-	8,195	7,088	-	7,088
3	Other income	36	-	36	35	-	35
	(Losses)/gains on investments held at fair value through profit or loss	-	(19,160)	(19,160)	-	91,312	91,312
		_______	_______	_______	_______	_______	_______
	Total income	8,231	(19,160)	(10,929)	7,123	91,312	98,435
	Expenses
4	Management and performance fees	(1,008)	-	(1,008)	(906)	(1,644)	(2,550)
	Other expenses	(422)	-	(422)	(407)	-	(407)
		_______	_______	_______	_______	_______	_______
	Profit/(loss) before finance costs and taxation	6,801	(19,160)	(12,359)	5,810	89,668	95,478
	Finance costs	(2,261)	-	(2,261)	(2,132)	-	(2,132)
	Profit/(loss) before taxation	4,540	(19,160)	(14,620)	3,678	89,668	93,346
	Taxation	(2)	-	(2)	(4)	-	(4)
	Net profit/(loss) for the year and total comprehensive income	4,538	(19,160)	(14,622)	3,674	89,668	93,342
		_______	_______	_______	_______	_______	_______
5	Earnings/(loss) per ordinary share	6.07p	(25.62)p	(19.55)p	4.91p	119.70p	124.61p

The total column of this statement represents the Statement of Comprehensive Income, prepared in accordance with IFRS as adopted by the European Union.

The revenue return and capital return columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies.

STATEMENT OF CHANGES IN EQUITY

for the year ended 31 May 2012

		Year ended 31 May 2012
		Retained earnings
Notes		Called up share capital £'000	Capital Redemption Reserve £'000	Capital Reserves £'000	Revenue Reserve £'000	Total £'000
	Total equity at 31 May 2011	18,727	26,694	243,800	8,963	298,184
	Total comprehensive income:
	(Loss)/profit for the year	-	-	(19,160)	4,538	(14,622)
	Transactions with owners,    recorded directly to equity:
6	Ordinary dividends paid	-	-	-	(3,146)	(3,146)
7	Buy-backs of ordinary shares	(41)	41	(490)	-	(490)
		_______	_______	_______	_______	_______
	Total equity at 31 May 2012	18,686	26,735	224,150	10,355	279,926
		_______	_______	_______	_______	_______
		Year ended 31 May 2011
		Retained earnings
		Called up share capital £'000	Capital Redemption Reserve £'000	Capital Reserves £'000	Revenue Reserve £'000	Total £'000
	Total equity at 31 May 2010	18,727	26,694	154,133	7,979	207,533
	Total comprehensive income:
	Profit for the year	-	-	89,667	3,675	93,342
	Transactions with owners,    recorded directly to equity:
6	Ordinary dividends paid	-	-	-	(2,696)	(2,696)
	Dividends unclaimed after  12 years	-	-	-	5	5
		_______	_______	_______	_______	_______
	Total equity at 31 May 2011	18,727	26,694	243,800	8,963	298,184
		_______	_______	_______	_______	_______

BALANCE SHEET

at 31 May 2012

Notes		2012 £'000	2011 £'000
	Non current assets
	Investments held at fair value through profit or loss	304,333	326,405
	Current assets
	Other receivables	1,521	1,633
	Cash and cash equivalents	270	642
		_______	_______
		1,791	2,275
		_______	_______
	Total assets	306,124	328,680
		_______	_______
	Current liabilities
	Other payables	(94)	(4,492)
	Bank loans	(6,100)	(6,000)
		_______	_______
		(6,194)	(10,492)
		_______	_______
	Total assets less current liabilities	299,930	318,188
	Non current liabilities
	Financial liabilities	(20,004)	(20,004)
		_______	_______
	Net assets	279,926	298,184
		_______	_______
	Equity attributable to equity shareholders
7	Called up share capital	18,686	18,727
	Capital redemption reserve	26,735	26,694
	Retained earnings:
	Capital reserves	224,150	243,800
	Revenue reserve	10,355	8,963
		_______	_______
	Total equity	279,926	298,184
		_______	_______
8	Net asset value per ordinary share	374.5p	398.1p
		_______	_______

CASH FLOW STATEMENT

for the year ended 31 May 2012

	2012 £'000	2011 £'000
Operating activities
(Loss)/profit before taxation	(14,620)	93,346
Add: interest payable	2,261	2,132
Add/(less): losses/(gains) on investments held at fair value through    profit or loss	19,160	(91,311)
Purchases of investments	(35,933)	(54,186)
Sales of investments	36,584	48,678
Decrease/(increase) in other receivables	7	(88)
Decrease in amounts due from brokers	-	563
Decrease/(increase) in accrued income	100	(675)
(Decrease)/increase in other payables	(1,634)	1,523
(Decrease)/increase in amounts due to brokers	(502)	395
Taxation on investment income	3	(6)
	_______	_______
Net cash inflow from operating activities before
interest and taxation	5,426	371
Interest paid	(2,261)	(2,132)
	_______	_______
Net cash inflow/(outflow) from operating activities	3,165	(1,761)
	_______	_______
Financing activities
Equity dividends paid	(3,146)	(2,696)
Dividends unclaimed after 12 years	-	5
Buy-backs of ordinary shares	(490)	-
Drawdown of bank loans	100	3,997
	_______	_______
Net cash (outflow)/inflow from financing	(3,536)	1,306
	_______	_______
Decrease in cash and cash equivalents	(371)	(455)
Exchange movements	(1)	-
Cash and cash equivalents at the start of the year	642	1,097
Cash and cash equivalents at the end of the year	270	642
	_______	_______

NOTES TO THE FINANCIAL STATEMENTS

1

Accounting policies - Basis of preparation

The Henderson Smaller Companies Investment Trust plc ('the Company') is a company incorporated and domiciled in the United Kingdom under the Companies Act 2006. The financial statements of the Company for the year ended 31 May 2012 have been prepared in accordance with International Financial Reporting Standards ('IFRS') as adopted by the European Union and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. These comprise standards and interpretations approved by the International Accounting Standards Board ('IASB'), together with interpretations of the International Accounting Standards and Standing Interpretations Committee approved by the International Financial Reporting Standards Committee ('IFRSC') that remain in effect, to the extent that IFRS have been adopted by the European Union. The financial statements have been prepared on a going concern basis and on the historical cost basis, except for the revaluation of certain financial instruments held at fair value through profit or loss. The principal accounting policies adopted are set out below. Where presentational guidance set out in the Statement of Recommended Practice ('the SORP') for investment trusts issued by the Association of Investment Companies ('the AIC') in January 2009 is consistent with the requirements of IFRS, the directors have sought to prepare the financial statements on a basis consistent with the recommendations of the SORP.

2	Investment Income						2012 £'000				2011 £'000
	Franked income from companies listed or quoted in the United Kingdom:
	Dividends						7,346				6,454
	Special Dividends						116				399
	Unfranked income from companies listed or quoted in the United Kingdom:
	Dividends						665				149
	Property income distributions						68				86
							______				______
	Total Investment Income						8,195				7,088
							______				______
	All investment income for the Company is from UK investments
3	Other Income						2012 £'000				2011 £'000
	Bank interest						3				6
	Underwriting income (allocated to revenue)*						33				29
							______				______
							36				35
							______				______
	*None of the income receivable from  sub-underwriting commitments was allocated to capital during the year (2011: £nil)
4	Management and performance fees	2012 Revenue Return £'000	2012 Capital Return £'000	2012 Total £'000	2011 Revenue Return £'000			2011 Capital Return £'000			2011 Total £'000
	Management fee	1,008	-	1,008	906			-			906
	Performance fee	-	-	-	-			1,644			1,644
		______	______	_____	______			_____			____
		1,008	-	1,008	906			1,644			2,550
		______	______	_____	______			_____			____
	A summary of the Management Agreement is available in the Directors report with the Annual Report.
5	(Loss)/earnings per ordinary share				2012 £'000				2011 £'000
	Net revenue profit				4,538				3,674
	Net capital (loss)/profit				(19,160)				89,668
					______				______
	Net total (loss)/profit				(14,622)				93,342
					______				______
	Weighted average number of ordinary shares in issue during the year				74,781,723				74,906,796
					______				______
					Pence				Pence
	Revenue earnings per ordinary share				6.07				4.91
	Capital (loss)/earnings per ordinary share				(25.62)				119.70
					______				______
	Total (loss)/earnings per ordinary share				(19.55)				124.61
					______				______
6	Dividends					2012 £'000				2011 £'000
	Amounts recognised as distributions to equity holders in the year:
	Final dividend for the year ended 31 May 2011 of 4.20p
	(2010: 3.60p) per ordinary share					3,146				2,696
						______				______
						3,146				2,696
						______				______
	The final dividend of 4.20p per ordinary share in respect of the year ended 31 May 2011 was paid on 7 October 2011 to shareholders on the register of members at the close of business on 16 September 2011. The dividend paid amounted to £3,146,000 in total. Subject to approval at the Annual General Meeting, the proposed final dividend of 5.50p per ordinary share will be paid on 12 October 2012 to shareholders on the register of members at the close of business on 21 September 2012. The proposed final dividend for the year ended 31 May 2012 has not been included as a liability in these financial statements. Under IFRS, the final dividend is not recognised until approved by the shareholders. The total dividends payable in respect of the financial year which form the basis of the test under section 1158 of the Corporation Tax Act 2010 are set out below:

		2012 £'000
	Revenue available for distribution by way of dividends for the year	4,538
	Proposed final dividend for the year ended 31 May 2012: 5.50p
	(based on the 74,706,796 shares in issue at 23 August 2012)	(4,109)
		______
	Undistributed revenue for section 1158 purposes *	429
		______
	* Undistributed revenue comprises 5.2% of the income from investments of £8,195,000.

7	Called up share capital	2012 £'000	2011 £'000
	Allotted issued and fully paid:
	74,741,796 ordinary shares of 25p each (2011: 74,906,796)	18,686	18,727
		______	______
	During the year the Company purchased for cancellation 165,000 of its own issued ordinary shares (2011: nil) at a total cost of £490,000 (2011: £nil). Since 31 May 2012 the Company has bought back a further 35,000 ordinary shares.
8	Net asset value per Ordinary share
	The net asset value per ordinary share is based on the net assets attributable to the ordinary shares of £279,926,000 (2011: £298,184,000) and on the 74,741,796 ordinary shares in issue at 31 May 2012 (2011: 74,906,796). An alternative net asset value per ordinary share can be calculated by deducting from the total assets less current liabilities of the Company, the preference stock and the debenture stock at their market (or fair) values rather than at their par (or book) values. The net asset value per ordinary share at 31 May 2012 calculated on this basis was 367.9p (2011: 392.5p). The Company has no securities in issue that could dilute the net asset value per ordinary share. The movement during the year of the net assets attributable to the ordinary shares was as follows:
			£'000
	Net assets attributable to the ordinary shares at 1 June 2011		298,184
	Net loss for the year		(14,622)
	Ordinary dividend paid in the year		(3,146)
	Buy-backs of ordinary shares		(490)
			______
	Net assets attributable to the ordinary shares at 31 May 2012		279,926
			______
9	2012 financial statements
	The figures and financial information for the year ended 31 May 2012 are compiled from an extract of the latest financial statements of the Company and do not constitute the statutory accounts for that year. Those financial statements included the report of the auditors which was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. They have not yet been delivered to the Registrar of Companies.

10	2011  financial statements
	The figures and financial information for the year ended 31 May 2011 are compiled from an extract of the published financial statements of the Company and do not constitute the statutory accounts for that year. Those financial statements have been delivered to the Registrar of Companies and included the report of the auditors which was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006.
11	Annual report and financial statements
	The Report and Financial Statements for the year ended 31 May 2012 will be posted to shareholders in  early September 2012 and copies will be available thereafter from the Secretary at the Company's Registered Office, 201 Bishopsgate, London EC2M 3AE. The Annual General Meeting will be held on Friday 5 October 2012 at 10.30 am.
12	Website
	This document, and the Report and Financial Statements for the year ended 31 May 2012, will be available on the following website: www.hendersonsmallercompanies.com.

ENDS

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

For further information please contact:

Neil Hermon

Fund Manager

The Henderson Smaller Companies Investment Trust plc

Telephone: [phone]

James de Sausmarez

Head of Investment Trusts

Henderson Global Investors

Telephone: [phone]

Sarah Gibbons-Cook

Investor Relations and PR Manager

Henderson Global Investors

Telephone: [phone]

 

END

 

 

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