Chelverton UK Dividend Trust plc: ACS-Annual Financial Report
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Chelverton UK Dividend Trust plc (SDVP)
Chelverton UK Dividend Trust PLC
Annual Results for the year to 30 April 2023
Printed copies of the Annual Report will be sent to shareholders shortly. Additional copies may be obtained from the Company Secretary - Apex Fund Administration Services (UK) Limited (formerly Maitland Administration Services Limited), Hamilton Centre, Rodney Way, Chelmsford, Essex CM1 3BY.
The financial information set out below does not constitute the Company's statutory accounts for the year ended 30 April 2023. The financial information for 2023 is derived from the statutory accounts for that year. The auditors, Hazlewoods LLP, have reported on the 2023 accounts. Their report was unqualified and did not include a reference to any matters to which the auditors draw attention by way of emphasis without qualifying their report. The financial information for 2022 is derived from the statutory accounts for that year. The following text is copied from the Annual Report and Accounts.
Strategic Report
Financial Highlights
* Adding back dividends paid in the year. ** Calculated in accordance with the Association of Investment Companies (‘AIC’) guidelines. Based on total expenses, excluding finance costs, for the year and average net asset value. *** Based on gross assets. Chairman’s Statement It gives me great pleasure to present this Annual Report, my first one as Chairman, for the financial year to 30 April 2023. I start by repeating what my predecessor Lord Lamont wrote in this report last year. The last 12 months have undoubtedly continued to be challenging. Although the Covid-19 pandemic and the associated lockdowns are now well in the past, the impact is still being felt, not only in the UK but also in Europe. In addition, the war in Ukraine started by Russia in February 2022 continues and there are no signs of an end to it this year. Whilst we all recall the turmoil in the markets in the autumn, caused by a febrile political situation in addition to the events around the ‘mini-budget’ and the more recent market volatility caused by the collapse of the Silicon Valley Bank and the distressed emergency takeover of Credit Suisse, the UK appears to be gradually recovering from these low points. At this time in the UK, we are living with elevated inflation and interest rates at multi-year highs which, since December 2021, have risen multiple times from 0.1% to the current 5%. The Bank of England has been forecasting for some time that the UK economy would move into recession, which we are very pleased to see has, to date, proven to be wrong. Recently the International Monetary Fund (‘IMF’) announced that the UK will be the worst performing economy in the G20 with a decline in GDP of 0.3% in the next year. However, and true to form, where it should also be noted that of the last 26 forecasts by the IMF, 24 have proven to be too pessimistic and they have now upgraded their forecast of the UK economy to grow by 0.4%! In addition to an economy that has been stagnating, combined with a major uptick in industrial action and a shortage of labour, there have been significant rises in energy prices, industry-wide increases in costs and supply chain issues. However, there has been recent evidence that these issues are easing as time passes and the economies of the world move away from the period of Covid-19 lockdowns. In the last few months, a debate has begun in respect of the reduced interest in investing in UK equities, in particular those shares outside the FTSE 100. The Government and the Treasury are consulting on the introduction of new policies aimed at encouraging all parties to increase their weighting in UK equities. With a highly UK-centric portfolio, invested only in smaller and mid-cap companies traded on UK markets, the shares this Company is invested in are very underrated on an historical basis notwithstanding the fact that the underlying trading performance of the companies is very satisfactory. However, history suggests that a recovery will take place in time, leading to longer term outperformance. Results The Company’s net asset value per ordinary share as at 30 April 2023 was 168.15p (2022: 198.47p), a decrease over the year of 15.3%, with an ordinary share price of 174.50p per share (2022: 192.50p). Total assets, including audited revenue reserves, were £53.674m (2022: £58.805m), a decrease over the year of 8.7%, and the total net assets were £35.563m (2021: £41.382m). During the same period the MSCI Small Cap Index decreased by 5.2%. The Company was launched on 12 May 1999, and since that time the net asset value per Ordinary share has risen by 70.35% while in addition a total of 228.89p has been paid to shareholders in the form of dividends, including the fourth interim dividend announced with this report. In the year under review, total dividends of 11.77p per Ordinary share were paid and proposed, including the fourth interim dividend of 2.9425p. The total dividend in 2023 represents an increase of 7% year-on-year. The Company has now returned to a position where the dividend is being paid entirely from the current year revenue surplus after costs. The balance of the surplus of £280,000, after the payment of the dividend, has been taken to bolster revenue reserves. The intention in the future is to increase dividends by 7% per annum and to take any surplus to replenish the revenue reserves that have been used over the past two years to ensure the dividend is not only being maintained but can be increased.
The underlying portfolio yield has increased this year as our investee companies have continued to grow their dividends, whilst at the same time there has been a continued general derating of shares. The portfolio yield is currently 5.6%, which is significantly higher than the normal range of 4% to 4.5% for this Company over its 24-year life. It is also worth pointing out that 6.5% of the portfolio is currently not paying a dividend as the Investment Manager manages the balance between revenue and capital growth. The Company has increased its dividend each year for the last 13 years. Because of the strength of the revenue reserves, and the intention to add to them in the future, the Company is in a strong position and the Board is confident in the Company’s ability to further grow the annual dividend, assuming the current macro-economic conditions continue to improve. The Company is currently invested in 81 positions across 17 sectors. This spread creates a well-diversified portfolio which should, in the future, lead to a strong return of dividend income and subsequently steady growth in revenue and, in time, capital. Capital structure Over the year the Board has approved the modest issuance of shares at a small premium to the prevailing net asset value. The number of ordinary shares has increased by 510,000 to 21,360,000 shares. In the past, the Company has been regularly asked to issue new shares to meet market demand. However, the Board’s policy is that it will only consider issuing new shares if it can do so at a premium to NAV which is sufficient not only to cover all the costs of issuance but also to recognise the value of the revenue reserves that have been built up over many years and where there are attractive opportunities for investment. Currently the Investment Manager considers that there are sufficient undervalued high yielding shares in the market for the recycling of existing funds and also for the proceeds of new share issuance to be invested. The issue of new shares at a premium enhances net asset value per share, and the increase in the size of the Company should improve liquidity in the market for its shares while making it more attractive to potential new investors. Dividend As briefly discussed in the Results Section, the Board has declared a fourth interim dividend of 2.9425p per Ordinary share (2022: 2.75p) which, when added to the three quarterly interim dividends of 2.9425p per Ordinary share, brings the total paid and declared to 11.77p (2022: 11.00p) for the year ended 30 April 2023, an increase of 7% over the previous year. Under the dividend distribution policy, the Board has not declared a special dividend (2022: nil) to be paid with the fourth interim dividend. The Company has revenue reserves which, after payment of the fourth interim dividend, represent 83.7% of the current annual dividend of 11.77p, or some 9.85p per Ordinary share. The Board is committed to progressively improving the Company’s dividend for investors and expects that the four interim dividends paid in respect of the financial year ending 30 April 2024 will very likely exceed, but in any event will not be less than, that paid in respect of the financial year ended 30 April 2023. Outlook As mentioned above, there is currently a great deal of uncertainty across Europe and in the UK. Sadly, the war in Ukraine is continuing and at this time there appears to be no end in sight. However, European countries have rebalanced their economies and have achieved major savings in energy costs which it is to be hoped will become embedded. With the global impact of the draconian lockdown in China and after seeing the effect of the blocking of the Suez Canal by the “Ever Given” container vessel, it has become clear to European investors that they had been under-pricing the risk of sourcing products from China; as a result we are likely to see a major rebalancing of production to much closer to home. The UK economy is expected to flat-line in 2023 but to recover to near long-term trend growth in 2024. Inflation is expected to decline by the end of the year, and it might well be that interest rates are therefore close to a peak. As the countries of Europe and the world return to ‘normal’ we can hope for a period of steady growth in the UK economy. Howard Myles Chairman 29 June 2023
Investment Manager’s Report The year to April 2023 has been another challenging one, with the global economy feeling the effects of the war in Ukraine, supply chain challenges, inflation, rising interest rates and a banking crisis. In the UK, these combined forces were exacerbated by political turmoil, culminating in multiple leadership changes and the mini-budget in September, which severely dented both corporate and consumer confidence. With this as the backdrop, it is not surprising that share prices have suffered, with the small and midcap companies in which we invest particularly affected. It should also be noted that the large open-ended funds which invest in small and midcap UK equities have seen significant redemptions over the past year, which has put further pressure on stock market valuations in our part of the market. In the year to 30 April 2023, there was a 15.28% decline in the Company’s net asset value per share from 198.47p to 168.15p. During the same period the MSCI Small Cap Index decreased by 5.18%. At the same time the core dividend increased 7% to 11.77p, as explained in the half-year report in October 2022. The Company has not paid a special dividend in respect of the 2022/2023 financial year, in line with the dividend policy announced in March 2019. It is encouraging that the underlying performance of the companies in the portfolio continues to be resilient with the majority of businesses reporting results in line with market expectations during the recent reporting season. The more efficient processes developed during the pandemic have helped our investee companies to navigate the difficult trading conditions over the past year and have left them well prepared to take advantage when the macro environment improves. Despite the resilient underlying trading, the small and midcap market has de-rated, resulting in the decline in the Company’s NAV. This was something of a year of two halves, however, with the above conditions resulting in a 22.92% reduction in the Company’s NAV to 152.99p in the first six months of the year, before it rebounded to 168.15p at the end of the year. The stock market is a forward-looking instrument and we believe the rebound in the second half of the year is a signal that investors are starting to look forward towards the end of interest rate rises and generally more stable macro conditions. Equally encouragingly, the resilient underlying performance of our portfolio companies was reflected in good cash generation and dividends which were generally in line with or ahead of expectations. This has allowed us to continue rebuilding the income account after the pandemic shock, while also building positions in companies which we believe will deliver strong capital growth in the coming years. We are pleased to have delivered an annual 7% rise in the dividend and, after three years of utilising reserves to pay the increasing dividends, the Company has a covered dividend and we are now able to pay the increased dividend from current revenue. Portfolio review We reported last year that the de-rating of UK equities had resulted in a pickup in corporate activity across the market. This trend continued into the year to April 2023, with six bids received for our portfolio companies in the year. At the beginning of the year we saw a recommend bid by KKR for ContourGlobal. As the year progressed and uncertainty over interest rates resulted in private equity deals drying up, corporates took up the baton. Over the course of the year Appreciate, Curtis Banks, Devro, Numis and RPS all received bids from trade buyers. While the takeout prices generally represented attractive premiums to the prevailing share prices at the time, it is fair to say that, overall, we feel the buyers have managed to purchase these assets at advantageous prices. Including five of the six bid situations (the Numis bid was announced on 28 April 2023), we exited seven positions in their entirety with Braemar Shipping and Centaur Media exited on yield grounds. Shareholdings were reduced in ten companies including Belvoir Lettings, Bloomsbury Publishing, Conduit, Kitwave Group, ME Group, Ramsdens Holdings, TP ICAP and Wilmington Group.
Twelve new shareholdings were added to the Company’s portfolio in the year including private and commercial banking group Arbuthnot Banking Group, Conduit – pure-play reinsurance business, Fonix Mobile – mobile payments, Hilton Foods – meat and fish processing, Liontrust – asset management, Marshalls – building materials, OSB Group – specialist mortgage lending, One Health – outsourced NHS Surgery, RWS – content and IP translation and Somero – concrete levelling equipment. Shareholdings were also increased in 17 companies including Bakkavor, Chesnara, Close Brothers Group, Crest Nicholson, Headlam Group, Personal Group Holdings, Regional REIT, Spectra Systems, UP Global Sourcing Holdings and Vector Capital.
Outlook After several years of significant negative events affecting markets, there are some positive signs on the horizon for equity investors. Expectations are starting to shift towards interest rates peaking and inflation falling to more manageable levels, while the spectre of a lasting UK recession appears to be receding. If this is the case, we would expect investor sentiment to gradually improve over the coming year, which would benefit our small and mid-cap universe. We also continue to see an elevated number of companies undertaking share buy-backs, another consequence of current valuations combined with good cash generation and strong balance sheets. As we have previously said, buy-backs are a positive for our stocks, as long as they are instigated alongside an appropriate dividend policy. We continue to have confidence in our investee companies and believe we are yet to benefit from the positive steps taken to improve the underlying operating efficiency of the businesses through the pandemic. Having traded through the challenges of the last twelve months, our companies are generally entering the next phase of the cycle as more lean, nimble enterprises. It will take a positive shift in investor sentiment for our companies to receive the ratings they deserve, but we are confident that the small and midcap universe in which we invest will return to outperformance over the medium term. David Horner Chelverton Asset Management Limited 29 June 2023
Breakdown of Portfolio by Industry
Portfolio Statement
Investment Objective and Policy The investment objective of the Company is to provide Ordinary shareholders with a high income and the opportunity for capital growth, having provided a capital return sufficient to repay the full final capital entitlement of the Zero Dividend Preference shares issued by the wholly-owned subsidiary company, SDVP. The Company’s investment policy is that:
Performance Analysis using Key Performance Indicators At each quarterly Board meeting, the Directors consider a number of key performance indicators (‘KPIs’) to assess the Group’s success in achieving its objectives, including the net asset value (‘NAV’), the dividend per share and the total ongoing charges.
Principal Risks The Directors confirm that they have carried out a robust annual assessment of the principal risks facing the Company, including those that would threaten its objectives, business model, future performance, solvency or liquidity. The Board regularly monitors the principal risks facing the Company, the likelihood of any risk crystallising, the potential implications for the Company and its performance, and any additional mitigation that might be introduced. Mitigation of these risks is primarily sought and achieved in a number of ways as set out below: Market risk The Company is exposed to UK market risk due to fluctuations in the market prices of its investments. The Investment Manager actively monitors economic performance of investee companies and reports regularly to the Board on a formal and informal basis. The Board meets formally with the Investment Manager on a quarterly basis when the portfolio transactions and performance are discussed and reviewed to ensure that the Investment Manager is managing the portfolio within the scope of the investment policy. The Company is substantially dependent on the services of the Investment Manager’s investment team for the implementation of its investment policy. The Company may hold a proportion of the portfolio in cash or cash equivalent investments from time to time. Whilst during positive stock market movements the portfolio may forego potential gains as a result of maintaining such liquidity, during negative market movements this may provide downside protection. Discount volatility The Board recognises that, as a closed-ended company, it is in the long-term interests of shareholders to reduce discount volatility and believes that the prime driver of discounts over the longer term is performance. The Board is pleased to report that discount volatility improved with the Company’s stronger net asset value position and share price during the second half of the year. However, the Board, with its advisers, continues to monitor the Company’s discount levels and shares may be bought back in future should it be considered appropriate to do so by the Board. Regulatory risk A breach of Companies Act provisions or Financial Conduct Authority (‘FCA’) rules may result in the Group’s companies being liable to fines or the suspension of either of the Group companies from listing and from trading on the London Stock Exchange. Furthermore, the Company must comply with the requirements of section 1158 of the Corporation Tax Act 2010 to maintain its investment trust status. The Board, with its advisers, monitors the Group’s regulatory obligations both on an ongoing basis and at quarterly Board meetings. Financial risk The financial position of the Group is reviewed via detailed management accounts at each Board meeting and both financial position and controls are monitored by the Audit Committee. Political risk The Board recognises that changes in the political landscape may substantially affect the Company’s prospects and the value of its portfolio companies. The Board and Investment Manager continue to monitor the impact of sanctions imposed on Russia as a result of the war in Ukraine. The Company has no exposure to Russian stocks within its investment portfolio, hence there was no requirement to amend the Company’s investment policy. Potential future changes to the UK’s policies and regulatory landscape in light of the UK’s departure from the EU could impact the Company and its portfolio companies. Potential political consequences for the Company are regularly monitored and assessed by the Board. Loss of key personnel The Board recognises the crucial part the Investment Manager plays in the ongoing success of the Company’s performance. The departure of the Investment Manager or a key individual at Chelverton Asset Management Limited (‘Chelverton’) may therefore affect the Company’s performance. As set out in the Investment Management Agreement, Chelverton is required to provide one or more dedicated fund managers to the Company, who provides the Board with regular updates on developments at Chelverton, such as succession planning and business continuity plans. Chelverton currently provides two fund managers to the Company, therefore lowering the impact of the potential loss of key personnel.
Pandemic risk The Board and Investment Manager continue to monitor the effects of the social and economic changes arising from the Covid-19 pandemic, together with its impact on the market. The Investment Manager seeks to mitigate exposure to any future pandemics or health crises by continuously monitoring the performance and adaptability of portfolio companies, diversifying investments and seeking to learn valuable lessons from the Covid-19 pandemic. Accounting policies New developments in accounting standards and industry-related issues are actively reported to and monitored by the Audit Committee, the Board where applicable and the Company’s advisers, ensuring that all appropriate accounting policies are adhered to. A more detailed explanation of the financial risks facing the Group is given in note 21 to the financial statements on pages 74 to 79 of the Annual Report. Gearing The Company’s shares are geared by the Zero Dividend Preference shares and should be regarded as carrying above average risk, since a positive NAV for the Company’s shareholders will be dependent upon the Company’s assets being sufficient to meet those prior final entitlements of the holders of Zero Dividend Preference shares. As a consequence of the gearing, a decline in the value of the Company’s investment portfolio will result in a greater percentage decline in the NAV of the Ordinary shares and vice versa.
Section 172 Statement The Directors are mindful of their duties to promote the success of the Company in accordance with Section 172 of the Companies Act 2006, for the benefit of the shareholders, giving careful consideration to wider stakeholders’ interests and the environment in which the Company operates. The Board recognises that its decisions are material, not only to the Company and its future performance, but also to the Company’s key stakeholders, as identified below. In making decisions, the Board considered the outcome from its stakeholder engagement exercises as well as the need to act fairly as between the members of the Company. Investors The Company’s shareholders have a significant role in monitoring and safeguarding the governance of the Company and can exercise their voting rights to do so at general meetings of the Company. Shareholders also benefit from improving performance and returns. All shareholders have access to the Board via the Company Secretary and the Investment Manager at key company events, such as the Annual General Meeting, and throughout the year by contacting the Company Secretary or the Chairman. These regular communications help the Board make informed decisions when considering how to promote the success of the Company for the benefit of shareholders. Furthermore, the Investment Manager prepares and publishes a monthly factsheet on their website. This year’s Annual General Meeting is to be held on 7 September 2023 at the offices of Chelverton Asset Management, Basildon House, 7 Moorgate, London EC2R 6EA. Shareholders are strongly encouraged to vote by proxy and to appoint the Chairman as their proxy. Shareholders are also encouraged to put forward any questions to the Company Secretary in advance of the Annual General Meeting. The Board received enhanced Investor Relations themed reporting from its broker, Shore Capital, during the year, including quarterly shareholder analysis, to ensure continuing awareness of key shareholder groups. Investment Manager The Board recognises the critical role of the Investment Manager in delivering the Company’s future success. The Investment Manager attends Board and Audit Committee meetings, to participate in transparent discussions, where constructive challenge is encouraged. The Board and Investment Manager communicate regularly outside of these meetings with the aim of maintaining an open relationship and momentum in the Company’s performance and prospects. The Investment Manager’s performance is evaluated informally on a regular basis, with a formal review carried out on an annual basis by the Board when performing the functions of a management engagement committee. The Investment Management Agreement is reviewed as part of this process as further discussed on page 27 of the Annual Report. Key service providers The Board relies on a number of advisors for support in the successful operation of the Company and in order to meet its obligations. The Board therefore considers the Investment Manager, Company Secretary/Administrator, Broker, Registrar and Custodian to be stakeholders. The Company employs a collaborative approach and looks to build long term partnerships with these key service providers. They are required to report to the Board on a regular basis and their performance and the terms on which they are engaged are evaluated and considered annually, as detailed on page 35 of the Annual Report. Portfolio companies The Investment Manager regularly liaises with the management teams of companies within the Investment Portfolio and reports on findings and the performance of investee companies to the Board on at least a quarterly basis. Regulators The Board regularly reviews the regulatory landscape and ensures compliance with rules and regulations relevant to the Company via reporting at quarterly Board meeting from the Company Secretary. Compliance with relevant rules and regulations is regularly formally assessed. Community and environment The Board believes that consideration of environmental, social and governance (‘ESG’) factors as part of the investment process when pursuing the Company’s objectives is key. The Board therefore discusses this with the Investment Manager on a regular basis.
Principal Decisions
The Board defines principal decisions as those that are material to the Company as well as those that are significant to any of the Company’s key stakeholders as identified in the table above. In making the principal decisions set out below, the Board considered the outcome from its engagement with stakeholders as well as the need to maintain a reputation for high standards of business conduct and the need to act fairly as between the members of the Company. Principal decision 1 – Issue of shares Strong NAV performance for the first half of the financial year to 30 April 2023 enabled the Board to approve the issuing of new shares in response to demand, as set out in more detail on page 28 of the Annual Report. Since the beginning of the calendar year, the Company issued 510,000 shares at a premium to NAV.
Principal decision 2 – Block listing facility As detailed further on page 28 of the Annual Report, the Board approved an application to the Financial Conduct Authority for a Block Listing Facility of 2,750,000 Ordinary shares to be admitted to the Official List and to the London Stock Exchange. Principal decision 3 – Monthly factsheets In order to enhance communications with the Company’s shareholders, the Investment Manager prepares and publishes a monthly factsheet, which is available on the Chelverton website. The Board decided that a notification of the publication of the monthly factsheet should be made to the London Stock Exchange, which has happened every month since July 2022. Principal decision 4 – Dividend policy In accordance with the Company’s dividend policy, the Board approved four quarterly dividends of 2.9425p per Ordinary share (totalling 11.77p for the year). In the financial year to 30 April 2022, the Company increased the quarterly dividend rate by 7% from that of the previous year. For the current financial year, the Board took the decision to once again increase the quarterly dividend rate by 7%.
Viability Statement The Board and Investment Manager continuously consider the performance, progress and future prospects of the Company over a variety of future timescales. These assessments, including regular investment performance updates from the Investment Manager, and a continuing programme of risk monitoring and analysis, form the foundations of the Board’s assessment of the future viability of the Company. The Directors are mindful of the Company’s commitments to shareholders of the Subsidiary in 2025 in forming their viability opinion for the Company each year. With this in mind, the Directors currently believe that future demand from investors will enable the Group’s subsidiary to issue new zero dividend preference shares (ZDPs) upon repayment of the existing ZDPs in 2025. The Directors remain of the view, therefore, that three years is a wholly realistic and the most appropriate period over which to assess the viability of the Company. After careful analysis, taking into account the potential impact of the current risks and uncertainties to which the Company is exposed, the Directors confirm that in their opinion:
The following facts, which have not materially changed in the last financial year, support the Directors’ view:
In order to maintain viability, the Company has a robust risk control framework for the identification and mitigation of risk, which is reviewed regularly by the Board. The Directors also seek assurances from its independent service providers, to whom all management and administrative functions are delegated, that their operations are well managed and they are taking appropriate action to monitor and mitigate risk. The Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period of the assessment.
Other Statutory Information Company status and business model The Company was incorporated on 6 April 1999 and commenced trading on 12 May 1999. The Company is a closed-ended investment trust with registered number 03749536. Its capital structure consists of Ordinary shares of 25p each, which are listed and traded on the main market of the London Stock Exchange. The principal activity of the Company is to carry on business as an investment trust. The Company has been granted approval from HMRC as an investment trust under Sections 1158/1159 of the Corporation Tax Act 2010 on an ongoing basis. The Company will be treated as an investment trust company subject to there being no serious breaches of the conditions for approval. The Company is also an investment company as defined in Section 833 of the Companies Act 2006. The current portfolio of the Company is such that its shares are eligible for inclusion in Individual Savings Accounts (‘ISAs’) up to the maximum annual subscription limit and the Directors expect this eligibility to be maintained. The Group financial statements consolidate the audited annual report and financial statements of the Company and SDVP for the year ended 30 April 2023. The Company owns 100% of the issued ordinary share capital and voting rights of SDVP, which was incorporated on 25 October 2017. Further information on the capital structure of the Company and SDVP can be found on pages 77 to 78 of the Annual Report. Alternative Investment Fund Manager (‘AIFM’) The Board is compliant with the directive and the Company is registered as a Small Registered AIFM with the FCA and all required returns have been completed and filed. Employees, environmental, human rights and community issues The Board recognises the requirement under Section 414C of the Companies Act to detail information about employees, environmental, human rights and community issues, including information about any policies it has in relation to these matters and the effectiveness of these policies. These requirements and the requirements of the Modern Slavery Act 2015 do not directly apply to the Company as it has no employees and no physical assets, all the Directors are non-executive and it has outsourced all its management and administrative functions to third-party service providers. The Company has therefore not reported further in respect of these provisions. However, in carrying out its activities and in relationships with service providers, the Company aims to conduct itself responsibly, ethically and fairly at all times. Environmental, Social, Governance (‘ESG’) The Investment Manager is committed to delivering the long-term investment objectives of the Company. This long-term lens involves careful consideration of systemic issues that can present investing opportunities and challenges for investors, such as those relating to climate change and more sustainable business practice.
Responsible investing and active stewardship lie at the heart of the investing approach and the Investment Manager is signatory to the United-Nations backed Principles of Responsible Investing (‘PRI’) and the revised UK Stewardship Code 2020. As signatory to these best-practice principles the Investment Manager systematically incorporates relevant ESG issues within their investment analysis and decision making and adhere to policies and processes designed to ensure the responsible allocation, management, and oversight of capital with the aim of protecting and enhancing value for investors, leading to benefits for the economy, the environment and society. The Responsible Investing policies, plans, and risk controls that guide the Investment Manager’s investing activities are detailed in a Responsible Investing Policies Pack, available to view on the Chelverton website alongside an annual UK Stewardship Code Report and quarterly Engagement and Voting reports. The Responsible Investing Pack includes:
The internal roles, governance structures, and resources that support the responsible investing and active stewardship activities of the Investment Manager include:
ESG in a UK Small and Mid-cap Context Small and medium-sized companies are neither immune from the impact of systemic risk, nor without a significant role to play in the delivery of required change. However, small and mid-sized companies are typically poorly researched by external ESG ratings agencies and assessments show a recognised large-cap bias. Consequently, the Investment Manager does not rely on external ESG ratings, considering these for contextual purposes only. The Investment Manager prefers in-house analysis supported by proprietary ESG data collection, considering this more appropriate for the small and mid-cap universe. Corporate Governance Issues The Investment Manager pays particular attention to corporate governance, believing purpose driven companies, demonstrating strong and effective governance and a healthy corporate culture, are best placed to succeed. The Investment Manager has the support of the ESG Team in this assessment and access to information and analysis gathered from proprietary ESG questionnaires. The assessment is sensitive to company size, level of maturity, and specific circumstances of each company. The Investment Manager is supportive of the general principles expressed by the UK Corporate Governance Code and Quoted Companies Alliance CQCA) Code for small and medium sized companies and expects companies to adhere to these standards or explain why they have not done so. The Investment Manager considers the following, engaging to understand individual circumstances and to influence change where this is deemed to be of value.
The Investment Manager considers the boards of small and medium-sized companies should not become too large for cost and efficiency reasons and that the Board should be well-balanced in terms of executive and non-executive directors, with a majority of non-executive directors. Non-executive directors are scrutinised for their independence and good historic behaviour. The tenure of directors should ideally not exceed 10 years. However, this is always considered within the company context. The Investment Manager prefers non-executives to be on fewer rather than multiple boards whilst acknowledging good non-executives are in short supply. The Investment Manager looks for an appropriate mixture of abilities and knowledge on the Board and consider the experience of an independent Chair to be particularly important. Diversity and inclusion at board level is considered an indicator of an inclusive company culture and important in relation to the quality of decision-making. Whilst encouraging boards to ensure their composition is reflective of society, the Investment Manager accepts this can take time to achieve. However, the Investment Manager will engage to ensure board diversity is a consideration in the nomination process, where appropriate.
Executive remuneration proposals are reviewed annually using the company Report and Accounts and the Investment Manager will engage with the Chair or Chair of the Remuneration Committee where proposals do not meet the following broad criteria: Remuneration should encourage long-term value creation and the alignment of management and shareholder interests, including claw back mechanisms in the event of misconduct. Basic pay awards above inflation should be justified by performance. Performance thresholds should be challenging and linked to clear targets. The Investment Manager favours the inclusion of material ESG management targets alongside financial targets and that awards should be sensitive to the constraints on awards to the wider workforce during periods of difficult trading. Long term incentive schemes should be simple and share-based with minimum holding periods, and the manager favours the inclusion of total shareholder return metrics in long term incentive schemes. Shareholder dilution resulting from the issuance of options or new shares in remuneration packages should not be excessive. One-off recruitment awards to secure the right candidate should not become part of ongoing remuneration. Executive pension contributions should progressively align with the pension contributions of the wider workforce. Capital Allocation, Dividend Policy and Capital Structure Capital allocation, dividend policy and capital structure are regularly and openly discussed at company engagement meetings, allowing a two-way dialogue. The Investment Manager seeks to invest in companies that recognise their responsibilities to existing shareholders and expect to be consulted regarding any changes in capital allocation or dividend policy. The Investment Manager is not opposed to the retention of cashflow within a business to fund opportunities at attractive rates of return but favour excess cashflow to be paid out in line with a clear policy. Dividend policies should be appropriate for the current and future cash flows of the business, while recognising the need to deliver returns to shareholders. Where dividend policies are expressed as a payout ratio, the Investment Manager typically favours a target range rather than an explicit ratio. If there is excess capital to distribute, the preferred method is a gradual increase in the ordinary dividend. The Investment Manager is not opposed to special dividends or share buy-backs in line with policy, but expects any shares bought back to be cancelled. The Investment Manager does not favour unnecessary equity issuance, or the dilution of existing shareholder returns through aggrandising corporate activity. However, all proposals for new equity are considered on a case-by -case basis. Environmental Issues The Investment Manager considers each company’s approach to the identification, management and reporting of material environmental issues, asking targeted questions via ESG questionnaire and relying on the support of the ESG Team for additional insight where appropriate. A review of company policies, standards, and commitments in relation to environmental responsibilities is undertaken. In addition, the Investment Manager writes annually to committed holdings outlining expectations regarding issues considered so pervasive that they have become the responsibility of all system participants to manage regardless of materiality. Climate The Investment Manager accepts that limiting global warming to 1.5 degrees above pre-industrials, in line with the Paris Agreement and national commitments to net zero, is a central consideration for a responsible investor. The Investment Manager is committed to using shareholder influence to ensure all investee companies are working towards the adoption of a Net Zero strategy. Biodiversity The Investment Manager is mindful of the depletion in the natural capital upon which we all depend and the urgency to reverse biodiversity loss and is committed to engaging with investee companies to ensure focus on natural resource efficiency, the control of negative impacts, and the adoption of policies and practices that can support nature restoration. Social Issues The Investment Manager considers each company’s approach to the identification, management and reporting of material social issues, asking targeted questions via ESG questionnaire and relying on the support of the ESG Team for additional insight where appropriate. A review of company policies, standards, and commitments in relation to social issues is undertaken. In addition, the Investment Manager writes annually to committed holdings outlining expectations regarding issues considered so pervasive that they have become the responsibility of all system participants to manage regardless of materiality. Human Rights The Investment Manager follows a process to understand each company’s focus on the effective management of human rights issues, including within supply chains. Questions are asked via an ESG questionnaire and a review company policies, standards, and commitments in relation to human rights is undertaken with the support of the ESG Team. Human Capital Competition for talent across all sectors of the economy has rarely been so fierce and the employment expectations and training and support needs of the workforce have rapidly evolved in recent years. Therefore, the Investment Manager considers company focus on recruitment, employee satisfaction, and retention to be central to ingredients of company success. Questions are asked via the ESG questionnaire and a review of company policies, standards, and commitments in relation to human capital management is undertaken with the support of the ESG Team. In addition, the Investment Manager is committed to using shareholder influence to ensure all investee companies are focussed on improving diversity, equity and inclusion within leadership and the wider workforce. Health and Safety As a part of understanding company culture and the Company’s focus on human capital, the Investment Manager reviews company policies, including performance statistics where relevant, relating the occupational Health and Safety, asking questions via the ESG questionnaire and reviewing the approach with the support of the ESG Team where relevant. Engagement Engagement lies at the heart of the Investment Manager’s approach to managing ESG risk and significant time and resources are devoted to company engagement. The Investment Manager fosters constructive relationships with the executive and non-executive management teams, and increasingly with sustainability and other professionals such as investor relations, seeking purposeful dialogue on ESG issues.
Engagement activity is reported on an annual basis in the Investment Manager UK Stewardship Code Report and is guided by the Chelverton Shareholder Engagement and Voting Policy. The Investment Manager considers their skill and expertise when engaging with companies to be value enhancing and follow a structured approach, relying on the support of the ESG Team to ensure the appropriate inclusion of ESG issues and progress in relation to active engagement objectives. The Investment Manager writes to all committed holdings on an annual basis outlining ESG management and reporting expectations and asking for focus on systemic issues, including climate change, diversity equity and inclusion, ESG targets within executive remuneration packages, and more recently natural resource usage and nature restoration. Collaborative engagement aims to support the needs of small and mid-sized companies within the financial system and promote their participation in more sustainable business practice and the Investment Manager targets collaborative engagements that address the market-wide and systemic risks identified through the investment process as important. The desired outcome of active engagement is to reduce investment risk and enhance the prospects of investee companies through dialogue and support. However, the Investment Manager is not a ‘forever’ investor and may look to sell holdings where the investment case is considered at risk due to inadequate management focus on material ESG risk. Proxy Voting The Investment Manager considers voting an important shareholder right and seek to vote every eligible vote in line with the principles laid out in the Chelverton Asset Management Shareholder Engagement and Voting Policy and active engagement objectives laid out in the annual Engagement Plan. However, in principle, having satisfied themselves regarding the integrity of the investment case, the Investment Manager is likely to be supportive of company management. The Investment Manager does not rely on the services of a third-party proxy voting advisor, believing in-house governance analysis by the ESG Team’s Corporate Governance Manager, considered alongside the contextual knowledge of the Investment Manager, is more pertinent for small and mid-sized companies. Voting behaviour, including the rationale for any vote that is not supportive of a management resolution, is reported on a quarterly basis on the Chelverton website and summarised annually in the UK Stewardship Code Report. Data Science and Third-party Data Resources The Chelverton ESG Team have built a proprietary ESG data base using company ESG questionnaire responses supplemented by desk-based research. The Investment Manager also maintains a shared Corporate Engagement Log recording relevant company engagements and progress in relation to engagement objectives. The Investment Manager has access to several external ESG data services that provide contextual insight in relation to ESG risk factors, including MSCI ESG data, Bloomberg ESG Data that includes summary ESG ratings from Sustainalytics, ISS and RobecoSam, signatory CDP data (Carbon Disclosure Project) relating to climate, water and deforestation, and ASR Macro ESG research. Screening The Investment Manager does not currently set limits or apply exclusion or inclusion criteria in relation to sustainability objectives, except where required by law or in relation to banned activities under international conventions. The Investment Manager relies on MSCI ESG data to provide data regarding involvement in controversial business exposures or banned weaponry. However, the Investment Manager’s investment focus on quality characteristics will tend to exclude companies assessed as managing ESG risks badly and/or without a credible strategy. For example, if a company operating in a high ESG risk sector is identified as managing ESG risk poorly, the company will tend to be excluded from consideration by our selection criteria, as paid out in the Investment Manager’s ESG Policy. Global greenhouse gas emissions The Company has no greenhouse gas emissions to report from its operations, nor does it have responsibility for any other emission-producing sources under the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013. Streamlined energy and carbon reporting The Company is categorised as a lower energy user under the HMRC Environmental Reporting Guidelines March 2019 and is therefore not required to make the detailed disclosures of energy and carbon information set out within the guidelines. The Company has therefore not reported further in respect of these guidelines. Culture and values The Company’s values are to act responsibly, ethically and fairly at all times. The Company’s culture is driven by its values and is focused on providing Ordinary shareholders with a high income and opportunity for capital growth, as set out on page 11 of the Annual Report. As the Company has no employees, its culture is represented by the values, conduct and performance of the Board, the Investment Manager and its key service providers, all of whom work collaboratively to support delivery of the Company’s strategy. Current and future developments A review of the main features of the year and the outlook for the Company is contained in the Chairman’s Statement on pages 2 to 4 of the Annual Report and the Investment Manager’s Report on pages 5 and 6 of the Annual Report.
Dividends declared/paid
Ten year dividend history
Diversity and succession planning As at 30 April 2023 the Board comprised three Directors, two male and one female. The Company did not meet the FCA Listing Rules target on diversity which requires 40% of the individuals on the board to be women and for at least one senior board position to be held by a woman. Furthermore, one director should come from an ethnic minority background. As at 30 April 2023, the Company did not meet this gender diversity requirement as only one out of three directors (33%) is female. The Board also does not have a director from an ethnic minority background. The Board recognises the need to consider the benefits of diversity when considering new appointments to the Board. All appointments are made on the basis of merit against objective criteria; however, the Board seeks to consider a wide range of candidates with due regard to diversity, spanning gender, ethnicity, background and experience. As all appointments are based on merit, and in view of the small size of the Board, the Board does not consider it appropriate to set diversity targets. The Board will continue to consider succession planning on an annual basis. The Strategic Report is signed on behalf of the Board by Howard Myles Chairman 29 June 2023
Statement of Directors’ Responsibilities in respect of the Annual Report and the financial statements The Directors are responsible for preparing the Annual Report and the financial statements. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare financial statements in accordance with UK adopted international accounting standards and with the requirements of the Companies Act 2006 as applicable to companies reporting under international accounting standards. Under company law the Directors must not approve the financial statements unless they are satisfied that they present fairly the financial position, financial performance and cash flows of the Group and the Company for that period. In preparing each of the Group and the Company’s financial statements, the Directors are required to:
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the Group’s financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, a Directors’ Report, Directors’ Remuneration Report and Statement on Corporate Governance that comply with that law and those regulations, and for ensuring that the Annual Report includes information required by the Listing Rules of the FCA. The Directors are responsible for the maintenance and integrity of the corporate and financial information relating to the Company on the Investment Manager’s website. Legislation in the UK governing the preparation and dissemination of financial statements differs from legislation in other jurisdictions. The Directors confirm that, to the best of their knowledge and belief:
On behalf of the Board of Directors Howard Myles Chairman 29 June 2023
Consolidated Statement of Comprehensive Income for the year ended 30 April 2023
The total column of this statement is the Statement of Comprehensive Income of the Group prepared in accordance with UK adopted IFRS and with the requirements of the Companies Act 2006. All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year. All of the net return for the period and the total comprehensive income for the period is attributable to the shareholders of the Group. The supplementary revenue and capital return columns are presented for information purposes as recommended by the Statement of Recommended Practice issued by the AIC. The accompanying notes form part of these financial statements.
Consolidated and Parent Company Statement of Changes in Net Equity for the year ended 30 April 2023
The accompanying notes form part of these financial statements.
Consolidated and Parent Company Balance Sheets as at 30 April 2023
The accompanying notes form part of these financial statements. These financial statements were approved by the Board of Chelverton UK Dividend Trust PLC and authorised for issue on 29 June 2023. Howard Myles Company Registered Number: 03749536 Consolidated and Parent Company Statement of Cash Flows for the year ended 30 April 2023
The accompanying notes form part of these financial statements.
Notes to the Financial Statements as at 30 April 2023 1 ACCOUNTING POLICIES Chelverton UK Dividend Trust PLC is a public company, limited by shares, domiciled and registered in the UK. The consolidated financial statements for the year ended 30 April 2023 comprise the financial statements of the Company and its subsidiary SDV 2025 ZDP PLC. Basis of preparation The consolidated financial statements of the Group and the financial statements of the Company have been prepared in accordance with UK adopted International Financial Reporting Standards (‘UK adopted IFRS’) and with the Companies Act 2006 as applicable to companies reporting under international accounting standards, and reflect the following policies which have been adopted and applied consistently. New standards, interpretations and amendments adopted by the Group There are no amendments to standards effective this year, being relevant and applicable to the Group. Critical accounting judgements and uses of estimation The preparation of financial statements in conformity with UK adopted IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and the amounts reported in the Balance Sheet and the Statement of Comprehensive Income. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future period if the revision affects both current and future periods. There were no significant accounting estimates or significant judgements in the current period. Basis of consolidation The Group financial statements consolidate (under IFRS10), the financial statements of the Company and its wholly-owned subsidiary undertaking, SDVP, drawn up to the same accounting date. The disclosure basis of recognition is at cost. The Subsidiary is consolidated from the date of its incorporation, being the date on which the Company obtained control, and will continue to be consolidated until the date that such control ceases. Control comprises the power to govern the financial and operating policies of the investee so as to obtain benefit from its activities and is achieved through direct or indirect ownership of voting rights. The financial statements of the Subsidiary are prepared for the same reporting year as the Company, using consistent accounting policies. All inter-company balances and transactions, including unrealised profits arising from them, are eliminated. As permitted by Section 408 of the Companies Act 2006, the Company has not presented its own Statement of Comprehensive Income. The amount of the Company’s return for the financial period dealt with in the financial statements of the Group is a loss of £3,933,000 (2022: loss of £3,665,000). Convention The financial statements are presented in Sterling rounded to the nearest thousand. The financial statements have been prepared on a going concern basis under the historical cost convention, except for the measurement at fair value of investments classified as fair value through profit or loss. Where presentational guidance set out in the Statement of Recommended Practice ‘Financial Statements of Investment Trust Companies and Venture Capital Trusts’ (‘SORP’), issued by the Association of Investment Companies (dated June 2022) is consistent with the requirements of UK adopted IFRS, the Directors have sought to prepare the financial statements on a consistent basis compliant with the recommendations of the SORP. Segmental reporting The Directors are of the opinion that the Group is engaged in a single segment of business, being investment business. The Group only invests in companies listed in the UK. Investments All investments held by the Group are recorded at ‘fair value through profit or loss’. Investments are initially recognised at cost, being the fair value of the consideration given. After initial recognition, investments are measured at fair value, with unrealised gains and losses on investments and impairment of investments recognised in the Consolidated Statement of Comprehensive Income and allocated to capital. Realised gains and losses on investments sold are calculated as the difference between sales proceeds and cost. For investments actively traded in organised financial markets, fair value is generally determined by reference to quoted market bid prices at the close of business on the Balance Sheet date, without adjustment for transaction costs necessary to realise the asset. Trade date accounting All ‘regular way’ purchases and sales of financial assets are recognised on the ‘trade date’, i.e. the day that the Group commits to purchase or sell the asset. Regular way purchases, or sales, are purchases or sales of financial assets that require delivery of the asset within a time frame generally established by regulation or convention in the market place. Income Dividends receivable on quoted equity shares are taken into account on the ex-dividend date. Where no ex-dividend date is quoted, they are brought into account when the Group’s right to receive payment is established. Other investment income and interest receivable are included in the financial statements on an accruals basis. Overseas dividends received from UK Companies are stated gross of any withholding tax. Expenses All expenses are accounted for on an accruals basis. All expenses are charged through the revenue account in the Consolidated Statement of Comprehensive Income except as follows:
All other expenses are allocated to revenue with the exception of 75% (2022: 75%) of the Investment Manager’s fee which is allocated to capital. This is in line with the Board’s expected long-term split of returns from the investment portfolio, in the form of capital and income gains respectively. Cash and cash equivalents Cash in hand and in banks including where held by custodians and short-term deposits which are held to maturity are carried at cost. Cash and cash equivalents are defined as cash in hand, demand deposits and short-term, highly liquid investments readily convertible to known amounts of cash and subject to insignificant risk of changes in value. Loans and borrowings All loans and borrowings are initially recognised at cost, being the fair value of the consideration received, less issue costs, where applicable. After initial recognition, all interest-bearing loans and borrowings are subsequently measured at amortised cost. Any difference between cost and redemption value is recognised in the Consolidated Statement of Comprehensive Income over the period of the borrowings on an effective interest basis. Zero Dividend Preference shares Shares issued by the Subsidiary are treated as a liability of the Group, and are shown in the Balance Sheet at their redemption value at the Balance Sheet date. The appropriations in respect of the Zero Dividend Preference shares necessary to increase the Subsidiary’s liabilities to the redemption values are allocated to capital in the Consolidated Statement of Comprehensive Income. This treatment reflects the Board’s long-term expectations that the entitlements of the Zero Dividend Preference shareholders will be satisfied out of gains arising on investments held primarily for capital growth. Share issue costs Costs incurred directly in relation to the issue of shares in the Subsidiary are borne by the Company and taken 100% to capital. Share issue costs relating to Ordinary share issues by the Company are taken 100% to the share premium account in respect of premiums on issue of such shares. Where there is no premium on issue, costs are taken directly to equity against revenue reserves. Capital reserve Capital reserve (other) includes:
Capital reserve (investment holding gains) includes increase and decrease in the valuation of investments held at the year end. This reserve is distributable to the extent that gains have been realised. Revenue reserve This reserve includes net revenue recognised in the revenue column of the Statement of Comprehensive Income. This reserve is distributable. Capital redemption reserve This reserve represents the cancellation of the C shares when they were converted into Ordinary shares and deferred shares. This reserve is not distributable. Taxation There is no charge to UK income tax as the Group’s allowable expenses exceed its taxable income. Deferred tax assets in respect of unrelieved excess expenses are not recognised as it is unlikely that the Group will generate sufficient taxable income in the future to utilise these expenses. Deferred tax is not provided on capital gains and losses because the Company meets the conditions for approval as an investment trust company. Dividends payable to shareholders Dividends to shareholders are recognised as a liability in the period in which they are paid or approved in general meetings and are taken to the Statement of Changes in Net Equity. Dividends declared and approved by the Group after the Balance Sheet date have not been recognised as a liability of the Group at the Balance Sheet date. 2 INCOME
Total income is comprised entirely of dividends.
3 INVESTMENT MANAGEMENT FEE
At 30 April 2023 there were amounts outstanding of £61,000 (2022: £73,000).
The current tax charge for the year is lower than the standard rate of corporation tax in the UK of 19.5% to 30 April 2023 and 19% to 30 April 2022. The differences are explained below:
The Group has unrelieved excess expenses of £24,871,884 (2022: £24,105,280). It is unlikely that the Group will generate sufficient taxable profits in the future to utilise these expenses and therefore no deferred tax asset has been recognised.
The main rate of corporation tax in the United Kingdom has increased from 19% to 25% from 1 April 2023. The theoretical corporation tax rate for the year ended is therefore 19.5% as disclosed above.
8 RETURN PER SHARE Ordinary shares Revenue return per Ordinary share is based on revenue on ordinary activities after taxation of £2,704,000 (2022: £2,084,000) and on 20,889,726 (2022: 20,850,000) Ordinary shares, being the weighted average number of Ordinary shares in issue during the year. Capital return per Ordinary share is based on the capital loss of £6,637,000 (2022: loss of £5,749,000) and on 20,889,726 (2022: 20,850,000) Ordinary shares, being the weighted average number of Ordinary shares in issue during the year. Zero Dividend Preference shares Capital return per Zero Dividend Preference share 2025 is based on allocations from the Company of £680,000 (2022: £654,000) and on 14,500,000 (2022: 14,500,000) Zero Dividend Preference shares 2025, being the weighted average number of Zero Dividend Preference shares in issue during the year.
9 DIVIDENDS
10 INVESTMENTS – Group and Company
During the year the Group incurred transaction costs of £33,000 (2022: £20,000) and £11,000 (2022: £12,000) on purchases and sales of investments respectively. These amounts are included in gains on investments, as disclosed in the Consolidated Statement of Comprehensive Income.
11 SIGNIFICANT INTERESTS The Company has provided notifications of holdings of 3% or more in relevant issuers. The following issuer notifications remain effective as at 30 April 2023: Name of issuer Class of share % held Chamberlin plc Ordinary 10.00 Coral Products plc Ordinary 7.75 One Health Group plc Ordinary 7.15 Orchard Funding Group plc Ordinary 5.85 RTC Group plc Ordinary 3.87 Vector Capital plc Ordinary 3.49
12 INVESTMENT IN SUBSIDIARY
The Company owns the whole of the issued ordinary share capital of SDVP, especially formed for the issuing of Zero Dividend Preference shares, which is incorporated and registered in England and Wales, under company number: 11031268.
13 TRADE AND OTHER RECEIVABLES
14 TRADE AND OTHER PAYABLES
15 ZERO DIVIDEND PREFERENCE SHARES On 8 January 2018, SDVP issued 10,977,747 Zero Dividend Preference shares at 100p per share from the conversion of Zero Dividend Preference shares of SCZ, the 2018 ZDP subsidiary. On 8 January 2018, 1,802,336 Zero Dividend Preference shares were also issued at 100p per share by a placing with net proceeds of £1.8 million. The expenses of the placing were borne by the Company and the Investment Manager. On 11 April 2018, SDVP issued a further 1,419,917 Zero Dividend Preference shares at 103p per share (a premium of 3p per share), and net proceeds of £1.5 million. On the 10 May 2018 and 15 May 2018, SDVP issued a further 100,000 and 200,000 Zero Dividend Preference shares at 104p per share (a premium of 4p per share), and net proceeds of £313,000. The Zero Dividend Preference shares each have an initial capital entitlement of 100p per share, growing by an annual rate of 4% compounded daily to 133.18p on 30 April 2025, a total of £19,311,000. The accrued entitlement as per the Articles of Association of SDVP at 30 April 2023 was 123.22p (2022: 118.52p) per share, being £17,186,000 in total, and the total amount accrued for the year of £680,000 (2022: £654,000) has been charged as a finance cost to capital. 16 SECURED LOAN Pursuant to a loan agreement between SDVP and the Company, SDVP has lent the gross proceeds of the following Zero Dividend Preference transactions to the Company:
The loan is non-interest bearing and is repayable three business days before the Zero Dividend Preference share redemption date of 30 April 2025 or, if required by SDVP, at any time prior to that date in order to repay the Zero Dividend Preference share entitlement. The funds are to be managed in accordance with the investment policy of the Company. The loan is secured by way of a floating charge on the Company’s assets under a loan agreement entered into between the Company and SDVP dated 27 November 2017. A contribution agreement between the Company and SDVP has also been made whereby the Company will undertake to contribute such funds as would ensure that SDVP will have in aggregate sufficient assets on 30 April 2025 to satisfy the final capital entitlement of the Zero Dividend Preference shares. The contribution accrued by the Company to cover the entitlement for the year was £680,000 (2021: £654,000).
During the year, the Company announced the following issuances of new Ordinary Shares of 25p each:
The rights attaching to the Ordinary shares are: As to dividends each year Ordinary shares are entitled to all the revenue profits of the Company available for distribution, including all undistributed income. As to capital on winding up On a winding up, holders of Zero Dividend Preference shares issued by SDVP are entitled to a payment of an amount equal to 100p per share, increased daily from 8 January 2018 at such a compound rate, equivalent to 4%, as will give a final entitlement to 133.18p for each Zero Dividend Preference share at 30 April 2025, £19,311,000 in total. The holders of Ordinary shares will receive all the remaining Group assets available for distribution to shareholders after payment of all debts and satisfaction of all liabilities of the Company rateably according to the amounts paid or credited as paid up on the Ordinary shares held by them respectively. Voting Each holder of Ordinary shares on a show of hands will have one vote and, on a poll, will have one vote for each Ordinary share held. Each holder of Zero Dividend Preference shares on a show of hands will have one vote at meetings where Zero Dividend Preference shareholders are entitled to vote and, on a poll, will have one vote for every Zero Dividend Preference share held. Duration Under the Parent Company’s Articles of Association, the Directors are required to convene a General Meeting of the Company to be held in April 2025 so as to align the vote with any timetable for a further issue of Zero Dividend Preference shares or to save costs by proposing the Continuation Resolution (as defined below) at the Annual General Meeting or some other General Meeting of the Company (‘the First GM’), at which an Ordinary Resolution will be proposed to the effect that the Company continues in existence (‘the Continuation Resolution’). In the event that such Resolution is not passed, the Directors shall, subject to the Statutes, put forward further proposals to shareholders regarding the future of the Company (which may include voluntary liquidation, unitisation or other reorganisation of the Company) (‘the Restructuring Resolution’) at a General Meeting of the Company to be convened not more than four months after the date of the First GM (or such adjournment). The Restructuring Resolution shall be proposed as a Special Resolution. If the Restructuring Resolution is either not proposed or not passed then the Directors shall convene a General Meeting not more than four months after the date of the First GM (or such adjournment). If the Restructuring Resolution is not proposed or four months after the date the Restructuring Resolution is not passed, an Ordinary Resolution pursuant to Section 84 of the Insolvency Act 1986 to voluntarily wind up the Company shall be put to shareholders and the votes taken on such Resolution shall be on a poll. 18 NET ASSET VALUE PER SHARE The net asset value per share and the net assets attributable to the Ordinary shareholders and Zero Dividend Preference shareholders are as follows: Net assets Net assets Net asset attributable to Net asset attributable to value per share shareholders value per share shareholders
The net asset value per Ordinary share is calculated on 21,150,000 (2022: 20,850,000) Ordinary shares, being the number of Ordinary shares in issue at the year end. The net asset value per Zero Dividend Preference share is calculated on 14,500,000 (2022: 14,500,000) Zero Dividend Preference shares, being the number of Zero Dividend Preference shares in issue at the year end. 19 RECONCILIATION OF NET RETURN BEFORE AND AFTER TAXATION
21 ANALYSIS OF FINANCIAL ASSETS AND LIABILITIES Objectives, policies and strategies The Group primarily invests in mid and small capitalised companies. All of the Group’s investments comprise ordinary shares in companies listed on the Official List and companies admitted to AIM. The Group finances its operations through Zero Dividend Preference shares issued by SDVP and equity. Cash, liquid resources and short-term debtors and creditors arise from the Group’s day-to-day operations. It is, and has been throughout the year under review, the Group’s policy that no trading in financial instruments shall be undertaken. Objectives, policies and strategies In pursuing its investment objective, the Group is exposed to a variety of risks that could result in either a reduction in the Group’s net assets or a reduction of the profits available for distribution. These risks are market risk (comprising currency risk, interest rate risk and other price risk), credit risk and liquidity risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below. As required by IFRS 7: Financial Instruments: Disclosures, an analysis of financial assets and liabilities, which identifies the risk to the Group of holding such items, is given below. Market risk Market risk arises mainly from uncertainty about future prices of financial instruments used in the Group’s business. It represents the potential loss the Group might suffer through holding market positions by way of price movements and movements in exchange rates and interest rates. The Investment Manager assesses the exposure to market risk when making each investment decision and these risks are monitored by the Investment Manager on a regular basis and the Board at quarterly meetings with the Investment Manager. Market price risk Market price risks (i.e. changes in market prices other than those arising from currency risk or interest rate risk) may affect the value of investments. The Board manages the risks inherent in the investment portfolios by ensuring full and timely reporting of relevant information from the Investment Manager. Investment performance is reviewed at each Board meeting. The Group’s exposure to changes in market prices at 30 April on its investments is as follows: 2023 2022 £’000 £’000 Fair value through profit or loss investments 52,825 57,751 Sensitivity analysis A 10% increase in the market value of investments at 30 April 2023 would have increased net assets by £5,283,000 (2022: £5,775,000). An equal change in the opposite direction would have decreased the net assets available to shareholders by an equal but opposite amount. Foreign currency risk All the Group’s assets are denominated in Sterling and accordingly the only currency exposure the Group has is through the trading activities of its investee companies. Interest rate risk Interest rate movements may affect the level of income receivable on cash deposits. The Group does not currently receive interest on its cash deposits. The majority of the Group’s financial assets are non-interest bearing. As a result the Group’s financial assets are not subject to significant amounts of risk due to fluctuations in the prevailing levels of market interest rates. Interest rate risk The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment decisions. The exposure at 30 April 2023 of financial assets and financial liabilities to interest rate risk is limited to cash and cash equivalents of £380,000 (2022: £534,000). Cash and cash equivalents are all due within one year. Credit risk Credit risk is the risk of financial loss to the Group if the contractual party to a financial instrument fails to meet its contractual obligations. The carrying amounts of financial assets best represent the maximum credit risk exposure at the Balance Sheet date. Listed investments are held by Jarvis Investment Management Limited acting as the Company’s custodian. Bankruptcy or insolvency of the custodian may cause the Company’s rights with respect to securities held by the custodian to be delayed. The Board monitors the Group’s risk by reviewing the custodian’s internal controls reports. Investment transactions are carried out with a number of brokers whose creditworthiness is reviewed by the Investment Manager. Transactions are ordinarily undertaken on a delivery versus payment basis whereby the Company’s custodian bank ensures that the counterparty to any transaction entered into by the Group has delivered in its obligations before any transfer of cash or securities away from the Group is completed. Cash is only held at banks that have been identified by the Board as reputable and of high credit quality. The maximum exposure to credit risk as at 30 April 2023 was £53,764,000 (2022: £58,805,000). The calculation is based on the Group’s credit risk exposure as at 30 April 2023 and this may not be representative of the year as a whole. None of the Group’s assets are past due or impaired. Liquidity risk The majority of the Group’s assets are listed securities in small companies, which can under normal conditions be sold to meet funding commitments if necessary. They may, however, be difficult to realise in adverse market conditions. Please see notes 15 and 16 for details of liabilities that fall due for payment in more than one year. All other payables are due in less than one year. Financial instruments by category The financial instruments of the Group fall into the following categories: 30 April 2023 Assets at fair value through At Loans and profit cost receivables or loss Total
IFRS 7 hierarchy As required by IFRS 7 the Company is required to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy consists of the following three levels: Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities. An active market is a market in which transactions for the asset or liability occur with sufficient frequency and volume on an ongoing basis such that quoted prices reflect prices at which an orderly transaction would take place between market participants at the measurement date. Quoted prices provided by external pricing services, brokers and vendors are included in Level 1, if they reflect actual and regularly occurring market transactions on an arm’s length basis. Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices). Level 2 inputs include the following:
Level 3 – Inputs for the asset or liability that are not based on observable market data (unobservable inputs). The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a Level 3 measurement. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgement, considering factors specific to the asset or liability. The determination of what constitutes ‘observable’ requires significant judgement by the Company. The Company considers observable data to investments actively traded in organised financial markets. Fair value is generally determined by reference to Stock Exchange quoted market bid prices (or last traded in respect of SETS) at the close of business on the Balance Sheet date, without adjustment for transaction costs necessary to realise the asset. IFRS 7 hierarchy Investments whose values are based on quoted market prices in active markets, and therefore classified within Level 1, include active listed equities. The Company does not adjust the quoted price for these investments. Financial instruments that trade in markets that are not considered to be active but are valued based on quoted market prices, dealer quotations or alternative pricing sources supported by observable inputs are classified within Level 2. Investments classified within Level 3 have significant unobservable inputs. Level 3 instruments include private equity and corporate debt securities. As observable prices are not available for these securities, the Company has used valuation techniques to derive the fair value. The Company has no Level 2 or Level 3 investments (2022: same). 22 CAPITAL MANAGEMENT POLICIES AND PROCEDURES
The Group actively and regularly reviews and manages its capital structure to ensure an optimal capital structure and to maximise equity holder returns, taking into consideration the future capital requirements of the Group and capital efficiency, prevailing and projected profitability, projected operating cash flows and projected strategic investment opportunities. The management regards capital as total equity and reserves, for capital management purposes. The Group currently do not have any loans and the Directors do not intend to have any loans or borrowings. 23 CAPITAL MANAGEMENT POLICIES AND PROCEDURES Between the year end and 28 June 2023, the latest practicable date before the publication of these financial statements, the Company has issued 210,000 Ordinary shares for a consideration of £355,400. Dissemination of a Regulatory Announcement, transmitted by EQS Group. The issuer is solely responsible for the content of this announcement. |
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| ISIN: | GB0006615826, GB00BZ7MQD81 |
| Category Code: | ACS |
| TIDM: | SDVP |
| LEI Code: | 213800DAF47EJ2HT4P78 |
| Sequence No.: | 254486 |
| EQS News ID: | 1669285 |
| End of Announcement | EQS News Service |
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