Dunedin Smaller Cos Inv Tst PLC - Half Yearly Report

RNS Number : 3605U

Dunedin Smaller Cos Inv Tst PLC

24 June 2009

DUNEDIN SMALLER COMPANIES INVESTMENT TRUST PLC

HALF YEARLY REPORT FOR THE SIX MONTHS ENDED 30 APRIL 2009

CHAIRMAN'S STATEMENT

Equity markets remained volatile in the period under review and the overall downtrend continued until the middle of March. From that point through to the end of April, however, markets staged a remarkable recovery in the face of bleak economic news. Investors regained some appetite for riskier assets in anticipation of economic recovery and this was reflected in a sharp rally in the share prices of smaller companies, particularly the more speculative stocks.

Our investment portfolio is constructed to deliver both capital and income growth and we remain focused on identifying good quality companies run by strong management teams, particularly where an above-average dividend yield is available. As a general rule, we do not invest in loss-making businesses which may be high-risk and carry a material chance of failure.

Over the six months ended 30 April 2009, the Company's share price and NAV rose by 9.5% and 4.2% respectively but the FTSE SmallCap Index (excluding Investment Companies) rose by 14.0% - the FTSE 100 Index fell by 3.1%. Our investment portfolio has delivered results ahead of the index in both rising and falling markets in recent years and, while disappointing, the under-performance in this six month period reflects the significant gains recorded by a number of the larger stocks in the index many of which were highly indebted and therefore did not meet our investment criteria, as outlined above. The Company maintained an essentially ungeared position over the period and held a net cash position at 30 April 2009.

The subscription shares which are listed on the London Stock Exchange had a closing price of 1.75p per share at 30 April 2009.

The Bank of England, the US Federal Reserve, the European Central Bank and other central banks have injected liquidity into their economies by buying bonds while many commercial and investment banks have been forced to raise additional equity capital to repair weakened balance sheets. Many countries are in the grip of the worst recession for decades. In the UK, unemployment is rising rapidly, house prices have fallen in value and interest rates have been cut to 0.5%. The weakness of the UK economy and concerns as to the state of the public finances also contributed to the sharp fall in sterling in 2008 against both the US dollar and the euro although there has been some recovery in recent months.

The deterioration in the UK economy, in conjunction with the re-pricing of credit facilities, forced a number of companies to revise downwards their dividend pay-outs. Lower dividends and reduced interest income on cash deposits have caused the Company's revenue return per share to fall from 2.25p to 1.39p. The Board is declaring an unchanged interim dividend of 1.85p per share which will be paid on 24 July 2009 to shareholders on the register on 10 July 2009. The revenue return for the full year is expected to be lower than last year although the Board is prepared to utilise the Company's significant revenue reserves of 7.45p per share with the objective of maintaining dividend payments to shareholders in the medium term.

During the period the Company repurchased 70,000 ordinary shares at discounts averaging 19%. The Directors will continue to monitor the Company's discount with that of its peer group and will use the Company's share buyback powers, subject to market conditions, when it feels this to be appropriate. The discount at 30 April 2009 was 14.0% and has since narrowed to 11.4% at the date of this report.

In our financial statements to 31 October 2008 we recognised a sum of £580,000 representing the VAT charged on our management fees between 2004 and 2007. While claims have been submitted for the VAT incurred on management fees during the periods 2001 to 2003 and 1990 to 1996, the amounts recoverable remain uncertain and therefore there has been no recognition of any sums in the interim statements. I am hopeful that progress will be made before the end of the financial year.

Global equity markets may have marked a low point in March but investor confidence is still fragile and markets are expected to remain volatile. Equities are not expensive by historic standards and many smaller companies are well-placed to participate in any recovery in activity. Indeed some of the companies that have cut their dividends will, as a consequence, have the balance sheet flexibility to capitalise on opportunities as the economy recovers. Nonetheless, profits and dividends may need to show signs of improvement before smaller companies extend the recent recovery in share prices.

Risks and Uncertainties

The Board has identified a number of key risks that affect its business. During the last six months there has been no change in the principal risks facing the Company, which are set out in detail in the Directors' Report on pages 18 and at note 18 on pages 39 to 44 of the last set of annual accounts. The major risks associated with the Company are market price risk, being the risk that the value of investments will fluctuate as a result of factors other than interest rate or currency movements, gearing risk and, to a lesser extent, liquidity risk and credit. Other risks include performance risk, discount volatility and regulatory risk.

Directors' Responsibility Statement

The Directors are responsible for preparing the half-yearly financial report in accordance with applicable law and regulations. The Directors confirm that to the best of their knowledge:

- the condensed set of financial statements within the half-yearly financial report has been prepared in accordance with the statement "Half-Yearly Financial Reports" issued by the UK Accounting Standards Board;

- the Chairman's Statement (constituting the interim management report) includes a fair review of the information required by rule 4.2.7R of the Disclosure and Transparency Rules (being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements and a description of the principal risks and uncertainties for the remaining six months of the financial year) and 4.2.8R (being related party transactions that have taken place during the first six months of the financial year and that have materially affected the financial position of the Company during that period; and any changes in the related party transactions described in the last annual report that could so do).

The half-yearly financial report for the six months to 30 April 2009 comprises the Interim Board Report, the Directors' Responsibility Statement and a condensed set of financial statements.

The Earl of Dalhousie

Chairman

23 June 2009

AUDITORS REPORT

Introduction

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months to 30 April 2009 which comprises the Income Statement, Balance Sheet, Reconciliation of Movements in Shareholders' Funds, Cash Flow Statement and the related explanatory notes. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the Company in accordance with the terms of our engagement to assist the Company in meeting the requirements of the Disclosure and Transparency Rules (the "DTR") of the UK's Financial Services Authority (the "UK FSA"). Our review has been undertaken so that we might state to the Company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report, or for the conclusions we have reached.

Directors' Responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FSA.

As disclosed in note 1, the annual financial statements of the Company are prepared in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice). The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with the Statement Half-Yearly Financial Reports as issued by the UK Accounting Standards Board.

Our Responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of Review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 April 2009 is not prepared, in all material respects, in accordance with the Statement Half-Yearly Financial Reports as issued by the UK Accounting Standards Board and the DTR of the UK FSA.

Gareth Horner

For and on behalf of KPMG Audit Plc

Chartered Accountants
Edinburgh

23 June 2009

INCOME STATEMENT

	Six months ended
	30 April 2009
	(unaudited)
	Revenue	Capital	Total
	£'000	£'000	£'000
Gains/(losses) on investments	-	2,590	2,590
Income (note 2)	892	-	892
Investment management fee	(25)	(134)	(159)
VAT recoverable on investment management fees	-	-	-
Administrative expenses	(182)	-	(182)
	__________	__________	__________
Net return before finance costs and taxation	685	2,456	3,141

Finance costs	(22)	(65)	(87)
	__________	__________	__________
Return on ordinary activities before and after taxation	663	2,391	3,054
	__________	__________	__________
Return per Ordinary share (pence):	1.39	4.99	6.38
	__________	__________	__________

The total column of this statement represents the profit and loss account of the Company.

A Statement of Total Recognised Gains and Losses has not been prepared as all gains and losses have been reflected in the Income Statement.

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

INCOME STATEMENT

	Six months ended
	30 April 2008
	(unaudited)
	Revenue	Capital	Total
	£'000	£'000	£'000
Gains/(losses) on investments	-	(13,795)	(13,795)
Income (note 2)	1,388	-	1,388
Investment management fee	(37)	(280)	(317)
VAT recoverable on investment management fees	-	-	-
Administrative expenses	(181)	-	(181)
	__________	__________	__________
Net return before finance costs and taxation	1,170	(14,075)	(12,905)

Finance costs	(79)	(234)	(313)
	__________	__________	__________
Return on ordinary activities before and after taxation	1,091	(14,309)	(13,218)
	__________	__________	__________
Return per Ordinary share (pence):	2.25	(29.55)	(27.30)
	__________	__________	__________

INCOME STATEMENT

	Year ended
	31 October 2008
	(audited)
	Revenue	Capital	Total
	£'000	£'000	£'000
Gains/(losses) on investments	-	(37,560)	(37,560)
Income (note 2)	3,039	-	3,039
Investment management fee	(67)	(515)	(582)
VAT recoverable on investment management fees	74	506	580
Administrative expenses	(380)	-	(380)
	__________	__________	__________
Net return before finance costs and taxation	2,666	(37,569)	(34,903)

Finance costs	(149)	(446)	(595)
	__________	__________	__________
Return on ordinary activities before and after taxation	2,517	(38,015)	(35,498)
	__________	__________	__________
Return per Ordinary share (pence):	5.22	(78.81)	(73.59)
	__________	__________	__________

BALANCE SHEET

	As at	As at	As at
	30 April 2009	30 April 2008	31 October 2008
	(unaudited)	(unaudited)	(audited)
	£'000	£'000	£'000
Non-current assets
Investments at fair value through profit or loss	43,617	65,843	41,083
	__________	__________	__________
Current assets
Debtors and prepayments	940	615	912
UK Treasury Bills	-	-	2,963
Cash and short term deposits	8,578	10,481	6,422
	__________	__________	__________
	9,518	11,096	10,297
	__________	__________	__________
Creditors: amounts falling due within one year
Bank loan	(8,000)	(10,000)	(8,000)
Other creditors	(220)	(326)	(210)
	__________	__________	__________
	(8,220)	(10,326)	(8,210)
	__________	__________	__________
Net current assets	1,298	770	2,087
	__________	__________	__________
Net assets	44,915	66,613	43,170
	__________	__________	__________

Capital and reserves
Called-up share capital	2,393	2,409	2,396
Share premium account	24	24	24
Capital redemption reserve	2,233	2,217	2,230
Capital reserve	36,034	57,669	33,689
Revenue reserve	4,231	4,294	4,831
	__________	__________	__________
Equity shareholders' funds	44,915	66,613	43,170
	__________	__________	__________
Net asset value per Ordinary share (pence):	93.86	138.28	90.08
	__________	__________	__________

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

Six months ended 30 April 2009 (unaudited)
		Share	Capital
	Share	premium	redemption	Capital	Revenue
	capital	account	reserve	reserve	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 31 October 2008	2,396	24	2,230	33,689	4,831	43,170
Purchase of own shares	(3)	-	3	(46)	-	(46)
Return on ordinary activities after taxation	-	-	-	2,391	663	3,054
Dividends paid ª	-	-	-	-	(1,263)	(1,263)
	________	________	________	________	________	________
Balance at 30 April 2009	2,393	24	2,233	36,034	4,231	44,915
	________	________	________	________	________	________

Six months ended 30 April 2008 (unaudited)
		Share	Capital
	Share	premium	redemption	Capital	Revenue
	capital	account	reserve	reserve	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 31 October 2007	2,466	19	2,160	73,307	4,412	82,364
Issue of subscription shares	-	5	-	-	-	5
Purchase of own shares	(57)	-	57	(1,329)	-	(1,329)
Return on ordinary activities after taxation	-	-	-	(14,309)	1,091	(13,218)
Dividends paid ª	-	-	-	-	(1,209)	(1,209)
	________	________	________	________	________	________
Balance at 30 April 2008	2,409	24	2,217	57,669	4,294	66,613
	________	________	________	________	________	________

Year ended 31 October 2008 (audited)
		Share	Capital
	Share	premium	redemption	Capital	Revenue
	capital	account	reserve	reserve	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 31 October 2007	2,466	19	2,160	73,307	4,412	82,364
Issue of subscription shares	-	5	-	-	-	5
Purchase of own shares	(70)	-	70	(1,603)	-	(1,603)
Return on ordinary activities after taxation	-	-	-	(38,015)	2,517	(35,498)
Dividends paid ª	-	-	-	-	(2,098)	(2,098)
	________	________	________	________	________	________
Balance at 31 October 2008	2,396	24	2,230	33,689	4,831	43,170
	________	________	________	________	________	________
ª See note 3.

CASH FLOW STATEMENT

	Six months ended	Six months ended	Year ended
	30 April 2009	30 April 2008	31 October 2008
	(unaudited)	(unaudited)	(audited)
	£'000	£'000	£'000
Net cash inflow from operating activities	413	609	2,075
Net cash outflow from servicing of finance	(87)	(314)	(604)
Net cash inflow from financial investment	176	3,020	3,911
Equity dividends paid	(1,263)	(1,209)	(2,098)
	__________	__________	__________
Net cash (outflow)/inflow before use of liquid resources and financing	(761)	2,106	3,284
Net cash inflow from management of liquid resources	2,963	9,313	6,350
Net cash outflow from financing	(46)	(1,324)	(3,598)
	__________	__________	__________
Increase in cash	2,156	10,095	6,036
	__________	__________	__________
Reconciliation of net cash flow to movements in net funds
Increase in cash as above	2,156	10,095	6,036
Net change in liquid resources	(2,963)	(9,313)	(6,350)
	__________	__________	__________
Change in net funds resulting from cash flows	(807)	782	(314)
Repayment of loan	-	-	2,000
	__________	__________	__________
Movement in net funds in the period	(807)	782	1,686
Opening net funds/(debt)	1,385	(301)	(301)
	__________	__________	__________
Closing net funds	578	481	1,385
	__________	__________	__________
Represented by:
Cash and cash equivalents	8,578	10,481	9,385
Debt due within one year	(8,000)	(10,000)	(8,000)
	__________	__________	__________
	578	481	1,385
	__________	__________	__________

Notes to the Financial Statements

1.	Accounting policies
	(a)	Basis of preparation and going concern
		The accounts have been prepared in accordance with applicable UK Accounting Standards, with pronouncements on half-yearly reporting issued by the Accounting Standards Board and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (issued in January 2009 and adopted early). The early adoption of the January 2009 SORP has no effect on the financial statements of the Company, other than the requirement separately to disclose capital reserves that relate to the revaluation of investments held at the reporting date. These are disclosed in note 6. This new requirement replaces the previous requirement to disclose the value of the capital reserve that was unrealised. They have also been prepared on the assumption that approval as an investment trust will continue to be granted.

		The financial statements and the net asset value per share figures have been prepared in accordance with UK Generally Accepted Accounting Practice (UK GAAP).

		These financial statements have been prepared using the same accounting policies as the preceding annual accounts.

	(b)	Investments
		Investments have been designated upon initial recognition as fair value through profit or loss. Investments are recognised at trade date where a purchase or sale is under a contract whose terms require delivery within the timeframe established by the market concerned, and are measured initially at fair value. Subsequent to initial recognition, investments are recognised at fair value through profit or loss. For listed investments, this is deemed to be bid market prices or closing prices for SETS stocks, sourced from the London Stock Exchange. SETS is the London Stock Exchange electronic trading service covering most of the market including all FTSE All-Share and the most liquid AIM constituents. Gains or losses arising from changes in the fair value are included in net profit or loss for the period as a capital item in the Income Statement and are ultimately recognised in the capital reserve.

	(c)	Dividends payable
		Interim and final dividends are recognised in the period in which they are paid.

		Six months ended	Six months ended	Year ended
		30 April 2009	30 April 2008	31 October 2008
2.	Income	£'000	£'000	£'000
	Income from investments ¹
	UK dividend income	730	1,076	2,424
	Overseas dividend income	45	45	85
		__________	__________	__________
		775	1,121	2,509
		__________	__________	__________

	Other income ²
	Interest from AAA rated Money Market funds	-	34	34
	Interest on Treasury Bills	26	137	150
	Deposit interest	88	95	344
	Underwriting commission	3	1	2
		__________	__________	__________
		117	267	530
		__________	__________	__________
	Total income	892	1,388	3,039
		__________	__________	__________

	¹ All investments have been designated fair value through profit or loss on initial recognition, therefore all investment income arises on investments at fair value through profit or loss.
	² Other income on financial assets not designated fair value through profit or loss.

		Six months ended	Six months ended	Year ended
		30 April 2009	30 April 2008	31 October 2008
3.	Dividends	£'000	£'000	£'000
	Amounts recognised as distributions to equity holders in the period:
	Interim dividend for 2008 - 1.85p	-	-	890
	Final dividend for 2008 - 2.65p (2007 - 2.50p)	1,269	1,209	1,208
	Refund by register of unclaimed dividends for prior periods	(6)	-	-
		__________	__________	__________
	Dividends paid in the period	1,263	1,209	2,098
		__________	__________	__________

	An interim dividend of 1.85p for the year to 31 October 2009 will be paid on 24 July 2009 to shareholders on the register on 10 July 2009. The ex-dividend date is 8 July 2009.

	The table below sets out the interim dividend payable in respect of the six months ended 30 April 2009. The revenue available for distribution by way of dividend for the period is £663,000 (2008 - £1,091,000).

			Six months ended	Six months ended
			30 April 2009	30 April 2008
			£'000	£'000
	Interim dividend payable for 2009 - 1.85p (2008 - 1.85p)		885	890

		Six months ended	Six months ended	Year ended
		30 April 2009	30 April 2008	31 October 2008
4.	Return per share	p	p	p
	Revenue return	1.39	2.25	5.22
	Capital return	4.99	(29.55)	(78.81)
		__________	__________	__________
	Total return	6.38	(27.30)	(73.59)
		__________	__________	__________

	The figures above are based on the following attributable revenues:

		Six months ended	Six months ended	Year ended
		30 April 2009	30 April 2008	31 October 2008
		£'000	£'000	£'000
	Revenue return	663	1,091	2,517
	Capital return	2,391	(14,309)	(38,015)
		__________	__________	__________
	Total return	3,054	(13,218)	(35,498)
		__________	__________	__________
	Weighted average number of Ordinary shares in issue	47,862,103	48,421,194	48,236,983
		__________	__________	__________

5.	Transaction costs
	During the period expenses were incurred in acquiring or disposing of investments at fair value through profit or loss. These have been expensed through capital and are included within gains/(losses) on investments in the Income Statement. The total costs were as follows:

		Six months ended	Six months ended	Year ended
		30 April 2009	30 April 2008	31 October 2008
		£'000	£'000	£'000
	Purchases	13	18	46
	Sales	2	6	8
		__________	__________	__________
		15	24	54
		__________	__________	__________

6.	Capital reserves The capital reserve reflected in the Balance Sheet at 30 April 2009 includes losses of £4,301,000 (30 April 2008 - gains of £15,377,000; 31 October 2008 - losses of £10,791,000) which relate to the revaluation of investments held at the reporting date.

		As at	As at	As at
7.	Net asset value per share	30 April 2009	30 April 2008	31 October 2008
	Equity shareholders' funds	£44,915,000	£66,613,000	£43,170,000
	Number of Ordinary shares in issue	47,852,573	48,172,573	47,922,573
	Equity shareholders' funds per share	93.86p	138.28p	90.08p

Called-up share capital

During the six months to 30 April 2009 70,000 Ordinary shares of 5p each were bought back for cancellation at a total cost of £46,000 including expenses. During the six months ended 30 April 2008 1,157,500 Ordinary shares were bought back for cancellation at a total cost of £1,329,000 including expenses. During the year ended 31 October 2008 1,407,500 Ordinary shares were bought back for cancellation at a total cost of £1,603,000 including expenses.

9.	Commitments, contingencies and post Balance Sheet events
	On 5 November 2007, the European Court of Justice ruled that management fees should be exempt from VAT. HMRC has announced its intention not to appeal against this case to the UK VAT Tribunal and therefore protective claims which have been made in relation to the Company will be processed in due course. The Company has not been charged VAT on its investment management fees from 1 November 2007.

	The Manager has agreed to refund £580,000 to the Company for VAT charged on investment management fees for the period 1 January 2004 to 31 October 2007 and this has been included in the financial statements for the year to 31 October 2008. The repayment was allocated to revenue and capital in line with the accounting policy of the Company for the periods in which the VAT was charged. The reclaim for previous periods and the timescale for receipt are at present uncertain and the Company has taken no account in these financial statements of any such repayment.

10.	Interim Report
	The financial information contained in this Half-Yearly Financial Report does not constitute statutory accounts as defined in Sections 434 - 436 of the Companies Act 2006. The financial information for the six months ended 30 April 2009 and 30 April 2008 has not been audited.

	The information for the year ended 31 October 2008 has been extracted from the latest published audited financial statements which have been filed with the Registrar of Companies. The report of the auditors on those accounts contained no qualification or statement under Section 237 (2) or (3) of the Companies Act 1985.

	The auditors have reviewed the financial information for the six months ended 30 April 2009 pursuant to the Auditing Practices Board guidance on Review of Interim Financial Information.

11.	This Half-Yearly Financial Report was approved by the Board on 23 June 2009 and the Interim Report will be posted to shareholders in July 2009 and copies will be available from the Manager or the Company's website, wwwdunedinsmaller.co.uk.

For Dunedin Smaller Companies Investment Trust PLC

Aberdeen Asset Management PLC SECRETARY

Please note that past performance is not necessarily a guide to the future and that the value of investments and the income from them may fall as well as rise. Investors may not get back the amount they originally invested.

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