TIDMSHD
RNS Number : 0265C
Shires Smaller Companies PLC
28 February 2011
SHIRES SMALLER COMPANIES PLC
ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2010
1. CHAIRMAN'S STATEMENT
In my final full year as Chairman of Shires Smaller Companies it
is satisfying to be able to report that 2010 has been another
strong year of returns for the Company. The Board and the Manager
have been very active over the last few years in repositioning the
Company and as such it is very pleasing to see the evidence of our
decisions coming to fruition. Protection of the dividend is
foremost in the Board's mind and we understand the importance of
this to our loyal shareholder base. Therefore, to be able to
announce a fourth quarter dividend of 1.5p per share, for a covered
full year dividend of 6p per share, in line with our expectations,
underlines the resilience of the portfolio's dividend generation.
At the current share price of GBP1.34 the Company yields 4.5% which
remains attractive against the market yield of 2.9%.
Investment Returns
Shires Smaller Companies significantly outperformed the market
with the NAV (total return) of 43.3%, and with the discount
narrowing, the share price increased 50.3% on a total return basis
for the year under review. With risk appetite returning, smaller
companies continued their ascent and the FTSE Smaller Companies (ex
Investment Companies) was up 16.9% on a total return basis for the
year. Looking across the market cap spectrum, the standout
performance for the year came from the FTSE Mid-250 which returned
27.4%, with the FTSE 100 up 12.6%. Performance was delivered across
the bond, preference and equity portfolio with robust earnings
being a significant contributor.
Gearing
As announced with the half year results the work undertaken by
the Board to replace the Zero Coupon financing was completed in
July. In replacement the Board has secured a three year GBP10m
revolving credit facility at an attractive rate of LIBOR + 200
basis points, providing a stable future platform for the Company.
This will also provide a short to medium term benefit to the
revenue account when you compare the current all-in rate of 2.625%
against the 5.49% we paid previously. We will continue to keep this
floating rate debt under review with the Manager as expectations
for an interest rate hike are increasing. The Monetary Policy
Committee tones have been more hawkish of late and with inflation
running stubbornly above expectations the discussion has turned to
when and not if rates will rise.
Structure, Earnings and Dividends
The portfolio structure has been simplified along with the
gearing. The Manager felt it was prudent to diversify the exposure
of the bond portfolio away from financial holdings, and introduced
a number of utility and transportation companies. We have also
reduced our exposure to the preference portfolio and with it, the
importance of this to the revenue of the Company. These changes
have improved the overall balance of revenue across sectors and
holdings, with minimal impact to the earnings delivered and the
resultant dividend.
On the above basis, and subject to any unforeseen circumstances,
the Board anticipates that it should be possible to pay a
maintained dividend of 6p per share for the year ending 31 December
2011.
Board
As I have indicated, this is my final statement to you as
Chairman and Carolan Dobson will be appointed Chairman at the
conclusion of the AGM. She along with your other Directors has led
a search process and I am delighted to announce that Mr Barry Rose
will join the Board with effect from 1 March 2011. It has been my
pleasure to serve as Chairman since 2004 and as a Director for the
last 15 years and I would like to thank our shareholders for their
support over that period. We have emerged strongly from the
financial turmoil of the last few years and I am delighted that the
work undertaken by the Board and the Manager over that time sees
the Company in a stable and healthy position, well placed for
future growth.
Change of Name / Appointment of Broker
The Board have considered the name of the Company and it is our
intention to change it to Aberdeen Smaller Companies High Income
Trust PLC. This will be done by Directors' resolution, exercising
the powers conferred under the new Articles adopted at last year's
AGM and will take place at the conclusion of this year's AGM. We
have also taken the decision to appoint Winterflood Securities as
the Company's broker, with effect from today's date, to assist the
Board and the Manager in promoting your Company.
Outlook
The Board believes that the Company's investment mandate remains
relevant. Our strategy has delivered strong performance over the
last two years and an attractive, stable and diversified yield for
income conscious investors. We believe your Company remains well
placed to continue to do so.
H. S. Cathcart
Chairman
28 February 2011
2. MANAGER'S REVIEW
Background
The year end Manager's review provides an opportunity to reflect
on the past year whilst also thinking about the challenges and
opportunities for the year ahead. As Manager of the trust, looking
at the returns in isolation is very comforting given the
outperformance in what was another tumultuous year on a number of
fronts. It is, however, also worth considering the outlook with
sovereign debt concerns, commodity inflation and long awaited
fiscal tightening weighing on the consumer.
Performance
Shires Smaller Companies delivered an NAV total return of 43.3%
over the year. 2010 was always going to be a sterner test of our
stock picking abilities following the rally of the prior year.
Whilst smaller company volatility remained high we saw a return to
fundamentals with particular focus on strong franchises and
especially on those with emerging market exposure. The work
undertaken through 2010 in positioning the portfolio with a focus
on high quality companies in niche areas with strong market
positions came to the fore.
Economic Backdrop
This year has seen the transition of the crisis from indebted
financials to indebted governments. Bond yields and risk insurance
(credit default swaps) have widened across a number of Eurozone
regions. The most pronounced cases were Greece and Ireland where
eventual bailout packages of EUR120bn and EUR85bn respectively were
required. Contagion spread to other regions - although the quantum
of the problem in Spain, the UK and Italy is arguably less severe.
The debate has also become increasingly political with Brussels and
key heads of state demanding rapid deficit reductions to align them
with Eurozone targets. Whilst at times it can be confusing to piece
together the different packages and bailout funds announced it is
important to focus on the fact that action has been taken to
stabilise the areas of most concern and make sure refinancing is
available. Ultimately the trade off underlying all of the bailouts
is that highly indebted governments will have access to funding in
return for severe demands on deficit reductions.
The domestic UK economy has similar deficit problems. The data
published in the HM Treasury spending review highlights very
clearly the step change in 2008/09. To put this into perspective
the coalition government has taken on Britain's largest budget
deficit in peacetime history at 11% of GDP, with the state
borrowing one pound in every four spent.
To close the gap, and keep debt repayments at an affordable
level, public sector budgets are being cut across the board. These
will be wide reaching and the knock on effects on unemployment and
investor confidence have to be closely managed. How this feeds
through to markets is still unknown and the recent Office for
National Statistics (ONS) data on weakening Q4 GDP gives some cause
for concern. Meanwhile, the Government is looking to stimulate
private sector spending to offset these declines as one way of
alleviating the pain but the message we are receiving from
management teams remains cautious. There are pockets of optimism
although it is worth noting that these have in general come from
companies with emerging market exposure.
Equity Portfolio
Emerging market exposure was one of the big themes behind
stockmarkets in general with smaller companies no exception. Whilst
it is true that smaller company revenue is more domestically
focused than that of their larger peers, 45% of the portfolio's
revenue is derived from outside the UK. The Company has exposure to
emerging markets through names like Aveva, Fenner, Oxford
Instruments and Robert Walters. Whilst these have all been strong
performers over the year valuations are reflective of the above
trend growth they have delivered and are now looking more
stretched. This is not only true of companies we own but also of
those where we have conducted our due diligence, so whilst we
continue to find attractive niche businesses, valuation is often
the stumbling block.
Industrial engineering was one of the top performing sectors
through 2010. The main contributors were Weir Group and Fenner both
of which have exposure to the mining sector. Chinese demand has
continued unabated and as service providers these companies have
been beneficiaries of burgeoning capital investment. Both have
strong aftermarket divisions that are accretive to margins and
provide a balance to the original equipment sale. The Electrical
and Electronics sector also had a good year. The sector held two of
the top performing stocks in the portfolio - Oxford Instruments and
XP Power which increased 252% and 146% respectively. The market has
now caught up with these growth stories and with valuations looking
stretched we have been recycling profits into other areas where we
see more value.
We introduced several new names to the portfolio over the year.
The first is Edinburgh based Forth Ports, the last UK listed port
operator. The business owns a number of ports in Scotland including
Grangemouth, Dundee, Leith and, south of the border, their Tilbury
site on the River Thames. The structure of the contracts has
provided downside protection in tougher times and, with trade flows
increasing, they are well positioned to benefit. We also added
Halfords, the speciality car maintenance, car enhancement and
leisure products company. It provides an interesting example of a
solely UK orientated retailer which can deliver attractive returns
thanks to the strength of its competitive position, differentiated
by its service offering, exposure to some structurally growing
categories and the strength of its balance sheet which affords
scope for acquisition opportunities, such as the recent Autocentres
deal.
Merger and acquisition activity was also a key driver of
performance. In terms of valuations these were not at the most
demanding of multiples. While disappointing that we couldn't
extract the full value for these businesses we did benefit from the
short term crystallisation of value. Chloride was the exception due
to a bidding war between Emerson Electric and ABB. The other
acquisitions were BSS Group, Care UK, Rensburg Sheppards and lastly
Brit Insurance. M&A activity is likely to remain high over the
coming year as company balance sheets have been repaired. We have
also seen the rebound and restocking effects come to an end and
with companies up against tougher comparators, acquisitions will
offer an additional growth driver.
Bond Portfolio
Interest rates remained at their all-time low of 0.5% throughout
the year, while the Bank of England's asset purchase scheme was
increased by GBP25bn to GBP200bn. There is still some debate in the
UK over whether rates should be raised to curb inflation which
remains stubbornly above the Monetary Policy Committee's target of
2%. UK Government bonds yields fell as they benefited from their
perceived status as a 'safe haven'. Investors' increased appetite
for risk assets has seen corporate bond spreads tighten throughout
the year. Non financial bonds have almost tightened back to
pre-crisis levels but financial spreads are still twice as high as
those recorded in September 2007.
Company results have been positive with many beating analyst
expectations and delivering good growth in profitability year on
year, albeit from a low base.
In the portfolio, we have locked in profits in subordinated
financial bonds and switched out of lower yielding telecoms into
higher yielding BBB rated utilities and transportation bonds.
European credit markets have started 2011 on a strong tone
driven by positive economic data from the US. However, the issue of
peripheral European government finances has not gone away and will
likely come to a head in 2011. Refinancing requirements are high
across Europe and the ability of both governments and banks to
rollover debt during the year will be key to market direction.
Outlook
While the global economic recovery is expected to make further
progress in 2011 there are also a number of headwinds and
potentially destabilising factors. Commodity price inflation is
likely to create a headache both for policymakers during a
tentative period for economic growth and companies exposed to such
commodities in their cost base. On balance it seems likely that
interest rates will finally begin to rise towards the end of the
year. Meanwhile fiscal austerity will have broader implications not
least in the UK as governments address the longer term trajectory
of the public finances. Related to this, it seems likely that
concerns around the European periphery will resurface before year
end.
Amidst these broader market risks it remains paramount, for us
as investors implementing our bottom-up process, to focus on the
outlook at the corporate level. Obvious concerns are public sector
exposure and input cost inflation. The former has been in focus for
some time; while the latter is a relatively new development for
2011. As such we are especially cognisant of companies' position in
the supply chain and associated ability to pass input cost
increases to their customers. More generally we have come through
an extraordinary period of cost cutting reflected in a year in
which earnings estimates were consistently beaten as operating
leverage was underappreciated. Therefore companies will be facing
new challenges from a position of strength; albeit strength which
has often not been lost on the market. Topline growth will be
increasingly important going forward now that the cost cutting
phase has drawn to an end.
Although many companies have re-rated sharply, equity yields
remain attractive against historic standards and on a relative
basis versus bonds. As an example we took the opportunity to reduce
the Northumbrian Water bond yielding 4% and buy higher yielding
equity where we also see an attractive opportunity for capital
growth. Prospects for dividend growth look good and it seems likely
given strong corporate balance sheets, improved risk appetite and
low levels of interest rates that M&A will see a continued
surge during the year. All of this should help provide a broadly
constructive environment for the portfolio.
Aberdeen Asset Managers Limited
28 February 2011
3. RESULTS & DIVIDENDS
Financial Highlights
31 December 31 December
2010 2009 % change
Total investments GBP42,814,000 GBP34,947,000 +22.5
Shareholders' funds GBP34,545,000 GBP25,327,000 +36.4
Market capitalisation GBP29,738,000 GBP21,004,000 +41.6
Net asset value per
share 156.24p 114.55p +36.4
Share price (mid market) 134.50p 95.00p +41.6
Discount to adjusted
NAV{A} 13.1% 15.8%
Gearing 23.9% 38.0%
Total expense ratio 1.8% 2.2%
Dividends and earnings
Revenue return per share{B} 6.04p 7.27p -16.9
Dividends per share{C} 6.00p 7.00p -14.3
Dividend cover 1.01 1.04
Revenue reserves{D} GBP1,995,000 GBP2,041,000
{A} Based on IFRS NAV above reduced by dividend adjustment of
1.50p (2009 - 1.75p).
{B} Measures the revenue earnings for the year divided by the
weighted average number of Ordinary shares in issue (see Statement
of Comprehensive Income).
{C} The figures for dividends per share reflect the years in
which they were earned (see note 8).
{D} The revenue reserve figure does not take account of the fourth
interim dividend amounting to GBP332,000 (2009 - GBP387,000).
1 year 3 year 5 year
% return % return % return
Net asset value +43.3 -12.0 -11.6
Share price (based on mid price) +50.3 -0.7 -18.5
FTSE SmallCap Index (excluding Investment
Companies) +16.9 -4.7 -3.9
FTSE All-Share Index +14.5 +4.4 +28.4
All figures are for total return and assume re-investment of net
dividends excluding transaction costs.
Dividends
Rate per xd date Record date Payment date
share
First interim 1.50p 7 April 2010 9 April 2010 30 April
dividend 2010
Second interim 1.50p 7 July 2010 9 July 2010 30 July 2010
dividend
Third interim 1.50p 6 October 8 October 29 October
dividend 2010 2010 2010
Fourth interim 1.50p 5 January 7 January 28 January
dividend 2011 2011 2011
2010 6.00p
First interim 1.75p 15 April 2009 17 April 30 April
dividend 2009 2009
Second interim 1.75p 8 July 2009 10 July 2009 31 July 2009
dividend
Third interim 1.75p 7 October 9 October 30 October
dividend 2009 2009 2009
Fourth interim 1.75p 6 January 8 January 29 January
dividend 2010 2010 2010
2009 7.00p
Distribution of Assets and Liabilities
Valuation at Movement during the year Valuation at
31 December Gains/ 31 December
2009 Purchases Sales Other{A} (losses) 2010
GBP'000 % GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 %
Listed
investments
Ordinary
shares 23,084 91.1 9,731 (9,765) - 9,850 32,900 95.2
Convertibles 1,206 4.8 - - - (45) 1,161 3.4
Corporate
bonds 6,499 25.7 1,670 (1,351) (27) (710) 6,081 17.6
Other fixed
interest 4,158 16.4 - (2,154) - 668 2,672 7.7
______ ______ ______ ______ ______ ______ ______
34,947 138.0 11,401 (13,270) (27) 9,763 42,814 123.9
Current
assets 3,418 13.5 1,882 5.4
Current
liabilities (13,038) (51.5) (151) (0.4)
Long-term
loan - - (10,000) (28.9)
______ ______ ______ ______
Net assets 25,327 100.0 34,545 100.0
______ ______ ______ ______
Net asset 114.6p 156.2p
value per
Ordinary
share
______ ______
{A} Amortisation adjustment of GBP27,000 (see note 2).
4. BUSINESS REVIEW
Activities
The Company is an investment trust. Its subsidiary undertaking,
Shirescot Securities Limited, is an investment dealing company.
There was no investment dealing activity in the year.
Results and Dividends
The financial statements are for the year ended 31 December
2010. Dividends declared for the year amounted to 6.00p per share
(2009 - 7.00p).
A fourth interim dividend of 1.50p per share was announced by
the Board on 15 December 2010 with an ExD date of 5 January 2011
and paid on 28 January 2011. Under International Financial
Reporting Standards (IFRS) this dividend will be accounted for in
the financial year ended 31 December 2011.
Current and Future Developments
A review of the business is given in the Chairman's Statement
and the Investment Manager's Review.
SHIRES SMALLER COMPANIES PLC
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year ended Year ended
31 December 2010 31 December 2009
Revenue Capital Total Revenue Capital Total
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Gains and
losses on
investments
Gains on
investments at
fair value 10 - 9,763 9,763 - 7,157 7,157
Fair value
movement in
zero coupon
finance
derivatives 13 - (58) (58) - (274) (274)
Revenue 2
Dividend income 1,367 - 1,367 1,258 - 1,258
Interest income
from
investments 486 (27) 459 667 (33) 634
Deposit
interest 19 - 19 23 - 23
Other income 1 - 1 134 - 134
_______ _______ _______ _______ _______ _______
1,873 9,678 11,551 2,082 6,850 8,932
Expenses _______ _______ _______ _______ _______ _______
Investment
management
fee 3 (151) (151) (302) (127) (127) (254)
VAT recovered
on investment
management
fees 3 16 16 32 144 144 288
Other
administrative
expenses 4 (231) - (231) (212) - (212)
Finance costs
of borrowings 5 (171) (279) (450) (279) (279) (558)
_______ _______ _______ _______ _______ _______
Profit before
tax 1,336 9,264 10,600 1,608 6,588 8,196
Tax expense 6 - - - - - -
_______ _______ _______ _______ _______ _______
Profit
attributable
to equity
holders of the
Group 7 1,336 9,264 10,600 1,608 6,588 8,196
_______ _______ _______ _______ _______ _______
Earnings per
Ordinary share
(pence) 9 6.04 41.90 47.94 7.27 29.80 37.07
_______ _______ _______ _______ _______ _______
The total column of this statement represents the Group's Statement
of Comprehensive Income, prepared in accordance with IFRS. The supplementary
revenue and capital columns are both prepared under guidance published
by the Association of Investment Companies. All items in the above
statement derive from continuing operations.
The Company does not have any income or expense that is not included
in profit for the year, and therefore the "Profit attributable to
equity holders of the Group" is also the "Total comprehensive income
attributable to equity holders of the Group" as defined in IAS 1 (revised).
All of the profit and comprehensive income are attributable to the
equity holders of the parent Company. There are no minority interests.
All items in the above statement derive from continuing operations.
The accompanying notes are an integral part of these financial statements.
SHIRES SMALLER COMPANIES PLC
Balance Sheets
Group Company
As at As at As at As at
31 31 31 31
December December December December
2010 2009 2010 2009
Notes GBP'000 GBP'000 GBP'000 GBP'000
Non-current assets
Ordinary shares 32,900 23,084 32,900 23,084
Convertibles 1,161 1,206 1,161 1,206
Corporate bonds 6,081 6,499 6,081 6,499
Other fixed interest 2,672 4,158 2,672 4,158
________ ________ ________ ________
Securities at fair
value 10 42,814 34,947 42,814 34,947
Current assets
Cash and cash
equivalents 1,552 2,381 1,552 2,381
Zero coupon finance
derivatives at fair
value 13 - 637 - 637
Investments in
dealing subsidiary - - - -
Other receivables 12 330 400 472 542
________ ________ ________ ________
1,882 3,418 2,024 3,560
________ ________ ________ ________
Current liabilities
Trade and other
payables (151) (126) (151) (126)
Short-term loan 13 - (7,000) - (7,000)
Zero coupon finance
derivatives at fair
value 13 - (5,912) - (5,912)
________ ________ ________ ________
(151) (13,038) (151) (13,038)
________ ________ ________ ________
Net current
assets/(liabilities) 1,731 (9,620) 1,873 (9,478)
________ ________ ________ ________
Total assets less
current liabilities 44,545 25,327 44,687 25,469
________ ________ ________ ________
Non-current
liabilities
Long-term loan 13 (10,000) - (10,000) -
________ ________ ________ ________
Net assets 34,545 25,327 34,687 25,469
________ ________ ________ ________
Issued capital and reserves attributable to equity holders of
the parent
Called up share
capital 14 11,055 11,055 11,055 11,055
Share premium account 11,892 11,892 11,892 11,892
Capital redemption
reserve 2,032 2,032 2,032 2,032
Retained earnings:
Capital reserve 15 7,571 (1,693) 7,571 (1,693)
Revenue reserve 15 1,995 2,041 2,137 2,183
________ ________ ________ ________
34,545 25,327 34,687 25,469
________ ________ ________ ________
Net asset value per
Ordinary share
(pence) 9 156.24 114.55
________ ________ ________ ________
SHIRES SMALLER COMPANIES PLC
Consolidated Statement of Changes in Equity
Year ended
31
December
2010
Share Capital
Share premium redemption Capital Revenue
capital account reserve reserve reserve Total
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
As at 31
December
2009 11,055 11,892 2,032 (1,693) 2,041 25,327
Revenue
profit
for the
year - - - - 1,336 1,336
Capital
profits
for the
year - - - 9,264 - 9,264
Equity
dividends 8 - - - - (1,382) (1,382)
_______ _______ _______ _______ _______ _______
As at 31
December
2010 11,055 11,892 2,032 7,571 1,995 34,545
_______ _______ _______ _______ _______ _______
Year ended
31
December
2009
Share Capital
Share premium redemption Capital Revenue
capital account reserve reserve reserve Total
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
As at 31
December
2008 11,055 11,892 2,032 (8,281) 2,677 19,375
Revenue
profit
for the
year - - - - 1,608 1,608
Capital
profits
for the
year - - - 6,588 - 6,588
Equity
dividends 8 - - - - (2,244) (2,244)
_______ _______ _______ _______ _______ _______
As at 31
December
2009 11,055 11,892 2,032 (1,693) 2,041 25,327
_______ _______ _______ _______ _______ _______
Company Statement
of Changes in
Equity
Year ended
31
December
2010
Share Capital
Share premium redemption Capital Revenue
capital account reserve reserve reserve Total
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
As at 31
December
2009 11,055 11,892 2,032 (1,693) 2,183 25,469
Revenue
profit
for the
year - - - - 1,336 1,336
Capital
profits
for the
year - - - 9,264 - 9,264
Equity
dividends 8 - - - - (1,382) (1,382)
_______ _______ _______ _______ _______ _______
As at 31
December
2010 11,055 11,892 2,032 7,571 2,137 34,687
_______ _______ _______ _______ _______ _______
Year ended
31
December
2009
Share Capital
Share premium redemption Capital Revenue
capital account reserve reserve Reserve Total
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
As at 31
December
2008 11,055 11,892 2,032 (8,281) 2,819 19,517
Revenue
profit
for the
year - - - - 1,608 1,608
Capital
profits
for the
year - - - 6,588 - 6,588
Equity
dividends 8 - - - - (2,244) (2,244)
_______ _______ _______ _______ _______ _______
As at 31
December
2009 11,055 11,892 2,032 (1,693) 2,183 25,469
_______ _______ _______ _______ _______ _______
The revenue reserve represents the amount of the Company's reserves
distributable by way of dividend.
The accompanying notes are an integral part of the financial statements.
SHIRES SMALLER COMPANIES PLC
Group and Company Cash Flow Statement
Year ended Year ended
31 December 2010 31 December 2009
GBP'000 GBP'000 GBP'000 GBP'000
Cash flows from operating
activities
Investment income received 1,922 2,083
Deposit interest received 20 165
Investment management fee paid (291) (386)
VAT recovered 32 728
Other cash expenses (240) (255)
________ ________
Cash generated from operations 1,443 2,335
Interest paid (428) (560)
________ ________
Net cash inflows from operating
activities 1,015 1,775
Cash flows from investing
activities
Purchases of investments (11,401) (11,024)
Sales of investments 13,276 12,678
________ ________
Net cash inflow from investing
activities 1,875 1,654
Cash flows from financing
activities ________ ________
Equity dividends paid (1,382) (2,244)
Repayment of July 2010 ZCF
position (5,337) -
Repayment of September 2009
ZCF position - (5,377)
Loan repaid (7,000) (3,000)
Loan drawndown 10,000 -
________ ________
Net cash outflow from financing
activities (3,719) (10,621)
________ ________
Net decrease in cash and cash
equivalents (829) (7,192)
Cash and cash equivalents at
start of year 2,381 9,573
________ ________
Cash and cash equivalents at
end of year 1,552 2,381
________ ________
SHIRES SMALLER COMPANIES PLC
YEAR ENDED 31 DECEMBER 2010
NOTES TO THE FINANCIAL STATEMENTS
1. Accounting policies
(a) Basis of accounting
The financial statements of the Group and Company have been
prepared in accordance with International Financial Reporting
Standards (IFRSs) which comprise standards and interpretations
approved by the International Accounting Standards Board ("IASB"),
and International Accounting Standards and International Financial
Reporting Interpretations Committee interpretations approved by
the International Accounting Standards Committee ("IASC") that
remain in effect, and to the extent that they have been adopted by
the European Union.
The financial statements have been prepared under the historical
cost convention as modified to include the revaluation of
securities held at fair value and on the assumption that
approval as an investment trust will continue to be granted.
The principal accounting policies adopted are set out below.
These policies have been applied consistently throughout
the year. Where presentational guidance set out in the Statement
of Recommended Practice ("SORP") for investment trusts issued
by the Association of Investment Companies in January 2009
is consistent with the requirements of IFRS, the Directors
have sought to prepare the financial statements on a basis
compliant with the recommendations of the SORP except as
referred to in paragraph (f) and (j) below. The effects
on capital and revenue of the items involving departures
from the SORP are set out under risk management - Income
Enhancement in note 17.
In order to better reflect the activities of an investment trust
company and in accordance with guidance issued by the AIC,
supplementary information which analyses the Statement of
Comprehensive Income between items of a revenue and capital nature
has been presented alongside the Statement of Comprehensive
Income. In accordance with the Company's status as a UK investment
company under Section 833 of the Companies Act 2006, net capital
returns may not be distributed by way of dividend. Additionally,
the net revenue of the Company is the measure the Directors
believe appropriate in assessing the Group's compliance with
certain requirements set out in Sections 1158 - 1159 of the
Corporation Tax Act 2010.
At the date of authorisation of these financial statements,
the following Standards and Interpretations were in issue
but not yet effective:
- Amendments to IFRS 1 - First time adoption - Financial
Instrument Disclosures (effective for annual periods
beginning on or after 1 July 2010).
- Amendments to IFRS 7 - Financial Instruments: Disclosures on
Derecognition 2011 (effective for annual periods beginning on
or after 1 July 2011).
- IFRS 9 - Financial Instruments: Classification and
Measurement (effective for annual periods beginning on or
after 1 January 2013). This standard has not yet been adopted
by the EU.
- Amendments to IAS 1 - First time adoption - narrow scope
amendment (effective for annual periods beginning on
or after 1 July 2011).
- Amendments to IAS 12 - Income taxes - deferred tax amendment
(effective for annual periods beginning on or after 1
January 2012).
- Amendments to IAS 24 - Related Party Disclosures (effective
for annual periods beginning on or after 1 January 2011).
- Amendments to IAS 32 - Classification of Rights Issues
(effective for annual periods beginning on or after 1
February 2010).
- IFRIC 19 - Extinguishing Financial Liabilities with Equity
Instruments (effective for annual periods beginning on
or after 1 July 2010).
- Amendments to IFRIC 14 - Prepayments of a Minimum Funding
Requirement (effective for annual periods beginning on
or after 1 January 2011).
The Directors anticipate that the adoption of these Standards
and Interpretations in future periods will have no material
financial impact on the financial statements of the Group.
The Group concludes however that certain additional disclosures
may be necessary on their application.
(b) Consolidation
The consolidated financial statements incorporate the financial
statements of the Company and entity controlled by the Company
(its subsidiary) made up to 31 December each year. Control
is achieved where the Company has the power to govern the
financial and operating policies of an investee entity so
as to obtain benefits from its activities. All intra-group
transactions, balances, income and expenses are eliminated
on consolidation. The Company has availed itself of the
relief from showing a Statement of Comprehensive Income
for the parent company, granted under Section 408 of the
Companies Act 2006.
(c) Investments
Investments have been designated upon initial recognition
at fair value through profit or loss. Investments are recognised
and de-recognised at trade date where a purchase or sale
is under a contract whose terms require delivery within
the time frame established by the market concerned, and
are initially measured at fair value. Subsequent to initial
recognition, investments are valued at fair value. 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's electronic trading service
for UK securities including all the FTSE All-Share Index
constituents.
Gains and losses arising from the changes in fair value
are included in net profit or loss for the period as a capital
item. Transaction costs are treated as a capital cost.
(d) Investments in dealing subsidiary undertaking
Investments held are shown as current assets at fair value.
Gains and losses arising on these investments are dealt
with in the revenue column of the Consolidated Statement
of Comprehensive Income.
(e) Zero coupon finance
The Company had in place during the year medium-term funding
in the form of zero coupon finance through a series of option
transactions on the FTSE 100 Index. The final position was
repaid in July 2010. The option contracts are accounted
for as separate derivative contracts and therefore are shown
on the Balance Sheet at their fair value i.e. market value
adjusted for the amortisation of transaction expenses. Changes
in the fair value of the option contracts are charged or
credited to capital and presented as a capital item in the
Consolidated Statement of Comprehensive Income.
(f) Income
Dividend income from equity investments including preference
shares which have a discretionary dividend is recognised
when the shareholders' rights to receive payment have been
established, normally the ex-dividend date.
Interest from debt securities which include preference shares
which do not have a discretionary dividend are accounted
for on an effective yield basis. Any write off of the premium
or discount on acquisition as a result of using this basis
is allocated against capital reserve. The SORP recommends
that such a write off should be allocated against revenue.
The Directors believe this treatment is not appropriate
for a high yielding investment trust which frequently trades
in debt securities and believe any premium or discount paid
for such an investment is a capital item.
Interest receivable on AAA rated money market funds and
short term deposits are accounted for on an accruals basis.
Underwriting commission is taken to revenue, unless any
shares underwritten are required to be taken up, in which
case the proportionate commission received is deducted from
the cost of the investment.
(g) Expenses
All expenses are accounted for on an accruals basis. In
respect of the analysis between revenue and capital items
presented within the Statement of Comprehensive Income,
all expenses have been presented as revenue items except
those where a connection with the maintenance or enhancement
of the value of the investments held can be demonstrated.
Accordingly the investment management fee and finance costs
have been allocated 50% to revenue and 50% to capital, in
order to reflect the Directors expected long-term view of
the nature of the investment returns of the Company.
(h) Bank borrowings
Interest-bearing bank loans and overdrafts are recorded
at the proceeds received. Finance charges, including premiums
payable on settlement or redemption and direct issue costs,
are accounted for on an accruals basis in the Statement
of Comprehensive Income using the effective interest rate
method.
(i) Finance costs and long-term borrowings
Long-term borrowings are stated at the amount of the proceeds
of issue net of expenses. The finance costs, being the difference
between the net proceeds of borrowing and the total amount
of payments that require to be made in respect of that borrowing,
accrue evenly over the life of the borrowing and are allocated
between capital and revenue.
With the exception of loan redemption costs, which have
been allocated 100% to capital, finance costs have been
allocated 50% to revenue and 50% to capital in the Consolidated
Statement of Comprehensive Income, in order to reflect the
Directors expected long-term view of the nature of the investment
returns of the Company.
(j) Taxation
The tax payable is based on the taxable profit for the year.
Taxable profit differs from net profit as reported in the
Consolidated Statement of Comprehensive Income because it
excludes items of income or expenditure that are taxable
or deductible in other years and it further excludes items
that are never taxable or deductible (see note 6 for a more
detailed explanation). The Group has no liability for current
tax.
Deferred tax is provided in full on timing differences which
result in an obligation at the Balance Sheet date to pay
more tax, or a right to pay less tax, at a future date at
rates expected to apply when they crystallise, based on
current tax rates and law. Timing differences arise from
the inclusion of items of income and expenditure in taxation
computations in periods different from those in which they
are included in financial statements. Deferred tax assets
are recognised to the extent that it is regarded as more
likely than not that they will be recovered.
The SORP requires that a transfer should be made from income
to capital equivalent to the tax value of any management
expenses that arise in capital but are utilised against
revenue. The Directors consider that this requirement is
not appropriate for an investment trust with an objective
to provide a high and growing dividend that does not generate
a corporation tax liability. Given there is only one class
of shareholder and hence overall the net effect of such
a transfer to the net asset value of the shares is nil no
such transfer has been made.
(k) Foreign currencies
Transactions involving foreign currencies are converted
at the rate ruling at the time of the transaction. Assets
and liabilities in foreign currencies are translated at
the closing rates of exchange at the Balance Sheet date.
Any gain or loss arising from a change in exchange rate
subsequent to the date of the transaction is included as
an exchange gain or loss in capital reserve or the revenue
account as appropriate.
2010 2009
2. Income GBP'000 GBP'000
Income from investments
Dividend income from UK equity securities 1,244 1,167
Dividend income from overseas equity
securities 123 91
Interest income from investments 486 667
_________ _________
1,853 1,925
_________ _________
2010 2009
GBP'000 GBP'000
Other income
Interest on VAT recoverable on investment
management fees 1 132
Deposit interest 19 23
Underwriting commission - 2
_________ _________
20 157
_________ _________
Total revenue income 1,873 2,082
_________ _________
As per note 1 (f), the Company amortises the premium or discount
on acquisition on debt securities against unrealised capital
reserve. For 2010 this represented GBP27,000 (2009 - GBP33,000)
which has been reflected in the capital column of the Statement
of Comprehensive Income.
2010 2009
Revenue Capital Total Revenue Capital Total
Investment
management
3. fees GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Investment
management fee 151 151 302 127 127 254
_____ _____ _____ _____ _____ _____
For the year ended 31 December 2010 management and secretarial
services were provided by Aberdeen Asset Managers Limited.
The fee is at an annual rate of 0.75%, calculated monthly and
paid quarterly. The fee is allocated 50% to capital and 50%
to revenue.
On 5 November 2007, the European Court of Justice ruled that
management fees on investment trusts should be exempt from
VAT. HMRC announced its intention not to appeal against this
ruling to the UK VAT Tribunal and therefore protective claims
were made in relation to the Company with HMRC. The Company
has not been charged VAT on its investment management fees
from 1 October 2007.
The VAT charged on the investment management fees has been
refunded in stages. The Manager has refunded GBP440,000 (excluding
interest) for the period 1 January 2004 to 30 September 2007
and GBP288,000 (excluding interest) to the Company for VAT
charged on investment management fees for the periods 28 August
1992 (commencement of trading) to 3 December 1996 and 1 January
2001 to 31 December 2003. The amounts received were included
in the financial statements for the year ended 31 December
2008 and 31 December 2009 respectively. In addition, a further
GBP32,000 (excluding interest) has been refunded by the Manager
in the current year. The repayment relates to VAT charged on
investment management fees for the quarter 1 July 2007 to 30
September 2007. This repayment has been allocated to revenue
and capital in line with the accounting policy of the Company
for the periods in which the VAT was charged.
In addition, interest of GBP132,000 was received and included
in the financial statements to 31 December 2009. A further
GBP1,000 of interest has been included in the current year's
financial statements in respect of the refund received in the
current period.
2010 2009
4. Other administrative expenses GBP'000 GBP'000
Directors' remuneration - fees as Directors 77 71
Fees payable to auditors and associates:
- fees payable to the Company's auditors for
the audit of the annual accounts 19 18
Other management expenses 135 123
_______ _______
231 212
_______ _______
The Company had no employees during the year (2009 - nil).
No pension contributions were paid for Directors (2009 - GBPnil).
2010 2009
Revenue Capital Total Revenue Capital Total
Finance
costs and
5. borrowings GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Bank loans 171 171 342 280 280 560
Bank loan
redemption
costs - 108 108 - - -
Overdrafts - - - (1) (1) (2)
_______ _______ _____ _______ _______ _____
171 279 450 279 279 558
_______ _______ _____ _______ _______ _____
Bank loan redemption costs were incurred by the Company on
repayment of the GBP7m loan facility with Royal Bank of Scotland.
These costs have been charged to capital in accordance with
the provisions of the SORP.
6. Taxation
Management expenses arising on revenue items this year were
sufficient to offset against taxable revenue. Nil (2009 - GBP302,000)
surplus management expenses arising on capital items were relieved
against the remaining taxable revenue. In accordance with accounting
policy 1(j) no amount (2009 - GBPnil) has been credited to
capital and charged to revenue as a notional corporation tax
item.
At 31 December 2010, the Company had net surplus management
expenses and loan relationship deficits of GBP8,274,000 (2009
- GBP7,851,000) in respect of which a deferred tax asset has
not been recognised. This is because the Company is not expected
to generate taxable income in a future period in excess of
the deductible expenses and deficits of that future period
and, accordingly, it is unlikely that the Company will be able
to reduce future tax liabilities through the use of existing
surplus expenses and loan relationship deficits.
The UK Corporation tax rate applicable at the year end was
28% (2009 - effective rate of 28%).
2010 2009
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Profit before tax 1,336 9,264 10,600 1,608 6,588 8,196
Taxation of
return on
ordinary
activities at
the standard
rate of
corporation tax 374 2,594 2,968 450 1,845 2,295
Effects of:
UK dividend
income not
liable to
further tax (373) - (373) (353) - (353)
Capital gains
disallowed for
the purposes of
corporation tax - (2,726) (2,726) - (1,995) (1,995)
Zero coupon
finance costs
not an allowable
tax deduction - 16 16 - 77 77
Income not
subject to tax (34) - (34) (12) - (12)
Utilisation of
surplus
management
expenses - - - (85) - (85)
Excess management
expenses not
utilised 33 116 149 - 73 73
_______ _______ _____ _______ _______ _____
Taxation charge - - - - - -
for the year
_______ _______ _____ _______ _______ _____
7. Revenue and capital profit attributable to equity holders of
the Company
The revenue and capital profits attributable to equity holders
of the Group for the financial year includes GBP10,600,000
(2009 - profits of GBP8,196,000) which has been dealt with
in the Company's financial statements.
2010 2009
8. Dividends GBP'000 GBP'000
Amounts recognised as distributions to equity
holders in the period:
Fourth interim dividend for the year ended
31 December 2009 of 1.75p (2008 - 4.90p) per
share 387 1,083
Three interim dividends for the year ended
31 December 2010 totalling 4.50p (2009 - 5.25p)
per share 995 1,161
_______ _______
1,382 2,244
_______ _______
The fourth interim dividend of 1.50p per share, declared on
15 December 2010 and paid on 28 January 2011 has not been included
as a liability in these financial statements.
We also set out below the total dividends payable in respect
of the financial year, which is the basis on which the requirements
of Sections 1158-1159 of the Corporation Tax Act 2010 are considered:
2010 2009
GBP'000 GBP'000
Three interim dividends for the year ended
31 December 2010 totalling 4.50p (2009 - 5.25p)
per share 995 1,161
Fourth interim dividend for the year ended
31 December 2010 of 1.50p (2009 - 1.75p) per
share 332 387
_______ _______
1,327 1,548
_______ _______
2010 2009
9. Return and net asset value per share GBP'000 GBP'000
The returns per share are based on the following
figures:
Revenue return 1,336 1,608
Capital return 9,264 6,588
_______ _______
Net return 10,600 8,196
_______ _______
Weighted average number of shares in issue 22,109,765 22,109,765
_________ _________
The net asset value per share is based on net assets attributable
to shareholders of GBP34,545,000 (2009 - GBP25,327,000) and
on the 22,109,765 (2009 - 22,109,765) shares in issue at 31
December 2010.
Group & Company
2010 2009
10. Non current assets - securities at fair value GBP'000 GBP'000
Listed on recognised stock exchanges:
United Kingdom 42,159 32,845
Overseas 655 2,102
_______ _______
42,814 34,947
_______ _______
Group & Company
2010 2009
GBP'000 GBP'000
Cost at 31 December 2009 38,355 45,244
Investment holdings losses at 31 December 2009 (3,408) (15,775)
_______ _______
Fair value at 31 December 2009 34,947 29,469
Purchases 11,401 11,024
Amortised cost adjustments to fixed interest
securities (27) (33)
Sales - proceeds (13,270) (12,670)
- net losses on sales (256) (5,210)
Movement in investment holdings losses during
the year 10,019 12,367
_______ _______
Valuation at 31 December 2010 42,814 34,947
_______ _______
Cost at 31 December 2010 36,203 38,355
Investment holdings gains/(losses) at 31
December 2010 6,611 (3,408)
_______ _______
Fair value at 31 December 2010 42,814 34,947
_______ _______
Group & Company
2010 2009
Gains/(losses) on investments GBP'000 GBP'000
Net realised losses on sales (256) (5,210)
Movement in fair value 10,019 12,367
_______ _______
Gains on investments 9,763 7,157
_______ _______
The total transaction costs on the purchases and sales in the
year were GBP59,000 (2009 - GBP52,000) and GBP11,000 (2009
- GBP6,000) respectively.
All investments are categorised as held at fair value through
profit and loss.
Company
2010 2009
11. Subsidiary undertaking GBP'000 GBP'000
Shares at cost - -
_______ _______
The Company owns the whole of the issued ordinary share capital
of its sole subsidiary undertaking, Shirescot Securities Limited,
an investment dealing company registered in Scotland.
As at 31 December 2010 Shirescot Securities Limited had net
liabilities of GBP142,000 (2009 - net liabilities of GBP142,000).
Shires Smaller Companies plc confirms that it will provide
financial support for Shirescot Securities Limited to continue
to trade.
Group Company
2010 2009 2010 2009
12. Other receivables GBP'000 GBP'000 GBP'000 GBP'000
Amounts due from brokers - 6 - 6
Accrued income & prepayments 287 391 287 391
Due by subsidiary undertaking - - 142 142
Other debtors 43 3 43 3
_______ _______ _______ _______
330 400 472 542
_______ _______ _______ _______
None of the above amounts are
overdue.
2010 2009
Loans and zero coupon finance derivatives at
13. fair value GBP'000 GBP'000
Bank loans included at amortised cost 10,000 7,000
Zero coupon finance derivatives at fair value
- current liabilities - 5,912
_______ _______
10,000 12,912
_______ _______
Bank loans
The bank loan of GBP7 million with Royal Bank of Scotland,
due to be repaid on 23 December 2010, was repaid in full on
29 July 2010. The interest on this loan was fixed at 5.49%
per annum on the principal amount. On 29 July 2010, a new three
year facility of GBP10 million with National Australia Bank
was drawn down in full. The loan was drawn down and rolled
over monthly. On 30 November 2010 the loan was rolled over
for 2 months at a rate of 2.63% per annum. The loan has subsequently
been rolled over on 28 February 2011 for one month at a rate
of 2.625%.
The Directors are of the opinion that the fair value of the
bank loan at 31 December 2010 is not materially different from
the book value. At 31 December 2009 the fair value of the loan
was determined to be GBP7,398,000 with reference to the interest
profile of an equivalent gilt.
Zero coupon finance
The zero coupon finance arrangement comprised a set of separately
traded financial instruments (FTSE 100 Index options) each
with its own market value, which equated to their fair values.
The options ran until July 2010 when the tranche taken out
in July 2005, was repaid at a cost of GBP5.3 million. Set out
below is an analysis of the different options split between
put and call options and assets and liabilities as was disclosed
in the Balance Sheet at 31 December 2009. The change in the
net total market value of the options in each accounting period
is treated as an unrealised loss and charged to the capital
column of the Consolidated Statement of Comprehensive Income
and where the position is closed out a realised loss is charged
to the capital column of the Consolidated Statement of Comprehensive
Income.
The amount charged to capital fluctuates over accounting periods
due to market volatility over the life of the options but was
approximately 5.5% per annum for the options which expired
in July 2010.
On repayment of the July 2010 tranche the collateral previously
pledged was no longer required. At 31 December 2009, the Company
had pledged collateral equal to at least 160% of the market
value of this finance in accordance with standard commercial
practice. The actual carrying amount of financial assets pledged
at 31 December 2009 equated to GBP8,463,000 in the form of
securities.
2010 2009
Fair value at 31 December 2010 GBP'000 GBP'000
Current assets
Call option expiring on 29 July 2010 - 4
Put option expiring on 29 July 2010 - 633
_______ _______
- 637
_______ _______
2010 2009
Current liabilities GBP'000 GBP'000
Call option expiring on 29 July 2010 - (1,414)
Put option expiring on 29 July 2010 - (4,498)
_______ _______
- (5,912)
_______ _______
Net zero coupon finance liability - fair value - (5,275)
_______ _______
The movements in the fair value of this finance
were as follows:
Group and Company
2010 2009
GBP'000 GBP'000
At 31 December 2009 5,275 10,384
Cost of closure of existing zero coupon finance
arrangement (5,333) (5,383)
_______ _______
(58) 5,001
Finance costs charged to capital 58 274
_______ _______
At 31 December 2010 - 5,275
_______ _______
Ordinary shares
of 50 pence each
14. Called up share capital Number GBP'000
Authorised
At 31 December 2010 and 31 December 2009 35,000,000 17,500
_________ _______
Allotted, called up and fully paid
At 31 December 2010 and 31 December 2009 22,109,765 11,055
_________ _______
The objective of the Company is to provide a high and growing
dividend and capital growth from a portfolio invested principally
in the ordinary shares of smaller UK companies and UK fixed
income securities.
The Company manages its capital to ensure that it will be able
to continue as a going concern while maximising the return
to shareholders through the optimisation of the debt and equity
balance.
The Board monitors and reviews the broad structure of the Company's
capital on an ongoing basis. This review includes:
- the planned level of gearing, which takes account of the
Investment Manager's views on the market;
- the level of equity shares in issue; and
- the extent to which revenue in excess of that which is required
to be distributed should be retained.
The Company's objectives, policies and processes for managing
capital are unchanged from the preceding accounting period.
The Company does not have any externally imposed capital requirements.
Group & Company
2010 2009
15. Retained earnings GBP'000 GBP'000
Capital reserve
At 31 December 2009 (1,693) (8,281)
Net losses on sales of investments during the
year (256) (5,210)
Movement in investment holdings gains during
the year 10,019 12,367
Amortised cost adjustment relating to capital (27) (33)
Zero coupon finance costs (note 13) (58) (274)
Finance costs of borrowings (note 5) (279) (279)
Investment management fee (151) (127)
VAT recovered on management fees 16 144
_______ _______
At 31 December 2010 7,571 (1,693)
_______ _______
The capital reserve includes investment holding gains amounting
to GBP6,611,000 (2009 - losses of GBP3,408,000), as disclosed
in note 10.
Group Company Group Company
2010 2010 2009 2009
Revenue reserve GBP'000 GBP'000 GBP'000 GBP'000
At 31 December 2009 2,041 2,183 2,677 2,819
Revenue return 1,336 1,336 1,608 1,608
Dividends paid (1,382) (1,382) (2,244) (2,244)
_______ _______ _______ _______
At 31 December 2010 1,995 2,137 2,041 2,183
_______ _______ _______ _______
16. Risk management, financial assets and liabilities
Risk management
The Company's objective of providing a high and growing dividend
with capital growth is addressed by investing in smaller UK
market capitalisation equities to provide growth in capital
and income and in fixed income securities to provide a high
level of income.
The impact of security price volatility is reduced by diversification.
Diversification is by type of security - ordinary shares, preference
shares, convertibles and corporate fixed interest - and by investment
in the stocks and shares of companies in a range of industrial,
commercial and financial sectors. The management of the portfolio
is conducted according to investment guidelines, established
by the Board after discussion with the Managers, which specify
the limits within which the Manager is authorised to act.
The Manager has a dedicated investment management process which
ensures that the investment objective explained above is achieved.
Stock selection procedures are in place based on the active
portfolio management and identification of stocks. The portfolio
is reviewed on a periodic basis by a Senior Investment Manager
and also by the Manager's Investment Committee.
The Company's Manager has an independent Investment Risk department
for reviewing the investment risk parameters of all core equity,
balanced, fixed income and alternative asset classes on a regular
basis. The department reports to the Manager's Performance Review
Committee which is chaired by the Manager's Chief Investment
Officer. The department's responsibility is to review and monitor
ex-ante (predicted) portfolio risk and style characteristics
using best practice, industry standard multi-factor models.
Additionally, the Manager's Compliance department continually
monitor the Company's investment and borrowing powers and report
to the Manager's Risk Management Committee.
The Manager has a Business Risk department to consolidate risk
management functions. The department is responsible for supporting
management in the efficient identification of risk and resolution
of control issues. The department incorporates Operational Risk,
Breaches and Errors Risk Control Management, Counterparty Risk,
and the Procedures and Business Control teams. The Head of Front
Office risk reports directly to the Manager's Group Head of
Risk.
Financial assets and liabilities
The Company's financial assets include investments, cash at
bank and short-term debtors. Financial liabilities consist of
bank loans and overdrafts, other short-term creditors and long-term
creditors arising from option contracts and a fixed rate term
loan.
The main risks the Company faces from its financial instruments
are (i) market risk (comprising interest rate risk and other
price risk), (ii) liquidity risk and (iii) credit risk. The
Company has no exposure to foreign currency risk as it does
not hold any foreign currency assets or have exposure to any
foreign currency liabilities.
The Company is subject to interest rate risk because bond yields
are linked to underlying bank rates or equivalents, and its
short-term borrowings and cash resources carry interest at floating
rates. The interest rate profile is managed as part of the overall
investment strategy of the Company.
(i) Market risk
The fair value or future cash flows of a financial instrument
held by the Company may fluctuate because of changes in market
prices. This market risk comprises three elements - interest
rate risk, currency risk and other price risk.
Interest rate risk
Interest rate movements may affect:
the fair value of the investments in fixed interest rate
- securities;
- the level of income receivable on cash deposits;
- interest payable on the Company's variable rate borrowings.
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 and borrowing decisions.
The Board reviews on a regular basis the values of the fixed
interest rate securities.
Interest rate profile
The interest rate risk profile of the portfolio of financial
assets and liabilities (excluding ordinary shares and convertibles)
at the Balance Sheet date was as follows:
Weighted
average Weighted
period
for average Non
which interest Fixed Floating interest
rate is
fixed rate rate rate bearing
As at 31 December
2010 Years % GBP'000 GBP'000 GBP'000
Assets
UK corporate bonds 9.29 6.39 6,081 - -
UK preference shares - 8.01 2,672 - -
Cash - - - 1,552 -
_______ _______ _______ _______ _______
Total assets - - 8,753 1,552 -
_______ _______ _______ _______ _______
Weighted
average Weighted
period
for average Non
which interest Fixed Floating interest
rate is
fixed rate rate rate bearing
Years % GBP'000 GBP'000 GBP'000
Liabilities
Short-term bank
loan 0.08 2.63 (10,000) - -
_______ _______ _______ _______ _______
Total liabilities - - (10,000) - -
_______ _______ _______ _______ _______
Total - - (1,247) 1,552 -
_______ _______ _______ _______ _______
Weighted
average Weighted
period
for average Non
which interest Fixed Floating interest
rate is
fixed rate rate rate bearing
As at 31 December
2009 Years % GBP'000 GBP'000 GBP'000
Assets
UK corporate bonds 8.30 7.19 6,499 - -
UK preference shares - 7.47 4,158 - -
Zero coupon finance - - - - 637
Cash - - - 2,381 -
_______ _______ _______ _______ _______
Total assets - - 10,657 2,381 637
_______ _______ _______ _______ _______
Liabilities
Short-term bank
loan 0.98 5.49 (7,000) - -
Zero coupon finance - - - - (5,912)
_______ _______ _______ _______ _______
Total liabilities - - (7,000) - (5,912)
_______ _______ _______ _______ _______
Total - - 3,657 2,381 (5,275)
_______ _______ _______ _______ _______
The weighted average interest rate is based on the current
yield of each asset, weighted by its market value. The weighted
average interest rate on bank loans is based on the interest
rate payable, weighted by the total value of the loans. The
maturity dates of the Company's loans are shown in note 13
to the financial statements.
The cash assets consist of cash deposits on call earning
interest at prevailing market rates.
Short-term debtors and creditors (with the exception of loans
and zero coupon finance) have been excluded from the above
tables.
All financial liabilities are measured at amortised cost.
Maturity profile
The maturity profile of the Company's financial assets and liabilities
at the Balance Sheet date was as follows:
Within Within Within Within Within More than
2-3 3-4 4-5
1 year 1-2 years years years years 5 years
At 31 December 2010 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Fixed rate
UK corporate bonds 737 - - 301 - 5,043
Bank loan - - (10,000) - - -
_______ _______ _______ _______ _______ _______
737 - (10,000) 301 - 5,043
_______ _______ _______ _______ _______ _______
Within Within Within Within Within More than
2-3 3-4 4-5
1 year 1-2 years years years years 5 years
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Floating rate
Cash 1,552 - - - - -
_______ _______ _______ _______ _______ _______
1,552 - - - - -
_______ _______ _______ _______ _______ _______
Total 2,289 - (10,000) 301 - 5,043
_______ _______ _______ _______ _______ _______
Within Within Within Within Within More than
2-3 3-4 4-5
1 year 1-2 years years years years 5 years
At 31 December 2009 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Fixed rate
UK corporate bonds 672 - 771 507 306 4,243
UK redeemable
preference shares 221 - - - - -
Bank loans (7,000) - - - - -
_______ _______ _______ _______ _______ _______
(6,107) - 771 507 306 4,243
_______ _______ _______ _______ _______ _______
Floating rate
Zero coupon finance (5,275) - - - - -
Cash 2,381 - - - - -
_______ _______ _______ _______ _______ _______
(2,894) - - - - -
_______ _______ _______ _______ _______ _______
Total (9,001) - 771 507 306 4,243
_______ _______ _______ _______ _______ _______
The maturity table above excludes the value of holdings in UK
irredeemable preference shares held at the year end, which equated
to GBP2,672,000 (2009 - GBP3,937,000).
Interest rate sensitivity
The sensitivity analysis below have been determined based on
the exposure to interest rates for both derivative and non-derivative
instruments at the Balance Sheet date and the stipulated change
taking place at the beginning of the financial year and held
constant throughout the reporting period in the case of instruments
that have floating rates.
If interest rates had been 100 basis points higher or lower
and all other variables were held constant, the Company's:
profit before tax for the year ended 31 December 2010 would
increase/decrease by GBP16,000 (2009 - GBP24,000). This is
mainly attributable to the Company's exposure to interest
rates on its floating rate cash balances. These figures have
- been calculated based on cash positions at each year end.
profit before tax for the year ended 31 December 2010 would
increase/decrease by GBP237,000 (2009 - GBP458,000). This
is also mainly attributable to the Company's exposure to
interest rates on its fixed interest securities. This is
based on a Value at Risk ('VaR') calculated at a 99% confidence
- level.
In the opinion of the Directors, the above sensitivity analyses
would not necessarily reflect the year as a whole, since the
level of exposure changes frequently as part of the interest
rate risk management process used to meet the Company's objectives.
The risk parameters used will also fluctuate depending on the
current market perception.
Other price risk
Other price risks (ie changes in market prices other than those
arising from interest rate or currency risk) may affect the
value of the quoted investments.
It is the Board's policy to hold an appropriate spread of investments
in the portfolio in order to reduce the risk arising from factors
specific to a particular sector. The allocation of assets to
specific sectors and the stock selection process both act to
reduce market risk. The Manager actively monitors market prices
throughout the year and reports to the Board, which meets regularly
in order to review investment strategy. The investments held
by the Company are listed on the London Stock Exchange.
Other price sensitivity
If market prices at the Balance Sheet date had been 10% higher
or lower while all other variables remained constant, the profit
before tax attributable to ordinary shareholders for the year
ended 31 December 2010 would have increased/decreased by GBP3,406,000
(2009 - increase/decrease of GBP2,429,000). This is based on
the Company's equity portfolio and convertibles held at each
year end.
(ii) Liquidity risk
This is the risk that the Company will encounter difficulty
in meeting obligations associated with financial liabilities.
Liquidity risk is not considered to be significant as the Company's
assets comprise mainly readily realisable securities, which
can be sold to meet funding commitments if necessary. Short-term
flexibility is achieved through the use of loan and overdraft
facilities (note 13).
(iii) Credit risk
This is failure of the counter party to a transaction to discharge
its obligations under that transaction that could result in
the Company suffering a loss.
The Company considers credit risk not to be significant as it
is actively managed as follows:
where the Manager makes an investment in a bond, corporate
or otherwise, the credit rating of the issuer is taken into
- account so as to minimise the risk to the Company of default;
investments in quoted bonds are made across a variety of
industry sectors so as to avoid concentrations of credit
- risk;
transactions involving derivatives are entered into only
with investment banks, the credit rating of which is taken
into account so as to minimise the risk to the Company of
- default;
investment transactions are carried out with a large number
of brokers, whose credit-standing is reviewed periodically
by the Manager, and limits are set on the amount that may
- be due from any one broker;
the risk of counterparty exposure due to failed trades causing
a loss to the Company is mitigated by the review of failed
trade reports on a monthly basis. In addition, the Custodian
carries out a stock reconciliation to third party administrators'
records on a monthly basis to ensure discrepancies are picked
up on a timely basis. The Manager's Compliance department
carries out periodic reviews of the Custodian's operations
and reports its finding to the Manager's Risk Management
- Committee.
transactions involving derivatives, structured notes and
other arrangements wherein the creditworthiness of the entity
acting as broker or counterparty to the transaction is likely
to be of sustained interest are subject to rigorous assessment
by the Manager of the credit worthiness of that counterparty.
The Company's aggregate exposure to each such counterparty
- is monitored regularly by the Board;
for part of the year a proportion of the Company's gearing
related to the zero coupon finance raised in the derivatives
market. The final liability of the zero coupon finance is
pre-determined at the outset of each tranche of zero coupon
finance. The zero coupon finance is subject to counterparty
risk. The Company places trades through a broker and pledges
collateral in support of the net market value of this finance
in accordance with commercial practice. Collateral requirements
can vary at the option of the broker and the broker's Euronext.LIFFE
market clearer. The overall intended effect of the related
put and call options which constitute each tranche of zero
coupon finance is dependent upon any liability of the Company
under each constituent option contract being honoured. The
option contracts are traded on Euronext.LIFFE. On-exchange
trades go through LCH.Clearnet S.A. such that the Company
is not exposed to the credit risk of the exchange member.
The Company managed its collateral obligations on a daily
- basis; and
cash is held only with reputable banks with high quality
- external credit enhancements.
None of the Company's financial assets are secured by collateral
or other credit enhancements.
Credit risk exposure
In summary, compared to the amounts in the Balance Sheet, the
maximum exposure to credit risk at 31 December was as follows:
2010 2009
Balance Maximum Balance Maximum
Sheet exposure Sheet exposure
GBP'000 GBP'000 GBP'000 GBP'000
Non-current assets
Securities at fair value
through profit or loss 42,814 42,814 34,947 34,947
Current assets
Trade and other receivables 43 43 9 9
Accrued income 287 287 391 391
Cash and cash equivalents 1,552 1,552 2,381 2,381
Zero coupon finance derivatives
at fair value - - 637 637
________ ________ ________ ________
44,696 44,696 38,365 38,365
________ ________ ________ ________
None of the Company's financial assets is past due or impaired.
Fair value of financial assets and liabilities
The fair value of the short term loan is shown in Note 13. The
book value of cash at bank and bank loans and overdrafts included
in these financial statements approximate to fair value because
of their short-term maturity. Investments held as dealing investments
are valued at fair value. The carrying values of fixed asset
investments are stated at their fair values, which have been
determined with reference to quoted market prices. For all other
short-term debtors and creditors, their book values approximate
to fair values because of their short-term maturity.
Gearing
The Company has in place a GBP10 million unsecured loan. The
Company augments this from time to time with short-term borrowings
so that greater returns to shareholders may be generated from
the capital stock thus enlarged. Although this gearing increases
the opportunity for gain, it also increases the risk of loss
in falling markets. The risk of increased gearing is managed
by retaining the flexibility to reduce short term borrowings
as appropriate.
For part of the year a further component of the Company's gearing
related to the zero coupon finance raised in the derivatives
market. The final liability of the zero coupon finance was pre-determined
at the outset of each tranche of zero coupon finance. However
the amount charged to capital fluctuated over accounting periods
due to interest rate movements giving rise to interest rate
risk. This was managed by investing the proceeds of the zero
coupon finance in predominantly investment grade corporate bonds,
the value of which were also affected by interest rates but
in an inverse manner to the zero coupon finance.
Gearing is also restricted by the various covenants applicable
to the different borrowings. The unsecured loan contains a clause
which stipulates that total borrowings cannot exceed 40% of
adjusted assets. As at 31 December 2010 the reported ratio was
22.4%.
There is a second short term borrowing facility with another
major bank for GBP1 million. In respect of this lender, the
Company's net asset value must not fall below GBP10 million.
As at 31 December 2010 the net asset value stood at GBP34.5
million (2009 - GBP25.3 million).
17. Income enhancement
Zero coupon finance (note 13) raised in the derivatives market
was invested in corporate fixed interest securities to augment
the income available for distribution to shareholders. The cost
of these funds was fixed when they were raised, and was charged
wholly to capital.
In addition the SORP recommends that debt securities are accounted
for on an effective yield basis with the associated adjustment
being allocated to revenue. The Company has decided to allocate
this adjustment to capital as explained in note 1(f). The effect
of this treatment on revenue and capital is set out below.
Finally, as explained in note 1(j) revenue utilises surplus
management expenses that have arisen in capital but does not
compensate capital as recommended by the SORP.
The effect of these income enhancement strategies on capital
and income is summarised in the table below. There is a risk
with these strategies that capital will be eroded unless the
charges to capital are covered by gains elsewhere in the portfolio,
and this is managed by investing in a portfolio of shares which
in the long run is expected to provide adequate capital growth
to absorb both the zero coupon finance cost and the effective
yield adjustment while paying growing dividends which contribute
to the pursuit of the Company's objectives.
In following this strategy, the Directors recognise that there
is only one class of shareholder.
2010 2009
Income Capital Income Capital
GBP'000 GBP'000 GBP'000 GBP'000
Zero coupon finance:
Finance costs charged to capital - (58) - (274)
Return on corresponding investments 199 (355) 286 212
Purchase of preference shares
with discretionary dividends
cum-dividend and sales
ex-dividend - - 19 -
Debt securities:
Amortised cost adjustment charged
to capital 27 (27) 33 (33)
Tax value of loan relationship /
management expenses arising in
capital but utilised against
income - - 85 (85)
______ ______ ______ ______
226 (440) 423 (180)
______ ______ ______ ______
18. Fair value hierarchy
The Group adopted the amendments to IFRS 7 'Financial Instruments:
Disclosures' effective from 1 January 2009. These amendments
require an entity 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
shall have the following levels:
- Level 1: quoted prices (unadjusted) in active markets for
identical assets or liabilities;
- Level 2: inputs other than quoted prices included within Level
1 that are observable for the assets or liability, either directly
(ie as prices) or indirectly (ie derived from prices); and
- Level 3: inputs for the asset or liability that are not based
on observable market data (unobservable inputs).
The financial assets and liabilities measured at fair value
in the statement of financial position are grouped into the
fair value hierarchy at 31 December 2010 as follows:
Level Level Level
1 2 3 Total
Note GBP'000 GBP'000 GBP'000 GBP'000
Financial assets at
fair value through
profit or loss
Quoted equities a) 35,572 - - 35,572
Quoted bonds b) 7,242 - - 7,242
Derivatives c) - - - -
______ ______ ______ ______
Total 42,814 - - 42,814
______ ______ ______ ______
Financial liabilities
at fair value through
profit or loss
Derivatives c) - - - -
______ ______ ______ ______
Net fair value 42,814 - - 42,814
______ ______ ______ ______
As at 31 December 2009
Level Level Level
1 2 3 Total
Note GBP'000 GBP'000 GBP'000 GBP'000
Financial assets at
fair value through
profit or loss
Quoted equities a) 27,242 - - 27,242
Quoted bonds b) 7,705 - - 7,705
Derivatives c) - 637 - 637
______ ______ ______ ______
Total 34,947 637 - 35,584
______ ______ ______ ______
Financial liabilities
at fair value through
profit or loss
Derivatives c) - (5,912) - (5,912)
______ ______ ______ ______
Net fair value 34,947 (5,275) - 29,672
______ ______ ______ ______
a) Quoted equities
The fair value of the Group's investments in quoted equities
have been determined by reference to their quoted bid prices
at the reporting date. Quoted equities included in Fair Value
Level 1 are actively traded on recognised stock exchanges.
b) Quoted bonds
The fair value of the Group's investments in Corporate quoted
bonds has been determined by reference to their quoted bid prices
at the reporting date.
c) Derivatives
The fair value of the Group's investments in Derivatives has
been determined using observable market inputs other than quoted
prices included within Level 1.
Additional Notes to the Annual Financial Report
This Annual Financial Report announcement is not the Company's
statutory accounts for the year ended 31 December 2010. The
statutory accounts for the year ended 31 December 2010 received an
audit report which was unqualified.
The statutory accounts for the financial year ended 31 December
2010 were approved by the Directors on 28 February 2011 but will
not be filed with the Registrar of Companies until after the
Company's Annual General Meeting which is to be held at 12 noon on
13 April 2011 at Bow Bells House, One Bread Street, London EC4M
9HH.
The Annual Report will be posted to shareholders in March 2011
and additional copies will be available from the Manager (Investor
Helpline - Tel. 0845 60 24 247) or by download for the Company's
webpage (www.shiressmallercompanies.co.uk)
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.
For Shires Smaller Companies plc
Aberdeen Asset Management PLC, Secretaries
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR DKFDDOBKDBBB
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