DJ Chelverton UK Dividend Trust plc: Annual Financial Report
Chelverton UK Dividend Trust plc (SDV)
Chelverton UK Dividend Trust plc: Annual Financial Report
11-Jul-2019 / 07:00 GMT/BST
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The issuer is solely responsible for the content of this announcement.
CHEVERTON UK DIVIDEND TRUST PLC
Annual Financial Report
For the year ended 30 April 2019
Strategic Report
The Strategic Report has been prepared in accordance with Section 414A of
the Companies Act 2006 ('the Act'). Its purpose is to inform shareholders
and help them understand how the Directors have performed their duty under
Section 172 of the Act to promote the success of the Company.
Chelverton UK Dividend Trust PLC ('the Company') and its subsidiary SDV 2025
ZDP PLC ('SDVP') ('the subsidiary') together form the Group. The Group's
funds are invested principally in mid and smaller capitalised UK companies.
The portfolio comprises companies listed on the Official List and companies
admitted to trading on AIM. The Group does not invest in other investment
trusts or in unquoted companies. No investment is made in preference shares,
loan stock or notes, convertible securities or fixed interest securities.
Financial Highlights
30 April 30 April
Capital 2019 2018 % change
Total gross assets (GBP'000) 62,032 66,386 (6.56)
Total net assets (GBP'000) 44,659 51,794 (13.78)
Net asset value per Ordinary 214.19p 249.61p (14.19)
share
Mid-market price per Ordinary 173.50p 251.00p (30.88)
share
Premium/(discount) (19.00%) 0.56%
Net asset value per Zero Dividend 105.48p 101.41p 4.02
Preference share 2025
Mid-market price per Zero 110.00p 105.50p 4.27
Dividend Preference share 2025
Premium 4.29% 4.02%
Year ended Year ended
30 April 30 April
Revenue 2019 2018 % change
Return per Ordinary share 13.40p 11.49p 16.62
Dividends declared per Ordinary 8.97p 8.46p 6.03
share
Special dividends declared per 2.50p 0.66p 278.79
Ordinary share
Total return
Total return on Group gross (3.53%) 25.96%
assets
Total return on Group's net (6.39%) 25.95%
assets* (total return as
proportion of net
assets after the provision for
the Zero Dividend Preference
shares)
Total return on Group's net (9.90%) 28.59%
assets*
Ongoing charges** 1.95% 1.84%
Ongoing charges*** 1.45% 1.44%
* Adding back dividends paid in the year.
** Calculated in accordance with the Association of Investment Companies
('AIC') guidelines. Based on total expenses, excluding finance costs, for
the year and average net asset value.
*** Based on gross assets.
Chairman's Statement
Results
The Company's net asset value per Ordinary share as at 30 April 2019 was
214.19p (2018: 249.61p), a decrease over the year of 14.2% with an Ordinary
share price of 173.50p per share (2018: 251.00p). Total assets, including
revenue reserves, were GBP62.032m (2018: GBP66.386m) and the total net assets
were GBP44.659m (2018: GBP51.794m).
The Company was launched on 12 May 1999 and the net asset value per Ordinary
share has risen by 123% and a total of 186.25p has been paid in dividends
including the fourth interim and special dividends announced with this
report. Since the year end, the net asset value per Ordinary share has
decreased to 198.74p as at 28 June 2019; the discount to market NAV is
currently some 8.9%.
In the year total dividends of 11.47p per Ordinary share were paid and
proposed including a special dividend of 2.50p. During the same period the
MSCI UK Small Cap Index decreased by 3.12%.
The current underlying portfolio dividend growth has again been positive in
the past year, with a portfolio yield today of 5%. As a result of the
underlying dividend growth in the year, it has been possible to increase the
interim dividend paid to shareholders and to pay a special dividend, whilst
retaining a very significant amount of revenue to add to the revenue
reserves.
The Company's portfolio is currently invested in 75 companies spread across
26 sectors. This spread creates a well-diversified portfolio which the
manager expects to lead to steady revenue growth and, in time, capital
growth.
Capital Structure
The Zero Dividend Preference Shares issued in 2012 ('ZDP 2012') reached the
end of their life on 8 January 2018 and shareholders received their final
entitlement in full. In order to maintain the capital structure, a new class
of Zero Dividend Preference shares was issued which will mature on 30 April
2025 ('ZDP 2025') with a final capital entitlement of 133.18p. This form of
capital gearing has proven to be very important for the fund in enhancing
total returns for Ordinary shareholders.
The 2025 ZDP has been issued by a wholly owned subsidiary SDV 2025 ZDP PLC.
The net asset value per ZDP share at 30 April 2019 was 105.48p per share
with a share price of 110.00p per share.
Dividend
The Board has declared a fourth interim dividend of 2.40p per Ordinary share
(2018: 2.40p) which, when added to the three quarterly interim dividends of
2.19p per Ordinary share (2018: 2.02p), brings the total (excluding the
special dividend) to 8.97p (2018: 8.46p) in respect of the year ended 30
April 2019, an increase of 6.03% over the previous year. In addition, the
Board has declared a special dividend of 2.50p per Ordinary (2018: 0.66p)
share to be paid with the fourth interim dividend. Shareholders will
effectively receive a fourth dividend of 4.90p per Ordinary share. This
equates to a total dividend for the year of 11.47p per Ordinary share.
It remains the Board's intention, which has been stated several times over
the past few years, to move the dividend payment profile to a position where
the fund pays four equal interim dividends on a quarterly basis through the
year. This will be achieved in the year ending 30 April 2020 with four
payments of 2.40p being a total for the year of 9.60p of core dividend. In
that same year there may or may not be a special dividend, the payment of
which will be dependent on the level of total dividend revenue received by
the Company including any special dividends.
The Board announced earlier this year its decision that once the Company's
retained revenue reserves are equal to double the historic core dividend,
the Company will distribute to shareholders all additional current period
revenue as a special dividend. If the current period revenue is insufficient
to meet the proposed core dividend target, the Company will use some of the
retained revenue reserves with the aim of reinstating its policy as soon as
is practical.
The Company as at year end of 30th April 2019 had retained revenue reserves
of GBP4,000,000 or 19.19p per share, which represents some 199% of the
expected 2020 core annual dividend of 9.60p per Ordinary share.
Board Succession
As part of the Board's succession planning, Mr David Harris retired as a
Director at the Annual General Meeting held in September 2018. The Board
would like to express its thanks to Mr Harris for his support to the Board
over the years. Mr Andrew Watkins joined the Board after the last Annual
General Meeting, as David Harris's successor, Andrew Watkins has brought to
the Board a wealth of experience from the investment industry, and is
already making a valuable contribution to the Board.
Outlook
The outlook remains similar to that which we set out last year, namely that
uncertainty around the outcome of negotiations with the EU remains, and this
will continue to cause uncertainty in markets. We believe, however, that the
Company's strategy, of investing in stable, largely ungeared and well-valued
businesses, remains a sensible, sustainable model.
Lord Lamont of Lerwick
Chairman
10 July 2019
Investment Manager's Report
In the year to 30 April 2019 there was a decline in Company's net asset
value per share from 249.61p to 214.31p. At the same time the core dividend
was increased by 6.03% in line with the targeted increase. The Company has
also announced a special dividend of 2.50p which, as usual, has been
aggregated with the fourth interim dividend.
This disappointing performance is a result of the continuing political
turmoil and uncertainty caused by the ongoing Brexit process and the
additional concerns caused by the trade "discussions" taking place between
the United States, China and the European Union. It is interesting to note
in the brief period of the Easter Recess when Brexit was not discussed, as
much, there was a significant increase in the asset value of the Company.
It is generally acknowledged by global analysts that UK equities are lowly
rated relative to other world markets and that within the Public Markets,
Mid Cap companies, and especially Small Cap companies are even more
undervalued. This market has some similarities to the "exuberant" period of
1999/2000 when Telecommunications, Media and Technology ("TMT") shares
reached extraordinary values and profitable, cash generating steadily
growing companies were overlooked and disregarded. At this time growth
companies have enjoyed a very strong run-up in prices whereas the exact
opposite could be said about the cash generative, steady growing, dividend
paying companies which make up the Company's portfolio. As we did in early
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DJ Chelverton UK Dividend Trust plc: Annual -2-
2000 we are using this period to acquire new holdings and increase our
existing shareholdings in what appears to be highly undervalued companies.
On one hand it is heartening to see an increase in the number of takeovers
as third parties recognise this undervalue and take the opportunity to
acquire high quality assets. On the other hand, whilst the uplifts in value
are very welcome and particularly when funds can be released to buy into
other significantly undervalued companies, one can't help feeling that the
"real value" should be higher than the price being paid. The takeovers and
offers set out below, in the Portfolio Review, have been announced in the
first six months of this calendar year, and therefore provide cash resources
that can be reinvested to produce a boost to the revenue account, and in
time, to the growth of the asset value.
Reflecting concern about the UK economy, the UK political position, the
periodic instability in Europe and the world trade position it is hardly
surprising that private investors have been holding back from buying the
Company's shares. The shares now trade in the region of a 10% discount which
over the life of the Company is historically very high. In the past the
discount has for very brief periods been at this level but has always
quickly narrowed. The yield on the shares is now at a healthy level, and
with a capital structure in place until April 2025 and with the statement
made by the Board on Dividend Policy the dividend pay out should grow
steadily into the future.
It is also concerning that in the past few weeks we have had several
enquiries about the percentage of the portfolio held in unquoted
investments. It is important to reiterate here that the Company has never,
does not and never will make unquoted investments. When a new company is
brought into the portfolio it is either traded on AIM or on the full list
(excluding the shares in the FTSE 100) and must yield at least 4%.
The Board made a public statement on the 6 March 2019 setting out a
clarification of the Dividend Policy. Given the strength of the underlying
dividend and the growth of the dividends of a lot of the portfolio it is the
Board's intention to pay four interim dividends of 2.40p in 2019/20, an
increase of 7%, and to increase the core dividend by the same 7% for the
foreseeable future. Obviously further distributions may or may not take
place as special dividends depending on the overall revenue account.
Portfolio Review
In the last year we have had two takeovers, Produce Investments and Dairy
Crest (2018 - 1), and just post the year end we received offers for KCom,
Mucklow (A & J) and BCA Marketplace. Including the takeovers of Produce
Investments and Dairy Crest, seven holdings from the portfolio were sold in
their entirety (2018 - 3), Curtis Banks, Discover IE, Macfarlane, Huntsworth
and Hilton Foods.
Shareholdings were reduced in sixteen companies including Amino
Technologies, BCA Marketplace, Bloomsbury Publishing, T. Clarke, Diversified
Gas & Oil, Go-Ahead Group, GVC Holdings, Jarvis Securities, Kin and Carta,
Numis Corporation, Polar Capital, Ramsdens, Randall and Quilter, Sanderson,
Titon Holdings and UP Global Sourcing, all after strong share price
performances.
Seven new shareholdings were added to the Company's portfolio in the year
including, Babcock International - specialising in managing complex assets
and infrastructure, Bakkavor - an international food manufacturing business
specialising in fresh prepared foods, Crest Nicholson - a housebuilder,
Devro - manufactures products derived from collagen, principally sausage
casings, FinnCap - the largest adviser on the Alternative Investment Market
("AIM") advising both public and private companies, Sabre Insurance Group -
a specialist car insurer, STV Group - a Scottish media company.
The shareholdings were increased in twenty-five companies which were in the
portfolio at the beginning of the financial year. Like last year this is a
significant part of the portfolio and included a number of holdings that
were "top sliced" in the early part of the year and then added to towards
the end of the year.
Outlook
Until the UK's relationship with the European Union is clarified it is hard
to see any reason for a change in the current valuations of our companies.
It is however our firm belief that agreement will be reached and that once
this is clear that there will be a significant rerating of the portfolio.
David Horner
Chelverton Asset Management Limited
10 July 2019
Breakdown of Portfolio by Industry
at 30 April 2019 Market value % of
Bid
Market sector GBP'000 portfolio
Support Services 8,240 13.70
Financial Services 7,531 12.50
Travel & Leisure 4,244 7.20
General Retailers 4,102 6.90
Household Goods & Home Construction 3,878 6.60
Construction & Materials 3,836 6.40
Industrial Engineering 3,141 5.20
Media 2,952 4.90
Real Estate Investment Trusts 2,874 4.80
Nonlife Insurance 2,840 4.80
Oil & Gas Producers 2,799 4.70
Real Estate Investment & Services 2,514 4.20
Electronic & Electrical Equipment 1,991 3.30
Software & Computer Services 1,943 3.20
Industrial Transportation 1,150 1.90
Life Insurance 1,083 1.80
Food Producers 1,038 1.80
General Industrials 991 1.60
Leisure Goods 911 1.50
Fixed Line Telecommunications 733 1.20
Food & Drug Retailers 658 1.10
Technology Hardware & Equipment 446 0.70
59,895 100.00
Breakdown of Portfolio by Market Capitalisation
at 30 April 2019
Number of Companies
GBP500m = 20
Source: Maitland Administration Services Limited
Portfolio Statement
at 30 April 2019 Market % of
value
Security Sector GBP'000 portfolio
Diversified Gas & Oil & Gas 2,223 3.7
Oil Producers
Randall & Quilter Nonlife 1,558 2.6
Insurance
Marston's Travel & 1,417 2.4
Leisure
UP Global Sourcing Household 1,363 2.3
Holdings Goods & Home
Construction
Mucklow (A&J) Real Estate 1,350 2.3
Group Investment
Trusts
Belvoir Lettings Real Estate 1,344 2.2
Investment &
Services
DFS Furniture General 1,255 2.1
Retailers
Shoe Zone General 1,248 2.1
Retailers
Strix Group Electronic & 1,190 2.0
Electrical
Equipment
De La Rue Support 1,101 1.8
Services
Clarke (T.) Construction 1,070 1.8
& Materials
Bloomsbury Media 1,066 1.8
Publishing
Crest Nicholson Household 1,059 1.8
Goods & Home
Construction
Restaurant Group Travel & 1,056 1.8
Leisure
Polar Capital Financial 1,045 1.7
Holdings Services
Park Group Financial 1,028 1.7
Services
Flowtech Fluid Industrial 1,020 1.7
Power Engineering
StatPro Group Software & 1,016 1.7
Computer
Services
Castings Industrial 968 1.6
Engineering
Go-Ahead Group Travel & 966 1.6
Leisure
Severfield Industrial 953 1.6
Engineering
Essentra Support 951 1.6
Services
Jarvis Securities Financial 935 1.6
Services
Kier Group Construction 935 1.6
& Materials
Sanderson Group Software & 927 1.5
Computer
Services
BCA Marketplace Support 925 1.5
Services
Photo-Me Leisure 911 1.5
International Goods
Personal Group Nonlife 884 1.5
Holdings Insurance
Alumasc Group Construction 882 1.5
& Materials
Murgitroyd Group Support 855 1.4
Services
Ramsdens Holdings Financial 855 1.4
Services
Premier Asset Financial 844 1.4
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Management Group Services
Financial Services
Centaur Media Media 836 1.4
Galliford Try Household 812 1.4
Goods & Home
Construction
XP Power Electronic & 801 1.3
Electrical
Equipment
Epwin Group Construction 800 1.3
& Materials
Regional REIT Real Estate 789 1.3
Investment
Trusts
RPS Group Support 772 1.3
Services
Braemar Shipping Industrial 760 1.3
Services Transportati
on
Brown (N) Group General 756 1.3
Retailers
Brewin Dolphin Financial 735 1.2
Holdings Services
Town Centre Real Estate 735 1.2
Securities Investment
Trusts
Northgate Support 734 1.2
Services
Chesnara Life 733 1.2
Insurance
KCom Group Fixed Line 733 1.2
Telecommunic
ations
Kin and Carta Support 705 1.2
Services
Palace Capital Real Estate 700 1.2
Investment &
Services
Numis Corporation Financial 686 1.1
Services
McColl's Retail Food & Drug 658 1.1
Group Retailers
Headlam Group Household 644 1.1
Goods & Home
Construction
Bakkavor Food 642 1.1
Producers
Orchard Funding Financial 638 1.1
Group Services
RTC Group Support 630 1.0
Services
Low & Bonar General 601 1.0
Industrials
Wilmington Group Media 600 1.0
Gattaca Support 580 1.0
Services
Anglo African Oil Oil & Gas 576 1.0
& Gas Producers
Finncap Group Financial 540 0.9
Services
Babcock Support 525 0.9
International Services
Foxtons Group Real Estate 470 0.8
Investment &
Services
Connect Group Support 462 0.8
Services
GVC Holdings Travel & 457 0.8
Leisure
STV Media 450 0.7
Amino Technologies Technology 446 0.7
Hardware &
Equipment
Saga General 441 0.7
Retailers
Moss Bros Group General 402 0.7
Retailers
Sabre Insurance Nonlife 398 0.7
Insurance
Devro Food 396 0.7
Producers
Coral Products General 390 0.6
Industrials
DX Group Industrial 390 0.6
Transportati
on
Hansard Global Life 350 0.6
Insurance
Revolution Bars Travel & 348 0.6
Group Leisure
GLI Finance Financial 225 0.4
Services
Chamberlin Industrial 200 0.3
Engineering
Titon Holdings Construction 149 0.2
& Materials
Total 59,895 100.0
Portfolio
Investment Objective and Policy
The investment objective of the Company is to provide Ordinary shareholders
with a high income and opportunity for capital growth, having provided a
capital return sufficient to repay the full final capital entitlement of the
Zero Dividend Preference shares issued by the wholly owned subsidiary
company SDVP.
The Company's investment policy is that:
· The Company will invest in equities in order to achieve its investment
objectives, which are to provide both income and capital growth,
predominantly through investment in mid and smaller capitalised UK
companies admitted to the Official List of the UK Listing Authority and
traded on the London Stock Exchange Main Market or traded on AIM.
· The Company will not invest in preference shares, loan stock or notes,
convertible securities or fixed interest securities or any similar
securities convertible into shares; nor will it invest in the securities
of other investment trusts or in unquoted companies.
Performance Analysis using Key Performance Indicators
At each quarterly Board meeting, the Directors consider a number of key
performance indicators ('KPIs') to assess the Group's success in achieving
its objectives, including the net asset value ('NAV'), the dividend per
share and the total ongoing charges.
· The Group's Consolidated Statement of Comprehensive Income is set out on
page 42.
· A total dividend for the year to 30 April 2019 of 11.47p (2018: 9.12p)
per Ordinary share has been declared to shareholders by way of three
payments totalling 6.57p per Ordinary share plus a fourth interim dividend
payment of 2.40p per Ordinary share and a special dividend of 2.50p per
Ordinary share.
· The NAV per Ordinary share at 30 April 2019 was 214.19p (2018: 249.61p).
· The ongoing charges (including investment management fees and other
expenses but excluding exceptional items) for the year ended 30 April 2019
were 1.95% (2018: 1.84%).
Principal Risks
The Directors confirm that they have carried out a robust assessment of the
principal risks facing the Company, including those that would threaten its
objective, business model, future performance, solvency or liquidity. The
Board regularly considers the principal risks facing the Company. Mitigation
of these risks is sought and achieved in a number of ways as set out below:
Market risk
The Company is exposed to UK market risk due to fluctuations in the market
prices of its investments.
The Investment Manager actively monitors economic performance of investee
companies and reports regularly to the Board on a formal and informal basis.
The Board formally meets with the Investment Manager on a quarterly basis
when the portfolio transactions and performance are discussed and reviewed.
The Company is substantially dependent on the services of the Investment
Manager's investment team for the implementation of its investment
policy.The Company may hold a proportion of the portfolio in cash or cash
equivalent investments from time to time. Whilst during positive stock
market movements the portfolio may forego potential gains, during negative
market movements this may provide protection.
Discount volatility
The Board recognises that, as a closed ended company, it is in the long-term
interests of shareholders to reduce discount volatility and believes that
the prime driver of discounts over the longer term is performance. The
Board, with its advisers, monitors the Company's discount levels and shares
may be bought back should it be thought appropriate to do so by the Board.
Regulatory risks
A breach of Companies Act provisions and Financial Conduct Authority ('FCA')
rules may result in the Group's companies being liable to fines or the
suspension of either of the Group companies from listing and from trading on
the London Stock Exchange. The Board, with its advisers, monitors the Group
and SDVP's regulatory obligations both on an ongoing basis and at quarterly
Board meetings.
Financial risk
The financial position of the Group is reviewed in detail at each Board
meeting and monitored by the Audit Committee.
New developments in accounting standards and industry-related issues are
actively reported to and monitored by the Board and its advisers, ensuring
that appropriate accounting policies are adhered to.
A more detailed explanation of the financial risks facing the Group is given
in note 23 to the financial statements on pages 60 to 65.
Gearing
The Company's shares are geared by the Zero Dividend Preference shares and
should be regarded as carrying above average risk, since a positive NAV for
the Company's shareholders will be dependent upon the Company's assets being
sufficient to meet those prior final entitlements of the holders of Zero
Dividend Preference shares. As a consequence of the gearing, a decline in
the value of the Company's investment portfolio will result in a greater
percentage decline in the NAV of the Ordinary shares and vice versa.
Viability Statement
The Board reviews the performance and progress of the Company over various
time periods and uses these assessments, regular investment performance
updates from the Investment Manager and a continuing programme of monitoring
risk, to assess the future viability of the Company. The Directors consider
that a period of three years is the most appropriate time horizon to
consider the Company's viability and, after careful analysis, the Directors
believe that the Company is viable over a three-year period. The following
facts support the Directors' view:
· The Company has a liquid investment portfolio invested predominantly in
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