DJ Chelverton UK Dividend Trust plc: Annual Report and Accounts for the year to 31 April 2020
Chelverton UK Dividend Trust plc (SDVP)
Chelverton UK Dividend Trust plc: Annual Report and Accounts for the year to
31 April 2020
06-Jul-2020 / 16:18 GMT/BST
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CHEVERTON UK DIVIDEND TRUST PLC
Annual Report and Accounts for the year to 31 April 2020
Printed copies of the Annual Report will be sent to shareholders shortly.
Additional copies may be obtained from the Corporate Secretary - Maitland
Administration Services Limited, Hamilton Centre, Rodney Way, Chelmsford,
Essex CM1 3BY.
The financial information set out below does not constitute the Company's
statutory accounts for the year ended 30 April 2020. The financial
information for 2020 is derived from the statutory accounts for that year.
The auditors, Hazlewoods LLP, have reported on the 2020 accounts. Their
report was unqualified and did not include a reference to any matters to
which the auditors draw attention by way of emphasis without qualifying
their report. The financial information for 2019 is derived from the
statutory accounts for that year.
The following text is copied from the Annual Report & Accounts.
Strategic Report
The Strategic Report comprising pages 1 to 16 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 2020 2019 % change
Total gross assets (GBP'000) 42,040 62,032 (32.23)
Total net assets (GBP'000) 26,034 44,659 (41.70)
Net asset value per Ordinary share 124.86p 214.19p (41.71)
Mid-market price per Ordinary share 127.50p 173.50p (26.51)
Premium/(discount) 2.11% (19.00%)
Net asset value per Zero Dividend Preference 105.48p 3.97
share 2025 109.67p
Mid-market price per Zero Dividend 110.00p (7.27)
Preference share 2025 102.00p
(Discount)/premium (6.99%) 4.29%
Year ended Year ended
30 April 30 April
Revenue 2020 2019 % change
Return per Ordinary share 9.45p 13.40p (29.48)
Dividends declared per Ordinary share 9.60p 8.97p 7.02
Special dividends declared per Ordinary 2.50p (100.00)
share -
Total return
Total return on Group gross assets (28.16%) (3.53%)
Total return on Group's net assets* (total (6.39%)
return as proportion of net
assets after the provision for the Zero
Dividend Preference shares) (25.85%)
Total return on Group's net assets* (36.06%) (9.90%)
Ongoing charges** 2.12% 1.95%
Ongoing charges*** 1.50% 1.45%
* 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
I sincerely hope all of our shareholders and their families are safe and
well as we transition through the current lockdown status to a gradual
return to something like a normal state. Albeit that might be somewhat
different to what we have been used to in the past before the outbreak of
Covid-19.
Results
The Company's net asset value per Ordinary share as at 30 April 2020 was
124.86p (2019: 214.19p), a decrease over the year of 41.7% with an Ordinary
share price of 127.50p per share (2019: 173.50p). Total assets, including
audited revenue reserves, were GBP42.040m (2019: GBP62.032m) and the total net
assets were GBP26.034m (2019: GBP44.659m).
The Company was launched on 12 May 1999, and the net asset value per
Ordinary share has risen by 26.5% and a total of 195.85p has been paid in
dividends, including the fourth interim dividend announced with this report.
Since the year end, the net asset value per Ordinary share has risen to
125.58p as at 29 June 2020 and the discount to market NAV is currently
1.13%.
In the year total dividends of 9.60p per Ordinary share were paid, including
the fourth interim dividend of 2.40p. During the same period the MSCI Small
Cap Index decreased by 17.08%.
At this time the current underlying portfolio yield is very hard to
evaluate, for obvious reasons. However, as a result of the policy over the
past ten years of growing the annual dividend and retaining to revenue
reserves the maximum permitted under the legislation relating to investment
trusts, the Company is in a strong position and can pay its dividend for
some time from accumulated reserves.
The Company's portfolio is currently invested in 76 companies spread across
23 sectors. This spread creates a well diversified portfolio which will, in
the future, lead to a strong return of dividend income and subsequently
steady revenue growth and, in time, capital growth.
Capital structure
Since the collapse in the stock market in March, there have been a number of
requests to issue new ordinary shares at a modest premium to the prevailing
net asset value per share. To date these have been turned down because the
issuing of such shares incurs a one-off cost with the London Stock Exchange
and the Board will not issue shares, when all costs are taken into account,
at a price that is not at least neutral to the existing shareholders.
In addition, at this particular time, the Board feels that the revenue
reserves that have been built up over the past ten years should only be
applied to the shares that existed prior to the lockdown.
If shares are issued in the future, the Board will take into account the two
factors above, along with the undoubted opportunities that there are at this
time to acquire shares in companies at 'the wrong price'.
Dividend
The Board has declared a fourth interim dividend of 2.40p per Ordinary share
(2019: 2.40p) which, when added to the three quarterly interim dividends of
2.40p per Ordinary share, brings the total to 9.60p (2019: 8.97p) in respect
of the year ended 30 April 2020, an increase of 7.02% over the previous
year.
As has been said before, it was the Board's intention, over time, to move
the dividend profile gradually to a position where the four interim
dividends paid are equal. This has now been achieved in the financial year
just completed.
The Company has revenue reserves which after payment of the fourth interim
dividend represent some 172% of the current annual dividend or some 16.50p
per Ordinary share.
As a consequence, the Board has decided that the four interim dividends paid
in respect of the financial year ending 30 April 2021 will not be less than
that paid in respect of the financial year ended 30 April 2020.
Outlook
Many commentators in the UK and around the world are now commentating on the
pace, scale and 'shape'
of the recovery when it arises.
Our view is that in certain sectors there will be a relatively rapid
recovery over the next few months as the lockdown is eased. However, overall
the economy will not return to where it was pre-lockdown. The final part of
the recovery will take longer, as specific sectors such as hospitality and
aerospace will need further time to get back to viability and the inevitable
increase in unemployment will hold back the recovery.
However, after three months we are encouraged by the resilience and strength
of the portfolio companies and believe that, in the medium term, our
companies will survive and prosper.
Lord Lamont of Lerwick
Chairman
6 July 2020
Investment Manager's Report
In the year to 30 April 2020 there was a decline in Company's net asset
value per share from 214.19p to 124.86p. At the same time the core dividend
was increased by 7.02% in line with the targeted increase. The announcement
of the fourth interim dividend is in line with the dividend policy as set
out on 6 March 2019. Further, in line with that policy, the Company has not
paid a special dividend in respect of the 2019/2020 financial year.
It is well worth noting that since the 'Great Panic' the net asset value per
share has recovered a large part of its immediate 'Covid-19 losses' from a
low point of 84.66p on the 19 March and is currently, 29 June, 125.58p an
increase of 48.3%. In the same way, the share price has improved from the 23
March level of 82.5p to its level on 29 June of 127.00p.
As stated in the Chairman's Statement, the Board intends that total core
dividends of not less than 9.60p will be paid in respect of the financial
year ending 30 April 2021, made up of four interim dividends of at least
2.40p.
Given the extraordinary developments of the past four months and the now
almost forgotten events of the second half of last calendar year, I have
decided to split this report into three sections:
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1) The period from the end of last financial year to the appointment of Mr
Johnson as leader of the Conservative Party and of course Prime Minister;
2) The period until the announcement of the lockdown, and;
3) The period since the lockdown.
The first period was dominated by the continuing, and what felt like
continuous, political fighting and wrangling over the whole Brexit issue.
Both sides of the issue would not be reconciled or compromise and the effect
on investor perception was very poor. It continued the same negative
investor view of the prospects for the United Kingdom economy which had
generally been the case since the Referendum in June 2016.
Shareholders I am sure recall 'the process' as being thoroughly exhausting
and distracting. In this period we received a number of offers for our
companies, which are set out below in the portfolio review section. At the
time, it felt like our companies were being acquired at the 'wrong price'.
Whilst the offer premiums were attractive, it was the prevailing share price
the day before the offer that we felt was very wrong. Given the number of
takeovers, it was clear that third parties looking at the UK economy and
prospects were not at all put off as to whether the UK was in, or out, of
the European Union.
Finally, the process came to a head with the change of Prime Minister and
the appointment of Mr Boris Johnson. Immediately, UK equities saw the start
of a correction, as markets hate uncertainty and it was perceived that even
leaving the EU was better than the saga of the prolonged leaving/not leaving
process.
Moving into the second period, investors became much more positive, as the
agenda was moved on very quickly to 'life after Brexit'. This was of course
added to with the very strong election performance by the Conservative Party
winning enough seats to provide a clear majority meaning that at least
decisions could now be made and passed into law. The UK equity markets
enjoyed what has been called the 'Boris Bounce'. There is no doubt that our
investee companies were relieved that they could finally plan for a known
future. As an aside, the portfolio is made up largely of smaller UK public
companies and sales to the EU were, and indeed are, a relatively small part
of total sales and principally arise through the ownership of operating
subsidiaries in countries who are members of the European Union.The
manifesto on which the Conservatives won a large majority was based on
resolving the Brexit issue and, as importantly, investing in new
infrastructure and regions outside the South East of England. Again, this
planned investment will be very positive for our largely UK-centric investee
companies.
Finally, the third period, being the time since the arrival of Covid-19 into
the United Kingdom. The introduction of 'the lockdown', something never
experienced before in the United Kingdom, led to a few days of what we are
calling 'the Great Panic'. Share prices, across the board, collapsed as fear
took over from uncertainty and the apocalyptic projections from Imperial
College of 500,000 people dying were not the backcloth to any economy
prospering.
This trust, has in its 21-year life, been through a number of major market
dislocations. The last major collapse was the Great Financial Crisis. Then,
as shareholders will recall, there was a real fear of a collapse in the
financial system around the world. At the time there was a major concern of
mass insolvencies as access to credit had completely dried. The fund was
then geared by fixed interest term loans from Lloyds Bank. The loans came
with covenants which, whilst never breached, were a constant problem as the
market in small company shares started declining in February 2007 and
continued downwards until March 2009.
At the time, the trust had very limited revenue reserves and as companies
cancelled their dividends these had to be largely utilised.
In this Covid-19 crisis, the trust finds itself in a much stronger position
than in 2008. At this time the financial gearing is provided by the Zero
Dividend Preference shares, which have no covenants and are in place until
April 2025. Over the past ten years, the trust has built up revenue reserves
such that the trust has one of the biggest reserves relative to its core
annual dividend of all investment trusts.
The impact of Covid-19 is all too obvious on our lives and the world and UK
economy. A lesser known impact is the general, across the board, reduction
or elimination of dividends paid by companies. Given the depth of the
revenue reserves which we have built up since the the 'Great Financial
Crisis' your company is able to continue paying dividends in the future.
This stronger position has meant that the trust has been able to review its
portfolio and to take action not driven by a desperate search for dividend
income. We have created a 'Pandemic Portfolio', being those companies in the
portfolio whose shares have fallen to a level probably never seen before and
certainly well below the lowest levels reached in the Great Financial
Crisis. It is our belief that purchases made at this time in what are good,
well run companies will produce strong returns in the future.
Portfolio review
In the last year we have had seven takeovers: KCom Group, Mucklow (A&J)
Group, Sanderson Group, Statpro, BCA Marketplace, Murgitroyd Group and Low &
Bonar (2019: 2), and post the year end the offer for Moss Bros Group was
confirmed. Including the above takeovers, two other holdings from the
portfolio were sold in their entirety (2019: 4), Anglo African Oil and Gas
and De La Rue.
Shareholdings were reduced in 11 companies, including Belvoir Lettings,
Bloomsbury Publishing, Castings, Clarke (T.), DFS Furniture, Jarvis
Securities, Kin and Carta, Moss Bros Group, Strix Group, UP Global Sourcing
Holdings and XP Power, all after strong share price performances.
Eight new shareholdings were added to the Company's portfolio in the year,
including: Close Brothers Group - Merchant Banking Group, Elementis -
Speciality chemicals and personal care products, MTI Wireless Edge -
Antennas and antenna systems, Portmeirion Group - Ceramic tablewear,
giftware, glassware and home fragrance products, TheWorks.co.uk [1] -
Retailer of gifts, arts and crafts, stationary, toys and books, Tyman -
Supplier of engineered fenestration components and access solutions, Vertu
Motors - Car dealership group, XPS Pensions - Pensions consultancy.
The shareholdings were increased in 19 companies which were in the portfolio
at the beginning of the financial year. As ever, this represents a
significant part of the portfolio and again includes 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 at lower prices.
Outlook
Following the disastrous market collapse in the second half of March, it is
pleasing to record a strong
recovery over the past two months.
Having been party to many electronic meetings over the past three months, it
is clear that certain trends are emerging. Firstly, the forecasts developed
at the point of the introduction of the lockdown have largely been beaten,
and some by significant margins. Secondly, through the force of necessity,
plans that had been in place to develop businesses over the next five years
have been put in place now and will provide, in the near future, real
improvements in efficiency and capacity and reduced costs.
There is no doubt that a sharp recovery is taking place and that this will
only increase as the lockdown is eased over the next few weeks. However,
until the furlough scheme comes to an end it is impossible to say exactly
where the economy will end up.
As has been seen after the other major market shocks over the life of this
trust, recovery has always been strong and the companies in the portfolio
have come back stronger and fitter. We expect it to be no different this
time.
David Horner
Chelverton Asset Management Limited
6 July 2020
Breakdown of Portfolio by Industry
at 30 April 2020 Market value % of
Bid
Market sector GBP'000 portfolio
Financial Services 6,286 15.6
Construction & Materials 3,347 8.2
Support Services 3,200 7.9
Household Goods & Home Construction 2,829 7.0
Industrial Engineering 2,591 6.4
General Retailers 2,459 6.1
Travel & Leisure 2,369 5.8
Nonlife Insurance 2,245 5.5
Media 2,180 5.3
Electronic & Electrical Equipment 2,017 5.0
Real Estate Investment & Services 1,950 4.8
Oil & Gas Producers 1,703 4.2
Life Insurance 1,336 3.3
Food Producers 1,301 3.2
Real Estate Investment Trusts 1,113 2.7
Technology Hardware & Equipment 829 2.0
Industrial Transportation 685 1.7
Banks 545 1.3
Food & Drug Retailers 517 1.3
Leisure Goods 468 1.2
General Industrials 387 0.9
Personal Care & Other Household Products 161 0.4
Chemicals 70 0.2
40,588 100.0
Breakdown of Portfolio by Market Capitalisation
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