BlackRock Smaller Companies Trust plc (LON:BRSC) has announced its latest portfolio update.
To learn more about the BlackRock Smaller Companies Trust plc please follow this link: blackrock.com/uk/brsc
All information is at 30 April2023 and unaudited.
Performance at month end is calculated on a Total Return basis based on NAV per share with debt at fair value
| One month % | Three months % | One year % | Three years % | Five years % | |
| Net asset value | 3.0 | -4.8 | -12.4 | 26.0 | 9.2 |
| Share price | 2.9 | -4.3 | -11.7 | 8.9 | 4.2 |
| Numis ex Inv Companies + AIM Index | 2.9 | -2.6 | -9.4 | 32.0 | 4.7 |
Sources: BlackRock and Datastream
At month end
| Net asset value Capital only (debt at par value): | 1,457.58p |
| Net asset value Capital only (debt at fair value): | 1,504.34p |
| Net asset value incl. Income (debt at par value)1: | 1,494.45p |
| Net asset value incl. Income (debt at fair value)1: | 1,541.21p |
| Share price: | 1,334.00p |
| Discount to Cum Income NAV (debt at par value): | 10.7% |
| Discount to Cum Income NAV (debt at fair value): | 13.4% |
| Net yield2: | 3.0% |
| Gross assets3: | £796.0m |
| Gearing range as a % of net assets: | 0-15% |
| Net gearing including income (debt at par): | 10.2% |
| Ongoing charges ratio (actual)4: | 0.7% |
| Ordinary shares in issue5: | 48,609,792 |
- Includes net revenue of 36.87p
- Yield calculations are based on dividends announced in the last 12 months as at the date of release of this announcement and comprise the interim dividend of 14.50 pence per share (announced on 3 November 2022, ex-dividend on 10 November 2022, and paid 9 December 2022) and the final dividend of 25.50 pence per share (announced on 05 May 2023, ex-date on 18 May 2023, and pay date 27 June 2023).
- Includes current year revenue.
- The Company’s ongoing charges are calculated as a percentage of average daily net assets and using the management fee and all other operating expenses excluding finance costs, direct transaction costs, custody transaction charges, VAT recovered, taxation and certain non-recurring items for year ended 28 February 2022.
- Excludes 1,383,731 ordinary shares held in treasury.
| Ten Largest Equity Investments Company | % of portfolio |
| Gamma Communications | 2.8 |
| CVS Group | 2.8 |
| Watches of Switzerland | 2.5 |
| 4imprint Group | 2.4 |
| Oxford Instruments | 2.1 |
| Bloomsbury Publishing | 1.8 |
| Qinetiq | 1.6 |
| Moneysupermarket.Com | 1.6 |
| Ergomed | 1.6 |
| Workspace Group | 1.6 |
Commenting on the markets, Roland Arnold, representing the Investment Manager noted:
During March the Company’s NAV per share rose by 3.0% to 1,541.21p on a total return basis, while our benchmark index rose by 2.9%.1 For comparison the large cap FTSE 100 Index continued to outperform, rising 3.4%.1
UK equities made a positive return in April reversing some of the underperformance from March, with growing interest in the attractive valuation discount seen across the UK market. In addition, a recent spike in M&A (mergers & acquisitions) activity of UK companies in the mid & small-cap space has further prompted positive sentiment from investors.
Market performance was largely supported by earnings beating expectations around the world, which offset concerns about U.S. banking problems. Despite the further US bank collapse of First Republic in April, concerns around the US banking sector softened, resulting in positive performance of Financials. Uncertainty still remains in the US however, with further pressure seen in some of the mid-market regional bank stocks. The European economy seemed to rebound from a feeble winter, but manufacturing weakness remained a concern and dampened the upturn. Inflation data in the UK came in higher in March with rising food prices keeping year-on-year headline inflation in double digits at 10.1%. Persistent services inflation kept core inflation at 6.2%. Wage growth also accelerated, despite an increase in labour supply.
The flurry of M&A activity that we saw during April was beneficial to performance during the month. Shares in city broker Numis surged after the company accepted a £410 million all-cash takeover offer from Deutsche Bank. Shares in veterinary services business, CVS Group benefited from the bid for Dechra Pharmaceuticals, a company which we previously owned in the portfolio until it became too large and left our investment universe. Defence business, Qinetiq, reported strong operational performance during the fourth quarter and upgraded guidance for the full-year and as a result the shares rose strongly.
Of the three largest detractors during the month, two came from shares that we do not own. Shares in Burford Capital surged following a ruling in a long-running lawsuit against Argentina. This could result in the business receiving a significant sum in damages; however, it is likely to take some time for the process to be finalised. THG, which we do not own, rallied after the company announced that it had received a preliminary and non-binding takeover proposal from PE (private equity) firm Apollo. Our holding in 4imprint, which has been a standout performer over the last year, gave back some recent share price performance. The company reported impressive results back in March and we believe the pullback in April was a result of some profit taking given recent strength.
In our January announcement we commented on the annual index rebalance, which saw a large number of companies fall into our benchmark and in some cases these companies now account for quite large weightings in the index. As a result, we have spent some time since the beginning of the year revisiting the investment case on a number of shares that we had previously avoided, many of which we continue to avoid given the low quality of the businesses. However, one that did not fall into this camp was Deliveroo. We believe that the industry is beginning to behave rationally, withdrawing from unprofitable areas and focusing on driving profitability in areas where they can achieve scale. The result of this behaviour has been evidenced in recent trading updates, and the current valuation coupled with the strength of balance sheet, which has a significant proportion of the market cap in net cash, has encouraged us to start a position.
Equity volatility has remained extremely high as we have entered 2023, with the new year seen in by an unexpected splurge from consumers, a re-awakening of demand in some of the more cyclical industrial sectors, a fall in bond yields, a rise in bond yields, oil falling in anticipation of economic weakness, oil rising in response to OPEC (Organization of the Petroleum Exporting Countries) cuts, China re-opening, a belief inflation may have peaked, and stubbornly high inflation prints. In short, we believe 2023 will see a continuation of recent themes of uncertainty; Russia/Ukraine war, China, supply chains and inflation. However, we do expect 2023 to see an end to rising interest rises and the start of disinflation. Generally speaking, financial conditions are not too stretched; corporates and consumers are reasonably well capitalised, and banks have plenty of capital. As such the path of employment will dictate the consumer outlook but we continue to expect the trough to be shallower than in previous recessions.
Industrial activity is likely to decline as excess inventory works through the system, but given major markets such as automotive and aerospace were already seeing choked demand through supply chain issues, again we expect a shallower trough. Housebuilding and RMI (repair, maintenance and improvement) will have a tough H1, but given the rapid re-pricing of mortgages post the brief Truss premiership, the outlook isn’t as bad as it was in September. Valuations have corrected quickly and looking back it appears all consumer orientated stocks overshot to the downside during the chaotic period around the Truss budget.
Whilst there is much that can be discussed with regards to the economic outlook, one thing is irrefutable; the valuation of UK small and mid-sized companies is more attractive than it has been for some time, and if that valuation is not recognized by the stock market, it will be recognized by others. As stated in recent updates, we expected to see M&A picking up through the course of the year and this certainly spiked in the last month, with approaches for several companies in the UK as Private Equity have decided to start deploying their substantial cash piles.
We are not out of the woods yet, but the recent round of trading updates from our investments have generally been in line or better than expectations. However, with oil and gas prices lower year-on-year, China re-opening, US$ weakening, shipping/logistics/factory gate prices dropping, much of the inflation pressure of last year could become deflationary during the course of this year, and we have tentatively started to utilise more of our gearing facilities.
Against this difficult backdrop, we remind ourselves that many equity markets (Europe, UK) are structurally under owned and could benefit as sentiment turns and investors begin to reduce these underweights. We remain focused on bottom-up company specific analysis to identify high quality, nimble businesses, operated by entrepreneurial management teams, with strong market positions and resilient cash-flows. These are the types of businesses that we believe will be best placed to manage and thrive in the current environment. Historically these periods have been followed by strong returns for the strategy and presented excellent investment opportunities.
We thank shareholders for their ongoing support.
1Source: BlackRock as at 30 April 2023
To learn more about the BlackRock Smaller Companies Trust plc please follow this link: blackrock.com/uk/brsc
