BlackRock Smaller Companies has published results covering the 12 month period ended 28 February 2025. The trust’s returns lagged those of the Deutsche Numis Smaller Companies plus AIM Index over the period, returning 0.0% in NAV terms and -1.4% in share price terms, while the index returned 6.2%. The chairman’s statement observes that the Aim Index fell by 2.6% over the period. This is a reflection of the part of the damage done by the Chancellor’s autumn budget.
The dividend has been upped from 42p to 44p. Revenue earnings per share didn’t quite cover the dividend – these increased from 40.7p to 42.5p. The board took the decision to up the dividend while recognising that many portfolio companies are making strong earnings forecasts for the full year. The trust has now increased its annual dividend every year since 2003.
During the year, the company bought back 3,515,000 shares at a total cost of £47.1m, delivering an uplift to the NAV per share of 0.7% for continuing shareholders. Since the year end, the company has bought back a further 700,000 shares at a total cost of £8.8m and an average discount to NAV of 12.2%. The discount currently stands at 12.2% compared to a sector average of 12.1% as at 2 May 2025.
On 22 January 2025, the company announced that it had entered into an agreement with Saba Capital Management L.P. (Saba), pursuant to which Saba has given a number of undertakings to the company regarding its shareholding in the Company, the full announcement can be viewed at the following link. The agreement lasts until the earlier of the day following the completion of the company’s 2027 AGM or 31 August 2027. The agreement does not limit Saba’s ability to acquire or dispose of shares in the company. The board believes that this agreement was in the long-term interest of shareholders.
Extract from the manager’s report
Having positioned the Company for a more successful UK Government, and the expectation of a positive inflection in sentiment towards the UK, the budget brought a new reality; rising rates, rising inflation expectations, reducing corporate profitability and cost cutting. We have spent much of the last six months reducing our positive stance on UK domestic stocks, but given the poor market liquidity we have been unable to do so quickly, leading the Company to underperform the index return of 6.2% by -6.2%.
It has been a long time since I have seen such a frustrating performance period, with stock specific issues only explaining a fraction of the underperformance. The rest has come from a series of positions where earnings have been in line with expectations, or indeed in some cases ahead, but share prices have reacted in the other direction.
Starting with the main stock specific drivers. TT Electronics surprised the market with a significant earnings downgrade only a few weeks after reporting numbers and reassuring the city about its outlook. Specific issues at a plant in Mexico appear to be the cause. A brief respite came via an unsolicited approach from Volex, although ultimately this came to nothing. We have exited the position whist we await clarity on any progress in the restructuring plans. Workspace Group is one of a collection of stocks where market sentiment has shifted in response to the budget and rate environment. Like so many in the property sector they trade at a significant discount to net asset value. It is worth noting the property sector has seen significant corporate interest so far this year as investors with longer term horizons look to purchase assets at beneath book cost. Secure Trust shares halved as an investigation into the Motor Finance sector took an unexpected turn. Initially it was felt that Secure Trust’s book of business was outside of the investigation, however a subsequent decision widened the scope. In the face of such extreme regulatory uncertainty and a range of outcomes beyond reasonable analysis we have sold the position. In any year there are always shares that we either don’t own, or don’t own enough of that have a relative impact. This year has seen Zegona Communications (Zegona), TBC Bank, Quilter, Plus500 and Ithaca Energy all rally strongly. Zegona is a relative unknown in the UK market, with the fundraising that accompanied their purchase of the Vodafone Spain business missing many. We maintained a small exposure to the business, with the highly levered balance sheet and complicated financing structure putting us off having a large holding. The shares doubled during the year. TBC Bank is one of the two main banks in Georgia. Most of the year was uneventful in share price terms, however the possibility of a settlement in Ukraine has seen the shares rally.
The Company has had some successes during the year, although in many cases we feel share prices have not adequately reflected the underlying earnings performance. Top of the leaderboard this year is pension consultancy XPS Pensions (XPS). Earnings have been upgraded a number of times this year partly reflecting the supportive background for the industry, which in the case of XPS has been amplified by a string of impressive client wins. Alfa Financial Software has managed to deliver earnings upgrades whilst at the same time managing the transition of their business from a licence based model to a recurring fee structure, a transition that typically may not run as smoothly as hoped. Demand for Baltic Classified Group’s various services have proven surprisingly immune from the uncertainty so close to their borders, whilst the management team has once again demonstrated not only the pricing power of the underlying services, but also their commitment to wielding that power with restraint. High margins and cash conversion has resulted in both debt reduction and increasing share buybacks.
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