abrdn UK Smaller Companies Growth Trust has published results for the 12 months ended 30 June 2024. Over the year, the NAV total return was 18.1%, well ahead of the 10.0% return generated by its benchmark (the Deutsche Numis Smaller Companies, plus AIM, ex Investment Companies, Index). A narrowing discount meant that shareholders did even better, with a return of 21.0%.

Over the year, the board bought back 14.1m shares (15.9% of the issued share capital), at a total cost of £60.5m and a weighted average price of 427.66 pence per share. The weighted average discount at which the shares were repurchased was 13.1%. The board calculates that this has added 10.7p to the NAV for remaining shareholders.

These improved returns go a long way to making up underperformance in previous years. The board says that it looked into the root causes of the underperformance in 2022, and the conclusion it reached was that this was largely attributable to external factors which were challenging for the manager’s investment style. [A significant reason will have been rising interest rates, which are now falling].

The dividend rises by 9.1% to 12p and this was well covered by revenue earnings of 13.1p (up from 12.4p for the prior year). The excess goes into the trust’s revenue reserve.

A renegotiated management fee last year helped the ongoing charges ratio to fall from 0.95% to 0.92%.

Extracts from the managers’ report

The more stable backdrop we have been waiting for did materialise this year and the focus of the markets reverted to stock specifics and reporting, rather than being dominated by top-down factors. The consistency of outperformance has been one of the most pleasing aspects for us, as portfolio managers, this year; the Company outperforming the reference index in 9 of the 12 months (only July 2023, Nov 2023 and April 2024 delivering relative underperformance).

The style factors driving markets, such as either growth stocks or value stocks being in favour, has been more settled this period. Value outperformed growth in the first half of the period, but value and growth both delivered similar returns in the market in the second half. We would characterise style factors as a slight headwind to our strategy during the period, but neutralising as we finished the year. Performance has predominantly been driven by stock specifics, companies reporting strong trading and earnings upgrades, with share prices responding appropriately, which is a distinct improvement on the situation over the last couple of years. Attribution and style analysis show that the outperformance has been driven by stock selection, rather than our style of Quality, Growth & Momentum being in favour.

Whilst we saw four successful bids for companies in the portfolio during the year, all at attractive premiums, this has not been the main driver of performance. These companies were Ergomed, Smart Metering Systems, Mattioli Woods, and Spirent. Overall, those four companies contributed 198 bps of relative performance during the year.

The five leading positive contributors to relative performance during the year were as follows:

• Ashtead Technology +153bps (share price performance +104% since purchase) The company was a new addition to the portfolio during the year and has delivered very strong performance. The management team has displayed a strong track record of upgrading earnings, from both organic outperformance and acquisitions since the IPO in late 2021. The business has benefitted from supportive end markets in oil and gas, and the green energy transition driving investment in renewables. Visibility is aided by strong customer backlogs, and we continue to see increased customer propensity to rent. The company generates strong free cash flow which the management team is re-investing into the business, and balance sheet strength provides scope for further M&A.
• Ergomed +102ps (+36%) The shares contributed to performance following the recommended offer from Permira, the European private equity firm, at an attractive all-cash price of £13.50 per share.
• Diploma +98bps (+39%) features in the top 5 contributors again this year, further highlighting its long-term track record. The share price has been driven by ongoing delivery of the growth strategy, with acquisitions that position Diploma behind structurally growing end markets, deepening penetration of its regions, and extending product ranges.
• Cranswick +85bps (+37%) has a long track record for delivering growth, evidenced by its 34-year unbroken dividend growth history. Over time, the company has broadened its core protein focus, created new consumer categories and developed an exemplary reputation with customers. The long-term success is underpinned by the company’s focus on achieving “carcase value maximisation”, requiring a constant understanding of consumer trends and customer needs, and an ability to invest to provide capacity and maintain its industry-leading position in efficiency.
• Hilton Food Group +85bps (+44%) has redeemed itself after being a bottom 5 contributor last year. Hilton is very much back on track of consistency of delivering, and its market position reaffirmed by the work it did with customers after the inflationary challenges in 2022. Over the past year, its organic execution has been strong, and the shares have been buoyed by the announcement of new customer wins, including Walmart in Canada.

The five weakest contributors to relative performance during the year were as follows:

• CVS Group -130bp (-49%) The share price was hit badly by the Competition Markets Authority (“CMA”) announcement of a review into the veterinary industry- focusing on price, consumer visibility and branding. We expect the outcomes to be manageable for CVS and have retained the position. Whilst CVS’s Australian business is progressing well and UK trading has been resilient, the CMA review places a near term cap on the share price.
• Big Technologies -115bps (-44%) Performance has been lacklustre, with a lack of big wins and one contract loss, impacting sentiment. Underlying growth and new contract wins should help offset that, but nearer term the business is in a no growth scenario. We continue to have a holding.
• XP Power -75bps (-25%) Despite management’s confidence that the business could trade out of a high net debt position, XP Power then issued a profit warning.  Having had a series of disappointments, our confidence in the management team diminished. The balance sheet was strained and an equity issue looked necessary. Together with earnings downgrades, the proposition deteriorated and we exited the position.
• Team17 -72bps (-24%) The gaming industry has had a challenging period. While demand dynamics  remain attractive, industry-wide unreleased content backlogs, inflation in intellectual property and content costs and competition for gaming hours have led to pressure across the sector. With a change in management and a longer than expected continuation of a challenging environment, we exited the position. 
• discoverIE -72bps (-20%) The shares suffered during the period from ongoing cyclical weakness impacting forecasts. Management has worked hard to protect margins, through a combination of pricing resilience, tight cost control and margin accretive M&A, but the end market weakness has weighed on the shares, and there has been less opportunity to acquire businesses given the higher interest rate environment.  We continue to hold the shares, but have reduced our exposure.

AUSC : Much better year for abrdn UK Smaller Companies Growth