Athelney Trust PLC 

Legal Entity Identifier: 

213800ON67TJC7F4DL05 

26 July 2022 

Half Yearly Financial Report for the Period ended 30 June 2022 

Athelney Trust PLC (LSE: ATY) is a company making investments in the equity securities of quoted United Kingdom companies including smaller companies. 

Investment Objective

The investment objective of the Trust is to provide long-term growth in dividends and capital, with the risks inherent in small cap investment minimised through a spread of holdings in quality small cap companies that operate in various industries and sectors. The Fund Manager also considers that it is important to maintain a progressive dividend record.

Investment Policy

The assets of the Trust are allocated predominantly to companies with either a full listing on the London Stock Exchange or a trading facility on AIM or AQSE. The assets of the Trust have been allocated in two main ways: first, to the shares of those companies which have grown steadily over the years in terms of profits and dividends but, despite this progress are undervalued by the market when compared to future earnings and dividends; second, those companies whose shares are undervalued by the market when compared with the value of land, buildings, other assets or cash on their balance sheet.

Chairman's Statement

Dear Shareholder

I am pleased to present the Interim Financial Report for the half year to 30 June 2023.

Period Highlights

•At 30 June 2023, unaudited Net Asset Value (NAV) had declined to 208.87p, (minus 4.8%) for the half year

•The share price fell by 7.1% to 195.0p from 210.0p at 31 December 2022

•The discount to NAV over the first six months of the year increased to 6.6% from 4.3%

•The Trust ranked fourth out of 25 investment trusts in the AIC's comparison of dividend yields for the UK Smaller Companies' segment with a yield of 4.92%

•Share price total return decreased by 8.3% in this six-month period, calculated as the change in net asset value (NAV) during the half year, including dividend paid

•Gross revenue has increased by 19.6% for the half year to £122,408 (30 Jun 2022: £102,311)

 •Revenue return per ordinary share was 4.9p (31 Dec 2022: 6.9p, 30 Jun 2022: 3.9p)

•A final dividend of 7.5p was paid in April 2023 (April 2021: 7.5p) and an interim dividend of 2.1p was paid in September 2022 (September 2021: 2.0p) making the total dividend paid for the financial year 9.6p (2022: 9.5p)

•The interim dividend will be 2.2p (2022: 2.1p).

Performance

The Company has produced solid investment performance over these six months for its shareholders by comparison with the UK Smaller Companies segment of Investment Trusts reported by the Association of Investment Companies.  The board continues to be pleased with our Managing Director and Fund Manager's results during a period where the world economy's growth expectations have declined and the UK market is still recovering from serious headwinds. 

Continuing headwinds include sticky and high inflation, market uncertainties raised by weak global economic growth, the expectation of a protracted Ukraine-Russia war and in the US a mini banking crisis, followed by national debt default concerns. 

In addition, the UK has seen considerable labour market tightening and increasing unrest, resulting in many days lost to public sector strikes.  The new Sunak/Hunt partnership continues to battle with the result of COVID-related poor growth figures (compared to other advanced economies), the need to find more money for higher wage settlements (now averaging over 6%) from departmental budgets, and the snail-paced return to confidence for their government after the debacle of the Truss mini-budget. 

Is inflation becoming embedded in the UK in the meantime?  Interest rate rises have so far had much less effect here than in the US where inflation in June returned to a two-year low of 3%. There was downwards movement in the UK June figures for annual and core inflation which dropped to 7.9% and 6.9%. both lower than expected.

Further information on portfolio activity and the drivers behind the portfolio's performance is contained in the Managing Director's Report below.  

Given these headwinds and the greater impact they might be expected to have on smaller companies, I am pleased by the Company's share price performance which declined just over 7% to 195p in the first half of our financial year.  It is now trading at a modest discount to NAV of around 7% compared to the current AIC UK Smaller Companies investment trust sector discount average of just below 13%. We thank shareholders for their support and continued interest in the company.

Dividends

We are very pleased to see the continuing recovery of your Company's income from dividends, as UK markets, alongside the rest of the world return to more normal conditions, post-pandemic.  Our gross revenue has increased by almost 20% over the comparative period last year to £122,408 (30 Jun 2022: £102,311). 

UK smaller companies should benefit from a general return to higher trading levels, and in some cases better margins also.  The current outlook is that FTSE Small Cap companies will deliver a yield of 3.8% and FTSE 250 3.4% (compared to the forecast for FTSE 100 companies of 3.9% - figures from Octopus Investments). 

We therefore have more confidence that companies in the UK are currently well-placed to deliver much better yields in 2023 than in the last two years.    

Against this background I am delighted to report your board has decided to pay an interim dividend of 2.2p per share on 22 September 2023 to all shareholders on the register of members at close of business on 8 September 2023. 

As usual, we will review the case for a final dividend in Q1 2024.

Shareholder Relations

The Board held an AGM on 16 March 2023 and was very pleased to take questions from attendees, as well as have some further conversations over refreshments and a light lunch.  There was ample opportunity to discuss the company's performance as well as the future.  We encourage more shareholders to take advantage of the time and access offered by attending the AGM for this financial year which will be held in London on 21 March 2024. 

Outlook

Thankfully we have transitioned to more usual business and market dynamics after the many COVID challenges of 2021 and 2022:   The need for immediate personal, governmental, or global action to combat the pandemic and its impacts is now replaced with the slow, delayed effects of interest rate rises or seeing, at long last, increased availability of product or services as capacity rises at production facilities or in supply chains.

We also seem to be transitioning from the expectation of deep recession to a mild recession or possibly no recession at all in both the US and UK.  The Bank of England's forecast at the start of 2023 perhaps underestimated the likely persistence of UK inflation at a high level, currently 8.7%.  After seeing that it has stuck in the high single digits, alongside negative core inflation, wage growth and employment signals, the Bank has returned to 50 basis point interest rate increases; the market is also resigned to more 'medicine' to bring inflation down to about 5% by the end of 2023 and to the Bank's target of 2% a year later. 

Meanwhile companies and the public alike are still transitioning mentally to the new environment of higher costs for everything from basic supplies to financial services; it now seems this is going to be a sustained period of fiscal challenge.

More normal business conditions have allowed UK company dividends to return to more familiar patterns and amounts which is a recent positive potential trend for the future.  On the other hand, wage and raw materials inflation threatens margins, and for those companies who are growing, there are struggles to recruit; it is reported there is a 1m-plus labour shortage.  Similar labour problems exist in other European countries; many took a break during COVID and have not returned to full employment.  Pre-tax profits were under pressure in energy-intensive businesses over the past 12 months as wholesale gas prices peaked at €340/MWh last summer and as gas prices are now decreasing, should ease one of the current constraints to business and consumer confidence. 

Your board continues to actively assess opportunities and threats, in order to provide stability and benefit for shareholders.  We remain confident the Company remains well-positioned to meet its objectives, and to take advantage of opportunities to capture value.

Frank Ashton

Chairman

25 July 2023

Other Matters

The important events that have occurred during the period under review and the key factors influencing the financial statements are set out above.

Directors' Responsibility Statement

The Directors are responsible for preparing the Half Yearly Financial Report in accordance with applicable laws and regulations. The Directors confirm that to the best of their knowledge:

·              The condensed set of Financial Statements for the six months to 30 June 2023 have been prepared in accordance with FRS 104 "Interim Financial Reporting", gives a fair view of the assets, liabilities, financial position and profit of the Company.

·              The Half Yearly Financial Report includes a fair review of the information required by:

a)             rule 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements and a description of the principal risks and uncertainties for the remaining six months of the year; and

b)            rule 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the financial year and that have materially affected the financial position or performance of the Company during that period; and any changes in the related party transactions described in the last Annual Report that could do so.

The Half Yearly Financial Report for the six months ended 30 June 2023 comprises an Interim Management Report, in the form of the Chairman's Statement and Other Matters, the Managing Director's Report, Portfolio Information and a set of Financial Statements which have not been reviewed or audited by the Company's Auditor.

Principal Risks and Uncertainties

The Board considers that the principal risks and uncertainties facing the Company, other than as set out below, remain the same as those disclosed in the Annual Report for the year ended 31 December 2022 on pages 14 and 15 and page 37. These risks include, but are not limited to, market risk, investment and strategic risk, regulatory risk, operational risk, financial risk and liquidity risk.

Global Issues

The global pandemic COVID-19 declared by WHO on 11 March 2020 and the war in Ukraine have emerged as  significant risks which have impacted global commercial activities. The board have been monitoring the development of these risks and have considered the impact they have had to date and assessed the impact they may have in the future. The Chairman's Statement and Managing Director's Report cover these in more detail.

On behalf of the Board

Frank Ashton

Chairman

25 July 2023

Managing Director's Report

Portfolio Commentary

 The Chairman's summary of the macro environment provides a pretty bleak picture, not to mention the recurring news of significant employee layoffs in some of the best-known brands and global tech giants and this has been reflected in the stock market with the FTSE 250 declining by 2.7% over the past six months. This decline occurred predominantly over the last quarter, with energy and basic materials groups being the main detractors due to weak commodity prices and concerns about the Chinese economy.

While the portfolio has under-performed the broader market, as the year of normalisation progresses, many of our companies are proactively cutting unnecessary expenditures, discarding unprofitable ventures, targeting high-value customers, establishing efficient operations, and honing a clear value proposition to bolster competitive strength.  At the core, efficiency is pivotal to business resilience and growth and by boosting overall efficiency and productivity, businesses are well placed to make market share gains and expedited growth in upcoming years once the macro-environmental factors stabilise.  Implementing Enterprise Resource Planning (ERP) systems and addressing procurement challenges are among the initiatives that have been used to improve outcomes and spur margin expansion. However, it is pleasing to note that the challenges within supply chains are gradually ameliorating and freight rates are decreasing, though they remain higher than 2019 levels. Additionally, the prices of raw materials are starting to normalise, sometimes even showing deflation. Our companies are reaping the benefits of these positive shifts slowly. Adjustments to inventory levels and operations are releasing working capital and mitigating lingering accounting effects. In this journey, quality businesses stay dedicated to delivering value to their customers, strengthening resilience, and securing market positions amidst economic uncertainties. 

An example of this is FeverTree Drinks (LSE: FEVR) which is experiencing the gradual unwinding of significant supply chain issues. Over the coming year, as the company releases inventory, the effects of these accounting issues, particularly energy and glass costs, will gradually subside, driving margin expansion. 

The changing landscape has triggered a power struggle among stakeholders in the value chain (consumers, employees, suppliers, distributors, etc.), which is squarely focused on who is delivering value. The ongoing tug-of-war incites changes in business models, drives industry consolidation, and other competitive measures, all aimed at preserving margins and fostering growth.

Gamma Communications (LSE: Gamma) observed channel partner consolidation, while Rightmove (LSE: RMV) noted agent consolidation, which only enhances supplier power.

We are no longer seeing growth for growth's sake, with the economic pie being redistributed between varying stakeholders. An observable shift is that more profitable brands are moving towards direct-to-consumer models as fragmented industries offer opportunities to those willing and capable of focusing on bringing alternative strategies to the market. These changing power dynamics bring into focus the economics of consumer value - who has acted responsibly or who has reached the limits of their pricing power. Companies are honing their customer-centric strategies to guarantee long-term competitive success.

By focusing on their most lucrative customers and core demographics, they enhance customer experience and generate robust free cash flows. A succinct and coherent value proposition is vital in the current environment. Businesses that effectively convey unique selling points distinguish themselves from rivals, build brand recognition, and attract and retain customers - fuelling growth.

Cake Box, a recent addition to the portfolio, has been successful as a franchise retailer promoting cakes that are completely egg free allowing the group to service a much larger potential market which includes those customers who are unable to eat eggs for dietary or religious reasons. The first concept store opened in East London in 2008.  The business expanded to a franchise estate of 91 stores by June 2018 when it was listed on AIM and has since grown to 205 stores by the end of March 2023.

We continue to focus on the group's franchisee growth, the empowering of the franchisees utilising a data-driven approach and their multi-channel expansion rather than press reports on issues with the clearing of protected trees on one of the CEO's properties.

While ensuring greater value is provided to a more specific set of customers, companies seek to drive sustained growth and double down on their competitive advantage in the market. The most noticeable shift toward customer-centricity is that companies, broadly across sectors, are now focusing on strategies to increase product value and service quality. The previous approach of growth for growth's sake has been replaced by a more targeted approach.

Rightmove (LSE: RMV) prioritises product development to provide increased value to agents and enhance the customer experience, expecting to reap the benefits in the upcoming year.

Dividend revenue in the current financial year increased by 19.9% as compared to same period last year which is a welcome sign of business conditions continuing to normalise.  We have continued to reduce our exposure

to the property trusts as dividend growth negates the need to hold these high yielding low growth assets. 

Consequently, the Company realised capital profits before expenses arising from the sale of investments during the period in the amount of £12,885 (30 June 2022: £304,722).

The continued increase in the dividend income that we receive from our investments, as well as the current level of retained earnings and realised capital reserves, should provide shareholders comfort that even in the current environment when share prices are under pressure, we are in the enviable position of being able to continue to pay dividends to our loyal shareholders for the foreseeable future.

As this market uncertainty continues, it is more important than ever that one has a strict investment process. It is vital not to get caught up in the hype and noise of the daily market movements, and instead invest with a long-term approach. A sound investment philosophy sets out a number of 'rules' or 'procedures' that we fall back on when the market noise gets too loud.  Companies that have a sustainable competitive advantage will always be well-placed to withstand short-term headwinds, regardless of market conditions, maintain market share and ultimately find new ways to grow.

When investing it can be challenging to recognise the potential in companies, particularly those that are in the growth stage of their life cycle. It can also be difficult to evaluate the 'narratives' that some companies are telling about themselves.  To invest appropriately in a company in the growth stage of their life cycle it is important to balance the company's narrative alongside its numbers. 

By drilling down into a company's financials and growth plans in a careful, considered and committed way, it is possible to identify the quality growth stocks that will prosper over the long-term. Their ability to be flexible, to move quickly to take advantage of opportunities as they arise, and to capitalise on market trends and demand, will continue to support the ongoing success of such businesses, and provide significant long-term opportunities for their investors.

Sustainable Investing

Athelney Trust Plc is committed to responsible investment and we believe that Environmental, Social and Governance (ESG) factors have a material impact on long-term investment outcomes. The consideration of ESG factors is an integral part of our decision-making process and is fully integrated through asset selection and portfolio management procedures. ESG issues are central to understanding and framing the contextual, systematic and idiosyncratic elements of the business and to this end we have adopted a Quality Franchise framework comprising six distinct pillars into our research process.  This framework ensures that companies are analysed in a systematic way to ensure they are sustainable over the long-terms as well as able to improve shareholder returns. Furthermore, through the application of this six-pillar framework, our investment process aims to mitigate our portfolio against ESG and sustainability risks through placing a material emphasis on Sustainability and Management by being two of the six distinct pillars:

·      The sustainability pillar focuses on areas of a business where there may be risk to the predictability of business operations through time. This assists our mitigation of default risk and uncertainty of business expansion.

·      The management pillar focuses on the trustworthiness of management. This assists our mitigation of uncertainty by reducing the risk of managerial conduct or failure of business strategy execution.

The other pillars are the Industry, the Business, the Competition and the Financials.

Our investment philosophy and corporate values steer us away from companies that have the potential to harm society, and moreover, help us avoid companies where there is a risk to the sustainability of their business operations. It is also important to note that we also exclude a number of industries including weapons, tobacco, gambling, thermal coal, petroleum, old-forest logging, palm oil, and pesticides - a list that is reviewed annually.

Investment Philosophy

As far as portfolio investments are concerned, our investment philosophy is clear:

I.    The economics of a business drives long-term investment returns; and

II.   Investing in high quality, growth businesses' that have the ability to generate predictable, above-average economic returns will produce superior investment performance over the long-term.

In essence, this means that in assessing potential investments we:

a)      Value long-term potential, not just performance

b)      Choose sustainable, growing businesses; and

c)      Ignore temporary market turbulence.

The key attributes that will define our investments are:

(1)    Organic Sales Growth: Quality franchises organically growing sales above GDP growth that can do so (sustainably) because they have a large, growing market opportunity and compelling competitive advantage which will drive ongoing market share gains are attractive.

(2)    A Proven Track Record: This encompasses both the management's capability and the strength of the business' model. Generally, a firm that consistently delivers a Return on Equity of greater than 15% indicates a Quality Franchise for us.  Our investment philosophy is built on the belief that a stock's long-term return to shareholders is driven by the return on capital of the underlying business.

(3)    Company's future profits: In essence we are backing a proven management team and a successful business model. Management are the key decision makers regarding the company's strategy and its competitive position in the marketplace and it is critical that we have confidence in the company's ability to sustainably execute its strategy and grow their earnings, even in a tough environment.

(4)    Low Leverage: We require investments to operate with low levels of debt, which ensure that they have sufficient resources to execute on their strategy. An Interest Coverage above 4x provides sufficient bandwidth in times of economic trouble. As a long-term investor, capital preservation is the highest priority. There is nothing that changes a management team's focus toward the short term quicker than impending debt refinancing when market conditions suddenly change for the worse. We need to be comfortable that this will not happen and that the company has a strong enough balance sheet so that it will retain optionality and can quickly and efficiently execute its strategy over the long-term.

Dr Manny Pohl AM

Managing Director

25 July 2023

Investment Portfolio at 30 June 2023

Top 20 Holdings

Income Statement   

For the Six Months Ended 30 June 2023

The total column of this statement is the statement of comprehensive income of the Company prepared in accordance with Financial Reporting Standards ("FRS"). The supplementary revenue return and capital return columns are prepared in accordance with the Statement of Recommended Practice issued in July 2022 by the Association of Investment Companies ("AIC SORP").

All revenue and capital items in the above statement derive from continuing operations.

The revenue column of the Income statement includes all income and expenses. The capital column includes the realised and unrealised profit or loss on investments

Statement of Changes in Equity

For the Six Months Ended 30 June 2023

Statement of Financial   Position As at 30 June 2023

    Approved and authorised for issue by the Board of Directors on 25 July 2023.

   Dr Manny Pohl AM

   Managing Director

Statement of Cash Flows

For the Six Months Ended 30 June 2023

Notes to the Financial Statements

For the Six Months Ended 30 June 2023

1.      Accounting Policies

a)      Statement of Compliance

The Company's Financial Statements for the period ended 30 June 2023 have been prepared under UK Generally Accepted Accounting Practice (UK GAAP) and the Statement of Recommended Practice, 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' issued in April 2022 ('the SORP') issued by the Association of Investment Companies.

The financial statements have been prepared in accordance with the accounting policies set out in the statutory accounts for the year ended 31 December 2022.

b)      Financial information

The financial information contained in this report does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The financial information for the period ended 30 June 2023 and 30 June 2022 have not been audited or reviewed by the Company's Auditor pursuant to the Auditing Practices Board guidance on such reviews. The information for the year to 31 December 2022 has been extracted from the latest published Annual Report and Financial Statements, which have been lodged with the Registrar of Companies, contained an unqualified auditor's report and did not contain a statement required under Section 498(2) or (3) of the Companies Act 2006. 

c)       Going concern

The Company's assets consist mainly of equity shares in companies listed on a recognised stock exchange which, in most circumstances, are realisable within a short timescale under normal market conditions. The Directors believe that the Company has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the financial statements. In assessing the Company's ability to continue as a going concern, the Board has fully considered the impact of COVID-19 and the war in Ukraine.  

2.   Taxation

The tax charge for the six months to 30 June 2023 is nil (year to 31 December 2022: nil; six months to 30 June 2022: nil).

      The Company has an effective tax rate of 0% for the year

ending 31 December 2022. The estimated effective tax rate is 0% as investment gains are exempt from tax owing to the Company's status as an Investment Trust and there is expected to be an excess of management expenses over taxable income.

3. The calculation of earnings per share for the six months ended 30 June 2023 is based on the attributable return on ordinary activities after taxation and on the weighted average number of shares in issue during the period.

4.   Net Asset Value per share is calculated by dividing the net assets by the weighted average number of shares in issue 2,157,881.

5.   Financial Instruments

       Fair value hierarchy

The fair value hierarchy consists of the following three classifications:

Classification A - Quoted prices in active markets for identical assets or liabilities. Quoted in an active market in this context means quoted prices are readily and regularly available and those prices represent actual and regularly occurring market transactions on an arm's length basis.

Classification B - The price of a recent transaction for an identical asset, where quoted prices are unavailable. The price of a recent transaction for an identical asset provides evidence of fair value as long as there has not been a significant change in economic circumstances or a significant lapse of time since the transaction took place. If it can be demonstrated that the last transaction price is not a good estimate of fair value (e.g. because it reflects the amount that an entity would receive or pay in a forced transaction, involuntary liquidation or distress sale), that price is adjusted.

Classification C - Inputs for the asset or liability that are based on observable market data and unobservable market data, to estimate what the transaction price would have been on the measurement data in an arm's length exchange motivated by normal business considerations.

The Company only holds classification A investments (2021: classification A investments only).

6. Related Party Transactions

Dr. E. C. Pohl is the sole beneficial owner of E C Pohl & Co Pty Limited and a Director of Astuce Group.  E C Pohl & Co Pty Limited held 86,000 (2022: 86,000) shares and Astuce Group held 550,000 (2022: 550,000) shares in the Company as at 30 June 2023.

Copies of the Half Yearly Financial Statements for the six months ended 30 June 2023 will be available on the Company's website www.athelneytrust.co.uk as soon as practicable.