Legal Entity Identifier:  213800N1B1HCQG2W4V90                                                                                          

THE EUROPEAN SMALLER COMPANIES TRUST PLC

(formerly TR European Growth Trust PLC)

Unaudited results for the half-year ended 31 December 2021

This announcement contains regulated information

INVESTMENT OBJECTIVE

The Company seeks capital growth by investing in smaller and medium sized companies which are quoted, domiciled, listed or have operations in Europe (ex UK).

PERFORMANCE

Fund Manager's report

The first half of the financial year ending 30 June 2022, saw the Company underperform the benchmark in a market led by very expensive growth stocks in contrast to our balanced portfolio comprised of sensibly priced growth, value and self-help stocks. The underperformance was exacerbated by the unwinding of share price performance in some stocks perceived as 'Covid Winners', some poor decision making around certain Initial Public Offerings ('IPOs') and some unhelpful events in other holdings.

The biggest drag on the portfolio in the period was German online furniture and interior décor retailer Westwing, which had been a substantial contributor to the portfolio in the previous year. The stock was perceived as being a 'Covid Winner' and sold off along with many other such names despite delivering strong organic growth in 2021. Another 'Covid Winner' that suffered was Swedish game developer Stillfront, that was further punished for a profit warning driven by the changes in Apple's policies aimed at enhancing user privacy disrupting the online customer acquisition model of mobile gaming companies.

The IPO market has historically been a good source of return for the Company, unfortunately this was not the case in the six months ending 31 December 2021. There were a huge number of IPOs that drove market indigestion and too many of the names we invested in failed to deliver on the expectations that they had set. German energy infrastructure contractor Friedrich Vorwerk came to market with many promises of orders to drive the energy transition, but they have proved slow to arrive. German omnichannel eyewear retailer Mister Spex contrived to deliver two profit warnings within six months of listing, acting as a reminder that investment bankers, greedy management teams and ruthless private equity vendors need treating with extreme caution. It is a source of pain to us that we need to relearn these lessons.

Swedish listed online gambling company Kindred was hit hard as they had to temporarily close their very profitable Dutch business as they transition to being a regulated player in that market.

The positive contributors to the portfolio largely came from stock specific stories.  German lender Aareal Bank received an inadequate takeover offer which nonetheless boosted the price of this very undervalued bank and technology company.  Norwegian owner of liquified natural gas ('LNG') container vessels FLEX LNG benefited from the rising gas price boosting the rates for LNG container vessels. Spanish online travel retailer eDreams ODIGEO was boosted by the reopening of global economies and successfully taking market share.

We opened a new position in Spanish stainless-steel producer Acerinox where we expect the higher prices and economy reopening to unlock the significant undervaluation of the stock. We opened a position in German automotive supplier Norma when it suffered a significant sell off after warning on supply chain issues that we anticipate clearing over the course of 2022. We invested in UK listed Renewi, which has 90% of its business in the Netherlands, performing waste management and recycling services that should continue to be boosted by economic recovery.

We exited positions in German semiconductor equipment manufacturer PVA and Irish healthcare business Uniphar as the valuations had become stretched after a very strong share price performance. We also exited our position in Swedish public transportation provider Nobina, that received a takeover approach.  This bid, and the one for Aareal Bank, are a reminder that private equity and trade buyers retain the need to pay sensible prices that can deliver the returns they demand.

As we head into 2022, there are clear geopolitical tensions that pose risks for the markets.  Russian aggression towards Ukraine demonstrates a genuine challenge to the post Cold War world we have lived in for the last three decades.  This escalation could cause economic pain.  Other permanent changes seem to have arrived with the early stages of the end of the pandemic.  There is a post global financial crisis normalisation to occur typified by an environment with higher interest rates.  As a result, we anticipate the market will begin to consider valuations more carefully. While we are keen to invest in companies that can grow, we will retain the valuation disciplines that we have always applied when deploying your capital.  We anticipate the market will recognise the positive attributes of these companies as the global economy recovers.

Ollie Beckett, Rory Stokes and Julia Scheufler

28 February 2022

Principal Risks and Uncertainties

The principal risks facing the Company are:

·      Investment strategy and objective

·      Operational

·      Legal and regulatory

·      Financial

Information on these risks and how they are managed is given in the Annual Report 2021. In the view of the Board these principal risks, and the uncertainties facing the Company, remain largely unchanged over the last six months, although the Russian invasion of Ukraine has increased the volatility in European markets and the threat of nation-sponsored cyber-attacks generally.  The Board anticipates that these principal risks will remain applicable to the next six months of the financial year.

Statement of Directors' Responsibilities

Each director (as set out in note 15) confirms, to the best of their knowledge, that:

·      the condensed set of financial statements have been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting' and gives a true and fair view of the assets, liabilities, financial position and profit or loss of the Company as required by Disclosure and Transparency Rule ('DTR') 4.2.4 R;

·      the interim management report includes a fair review of the information required:

-      by DTR 4.2.7 R (indication of important events during the first six months and a description of principal risks and uncertainties for the remaining six months of the year); and

-      by DTR 4.2.8 R (disclosure of related party transactions and changes therein).

On behalf of the Board

Christopher Casey

Chairman

28 February 2022

Notes to the condensed financial statements

1.    Accounting policies

a)  Basis of preparation

The condensed financial statements comprise the unaudited results of the Company for the half-year ended 31 December 2021. They have been prepared on a going concern basis and in accordance with UK adopted International Accounting Standards and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' ('SORP'), issued in April 2021 where the SORP is consistent with the requirements of IFRS.

For the period under review the Company's accounting policies have not varied from those described in the annual report for the year ended 30 June 2021.  These financial statements have not been audited or reviewed by the Company's auditors.

2.   Return per ordinary share

The return per ordinary share is based on the loss for the half-year of £11,675,000 (half-year ended 31 December 2020: profit of £192,430,000; year ended 30 June 2021: profit of £328,517,000) and on 400,867,176 ordinary shares (half-year ended 31 December 2020 and year ended 30 June 2021: 400,867,176*), being the weighted average number of ordinary shares in issue during the period.

The return per ordinary share detailed above can be further analysed between revenue and capital, as below.

3.   Share capital

At 31 December 2021 there were 400,867,176 ordinary shares in issue (31 December 2020 and 30 June 2021: 400,867,176*).

During the half-year ended 31 December 2021 the Company did not issue or repurchase for cancellation any ordinary shares (31 December 2020 and 30 June 2021: same).

* Comparative figures for the periods ended 31 December 2020 and 30 June 2021 have been restated due to the sub-division of each ordinary share of 12.5p into 8 ordinary shares of 1.5625p each on 13 December 2021.

4.   Net asset value per ordinary share

The net asset value per ordinary share is based on the net assets attributable to equity shareholders of £820,546,000 (31 December 2020: £708,689,000; 30 June 2021: £840,667,000) and on 400,867,176 ordinary shares (31 December 2020 and 30 June 2021: 400,867,176*), being the number of ordinary shares in issue at the period end.

* Comparative figures for the periods ended 31 December 2020 and 30 June 2021 have been restated due to the sub-division of each ordinary share of 12.5p into 8 ordinary shares of 1.5625p each on 13 December 2021.

5.   Dividends

The Company has declared an interim dividend of 1.25p per ordinary share (31 December 2020: 1.025p*) payable on 29 April 2022 to members on the register as at 1 April 2022. The shares will trade ex-dividend on 31 March 2022.

A final dividend of 2.10p* per ordinary share was paid on 3 December 2021 from the Company's revenue account in respect of the year ended 30 June 2021.

* Comparative figures for the periods ended 31 December 2020 and 30 June 2021 have been restated due to the sub-division of each ordinary share of 12.5p into 8 ordinary shares of 1.5625p each on 13 December 2021.

6.   Transaction costs

Purchase transaction costs for the half-year ended 31 December 2021 were £178,000 (half-year ended 31 December 2020: £275,000; year ended 30 June 2021: £611,000). These comprise mainly stamp duty and commission. Sales transaction costs for the half-year ended 31 December 2021 were £67,000 (half-year ended 31 December 2020: £86,000; year ended 30 June 2021: £282,000).

7.   Management and performance fees

With effect from 1 October 2021, the base management fee payable to the Manager is 0.55% of net assets up to £800m, reducing to 0.45% thereafter (prior to 1 October 2021 the base management fee payable to the Manager was 0.6% of net assets up to £500m, reducing to 0.5% thereafter). Fees are charged quarterly in arrears.

The Manager may also be eligible to receive a performance related fee. In order to determine whether a performance fee is payable, performance is measured against, and expressed relative to, the benchmark, the Euromoney Smaller European Companies index (ex UK) expressed in Sterling. Performance of both the Company and the benchmark is measured on a NAV total return (with gross income reinvested) basis and is measured over three years.

In any given year in which a performance fee is payable, the performance fee rate is 15% of the positive difference between the average annual NAV total return and the average annual total return of the benchmark. The upper limit on the total fee, including the base fee and any performance fee, for any given accounting year is 2.0% of the NAV of the Company as at the last day of the relevant calculation period. A performance hurdle over the benchmark of 1.0% has to be reached before any performance fee can be earned. For clarity, performance is measured solely on the basis of NAV total return relative to the total return of the benchmark index; no account is taken of whether the NAV grows or shrinks in absolute terms. Any performance fee payable is allocated to capital.

A performance fee of £4,650,000 has been accrued as at 31 December 2021 (31 December 2020: £nil; 30 June 2021: £4,549,000).

8.   Financial instruments

At the period end the carrying value of financial assets and financial liabilities approximates their fair value.

Financial instruments carried at fair value

Fair value hierarchy

The table below analyses recurring fair value measurements for financial assets and financial liabilities. These fair value measurements are categorised into different levels in the fair value hierarchy based on the inputs to valuation techniques used. Categorisation within the hierarchy has been determined on the basis of the lowest level of input that is significant to the fair value measurement of the relevant asset or liability. The different levels are defined as follows:

Level 1:   valued using quoted prices in active markets for identical assets;

Level 2:   valued by reference to valuation techniques using observable inputs other than quoted prices included within    Level 1; and

Level 3:  valued by reference to valuation techniques that are not based on observable market data.

There have been no transfers between levels of fair value hierarchy during the period. Transfers between levels of fair value hierarchy are deemed to have occurred at the date of the event or change in circumstances that caused the transfer.

9.   Going concern

The directors have considered the principal risks and uncertainties facing the Company, including the ongoing impact of the Covid-19 pandemic, cash flow forecasting, a review of covenant compliance including the headroom above the most restrictive covenants and an assessment of the liquidity of the portfolio. They have concluded that they are able to meet their financial obligations, including the repayment of the bank overdraft, as they fall due for a period of at least twelve months from the date of approval of these financial statements. Having assessed these factors, the Board has determined that it is appropriate for the financial statements to be prepared on a going concern basis.

10.   Related party transactions

The Company's transactions with related parties in the period were with the directors and Janus Henderson. There have been no material transactions between the Company and its directors during the period and the only amounts paid to them were in respect of expenses and remuneration for which there were no outstanding amounts payable at the period end. In relation to the provision of services by Janus Henderson, other than fees payable by the Company in the ordinary course of business and the provision of sales and marketing services, there have been no material transactions with Janus Henderson affecting the financial position of the Company during the period under review.

11.   Comparative information

The financial information contained in this half-year report does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. The financial information for the half-years ended 31 December 2021 and 31 December 2020 have not been audited or reviewed by the Company's auditors. The figures and financial information for the year ended 30 June 2021 are an extract based on the latest published accounts and do not constitute statutory accounts for that year. Those accounts have been delivered to the Registrar of Companies and included the Independent Auditors' Report which was unqualified and did not contain a statement under either section 498(2) or 498(3) of the Companies Act 2006.

12.  Website

Details of the Company's share price and net asset value, together with general information about the Company, monthly factsheets and data, copies of announcements, reports and details of general meetings can be found at www.europeansmallercompaniestrust.com

13.  Half-year report

The Company's half-year report will be available on the Company's website. An update extracted from the Company's report for the half-year ended 31 December 2021, will be posted to shareholders in March 2022 and will be available on the website thereafter.

14.   Company status

The European Smaller Companies Trust PLC is registered in England and Wales, No. 2520734, has its registered office at 201 Bishopsgate, London EC2M 3AE and is listed on the London Stock Exchange. 

SEDOL/ISIN:  0906692/GB0009066928

London Stock Exchange (TIDM) code:  ESCT

Global Intermediary Identification Number (GIIN):  JX9KYH.99999.SL.826

Legal Entity Identifier (LEI):  213800N1B1HCQG2W4V90

15.  Directors and Secretary

At the date of this report, the directors of the Company are Christopher Casey (Chairman), Daniel Burgess (Chairman of the Audit Committee), Ann Grevelius, Simona Heidempergher and Alexander Mettenheimer. The Corporate Secretary is Henderson Secretarial Services Limited.