Standard Life UK Smaller Companies Trust — Strong track record of outperformance

abrdn UK Smaller Companies Growth Trust (LSE: AUSC)

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Standard Life UK Smaller Companies Trust — Strong track record of outperformance

Standard Life UK Smaller Companies Trust (SLS) is managed by Harry Nimmo, who aims to generate long-term capital growth from a portfolio of smaller-cap UK equities. The trust has a strong performance track record; it has meaningfully outpaced its benchmark over one, three, five and 10 years. SLS has also outperformed the majority of its peers over these periods, ranking second out of 10 funds over one and three years, fifth over five years and first over 10 years. The trust has recently changed its benchmark to include AIM stocks, reflecting SLS’s increasing exposure to this area of the UK stock market, as the board and manager consider the quality of these companies has improved in recent years.

Melanie Jenner

Written by

Mel Jenner

Director, Investment Trusts

Investment Companies

Standard Life UK Smaller Companies

Strong track record of outperformance

Investment trusts

28 March 2018

Price

489.0p

Market cap

£338m

AUM

£357m

NAV*

495.7p

Discount to NAV

1.3%

NAV**

497.5p

Discount to NAV

1.7%

*Excluding income. **Including income. As at 26 March 2018.

Yield

1.4%

Ordinary shares in issue

69.2m

Code

SLS

Primary exchange

LSE

AIC sector

UK Smaller Companies

Benchmark

Numis Smaller Cos plus AIM ex-ICs

Share price/discount performance

Three-year performance vs index

52-week high/low

528.0p

386.0p

522.7p

421.8p

**Including income.

Gearing

Gross*

14.5%

Net*

7.4%

*As at 28 February 2018.

Analysts

Mel Jenner

+44 (0)20 3077 5720

Gavin Wood

+44 (0)20 3681 2503

Standard Life UK Smaller Companies Trust is a research client of Edison Investment Research Limited

Standard Life UK Smaller Companies Trust (SLS) is managed by Harry Nimmo, who aims to generate long-term capital growth from a portfolio of smaller-cap UK equities. The trust has a strong performance track record; it has meaningfully outpaced its benchmark over one, three, five and 10 years. SLS has also outperformed the majority of its peers over these periods, ranking second out of 10 funds over one and three years, fifth over five years and first over 10 years. The trust has recently changed its benchmark to include AIM stocks, reflecting SLS’s increasing exposure to this area of the UK stock market, as the board and manager consider the quality of these companies has improved in recent years.

12 months ending

Share price
(%)

NAV
(%)

Blended benchmark* (%)

Numis Smaller Cos plus AIM ex-ICs (%)

FTSE AIM (%)

FTSE All-Share (%)

28/02/14

36.4

35.7

32.2

27.4

21.5

13.3

28/02/15

(15.7)

(7.5)

(1.8)

(6.2)

(19.0)

5.6

29/02/16

25.5

14.9

(1.8)

(1.6)

(1.7)

(7.3)

28/02/17

14.2

20.1

21.2

23.6

33.1

22.8

28/02/18

26.5

24.3

10.3

11.1

16.0

4.4

Source: Thomson Datastream. Note: All % on a total return basis in GBP. *Numis Smaller Cos ex-ICs to 31 December 2017 and Numis Smaller Cos plus AIM ex-ICs thereafter.

Investment strategy: Long-term, high-quality focus

Nimmo uses Aberdeen Standard Investments’ proprietary stock-selection Matrix to screen the investible universe of c 650 companies, seeking quality firms with the potential for sustainable growth. Factors include earnings revision and share price momentum, as well as balance sheet strength. The manager believes that valuation is a secondary consideration, as you often “get what you pay for”. Potential investee companies undergo rigorous fundamental analysis and meetings with managements are a key part of the process. Nimmo invests for the long term and the portfolio is unconstrained by benchmark weightings. At end-February 2018, net gearing was 7.4%, which is towards the higher end of the historical range and compares with the maximum permitted 25% of NAV. Gearing includes £11.1m in convertible unsecured loan stock whose final conversion date is 29 March 2018.

Market outlook: Outperformance may continue

Over the long term, the performance of smaller UK companies, measured by the Numis Smaller Companies plus AIM ex-ICs index, has outpaced the broader UK stock market. In aggregate, they have relatively attractive growth profiles and in terms of forward P/E multiples, only modestly higher valuations than the broader UK market. This backdrop may indicate potential for further outperformance.

Valuation: Active discount management

SLS’s board actively manages the discount, aiming to keep it below 8% in normal market conditions. This is primarily via share repurchases, although there are discretionary six-monthly tender offers. The trust’s share price is now close to par, with the discount having been in a narrowing range over the last 18 months. SLS’s annual dividend has grown for the last 10 consecutive years, compounding at an annual rate of c 24%. Its current dividend yield is 1.4%.

Exhibit 1: Trust at a glance

Investment objective and fund background

Recent developments

Standard Life UK Smaller Companies Trust (SLS) aims to achieve long-term capital growth through investment in a diversified portfolio mainly consisting of UK-quoted smaller companies. SLS started life as Edinburgh Smaller Companies in 1993 and Standard Life Investments (now Aberdeen Standard Investments) assumed management from 2003.

28 February 2018: Six-month results to 31 December 2017. NAV TR +14.2% versus benchmark +8.9% TR. Share price TR +16.6%.

15 December 2017: Announcement that SLS has drawn down £15m of the £20m revolving credit facility agreed with RBS in November 2017.

1 November 2017: Announcement that SLS has entered into a £45m unsecured loan facility with RBS – a five-year term loan of £25m and a five-year revolving credit facility of £20m.

Forthcoming

Capital structure

Fund details

AGM

October 2018

Ongoing charges

1.06% (as at H118)

Group

Aberdeen Standard Investments

Final results

September 2018

Net gearing

7.4%

Manager

Harry Nimmo

Year end

30 June

Annual mgmt fee

Tiered (see page 7)

Address

1 George Street,

Edinburgh, EH2 2LL

Dividend paid

Apr and Oct/Nov

Performance fee

None

Launch date

1993

Trust life

Indefinite

Phone

+44 (0)345 6002268

Continuation vote

N/A

Convertible loan stock

£11.1m nominal

Website

www.standardlifeuksmallercompaniestrust.co.uk

Dividend policy and history (financial years)

Share buyback policy and history (financial years)

While focused on SLS’s long-term capital growth objective, the manager pays close attention to the potential for dividend growth, and SLS’s ordinary dividends have compounded at c 24% pa over 10 years.

The board is focused on managing the discount such that the share price discount to cum-income NAV is less than 8%. This is managed via share buybacks and periodic tender offers when required. Allotments since March 2014 relate to exercise of CULS, which expire at end-March 2018.

Shareholder base (as at 23 March 2018)

Portfolio exposure by sector (as at 28 February 2018)

Top 10 holdings (as at 28 February 2018)

Portfolio weight %

Company

Sector

28 February 2018

28 February 2017*

NMC Health

Healthcare

4.1

4.2

Dechra Pharmaceuticals

Healthcare

3.9

3.3

First Derivatives

Information technology

3.7

2.8

Fevertree Drinks

Consumer goods

3.6

4.2

Abcam

Healthcare

3.2

N/A

JD Sports Fashion

Consumer services

3.1

3.2

Cranswick

Consumer goods

3.1

N/A

Midwich

Industrials

3.0

N/A

Accesso Technology

Information technology

2.9

N/A

Hilton Food

Consumer goods

2.8

N/A

Top 10

33.4

33.4

Source: Standard Life UK Smaller Companies Trust, Edison Investment Research, Bloomberg, Morningstar. Note: *N/A where not in February 2017 top 10.

Market outlook: Earnings driving outperformance

Exhibit 2 (LHS) shows the performance of UK indices over the last 10 years. The Numis Smaller Companies plus AIM ex-ICs index has outperformed both the FTSE AIM and FTSE All-Share indices over the period. Despite this outperformance, its forward P/E valuation is only modestly above that of the FTSE All-Share and considerably lower than the FTSE AIM index, suggesting that superior earnings growth has been the main driver of performance. It is interesting to note that while UK smaller-cap equities sold off more sharply than larger-caps following the result of the UK’s European referendum, they have more than made up for this period of underperformance, which may be due to their relatively favourable growth attributes. A lot of smaller-cap companies have international or niche operations, increasing their resilience to periods of domestic economic weakness. For investors seeking exposure to smaller-cap UK equities, a fund with a well-defined investment process and a strong long-term performance track record, may be of interest.

Exhibit 2: Market performance and valuation metrics

Performance of UK indices

Index valuation metrics (as at 27 March 2018)

 

NSCI + AIM ex-IC

FTSE AIM

FTSE All-Share

P/E forward (x)

15.9

23.9

13.5

Price to book (x)

1.8

2.4

1.7

EV/sales (x)

1.2

1.6

1.4

Dividend yield (%)

2.6

1.4

4.4

Source: Thomson Datastream, Edison Investment Research, Bloomberg

Fund profile: High-conviction, small-cap investment

Standard Life Investments (now Aberdeen Standard Investments) took over management of SLS on 1 September 2003, following a prolonged period of underperformance. Lead manager Nimmo employs Aberdeen Standard Investments’ proprietary stock-selection Matrix to construct a portfolio of c 55 holdings, aiming to generate long-term capital growth. The manager adopts an unconstrained approach, and since 1 January 2018, performance is measured against the Numis Smaller Companies plus AIM ex-Investment Companies Index (previously Numis Smaller Companies ex-Investment Companies Index). There are portfolio guidelines in place: a maximum of 5% in a single company; up to 5% in companies with a market cap below £50m; a maximum 5% in ‘blue sky’ investments; and up to 50% in AIM-listed companies. The board has delegated gearing responsibility to the manager within a range of 5% of NAV in cash to 25% debt (at the time of drawdown). At end-February 2018, net gearing was 7.4%. Despite a focus on capital growth, annual dividends have increased every year since 2007, compounding at c 24% pa over the period.

The fund manager: Harry Nimmo

The manager’s view: Underappreciated asset class

Nimmo believes that UK smaller companies is an underappreciated asset class. He says that in this sector, where market caps are up to £1.7bn, investors can find focused and innovative companies, with higher growth potential than larger-cap companies and dynamic management teams. A lack of both buy- and sell-side analyst coverage means that Nimmo and his team are able to find interesting investment opportunities, at attractive valuations, within the smaller-cap space.

The manager highlights what he believes is an improvement in the Alternative Investment Market (AIM). In December 2010, more than 45% of AIM’s total market cap was in oil & gas and mining companies. By December 2016, the largest sectors were pharmaceuticals and general retailers (both c 10%). Over this period, within the AIM 50 index, the market cap of early stage ‘blue sky’ companies reduced from 74% to 22%, while the amount of more mature dividend payers increased from 16% to 68%. While the valuation of AIM stocks remains relatively high, the manager suggests this reflects real near-term growth potential. SLS has been increasing AIM exposure within the portfolio in recent years and the maximum permissible investment in these companies has been increased from 40% to 50% (42% at end-December 2017).

Nimmo remains excited about the outlook for UK smaller companies, and SLS in particular, which he describes as his largest personal investment by some margin. He notes that all of the trust’s top 10 holdings are experiencing rising earnings estimates. The manager says this is unusual, as there are normally a few that are not seeing positive revisions at any one time. He notes that the overall Matrix score for the portfolio is very high and has been so for the last few months and he believes this bodes well for the trust’s short-term investment performance.

Asset allocation

Investment process: Proprietary stock-selection Matrix

Nimmo has six principles for successful investment in small-cap companies, which he follows consistently through economic cycles. These are: look for sustainable growth; go for quality; run your winners; concentrate your efforts; management longevity; and valuation is secondary. He aims to buy tomorrow’s larger companies today, seeking quality growth firms that have proven business models and a higher level of recurring revenues. The investible universe of c 650 companies is screened using Aberdeen Standard Investments’ proprietary stock-selection Matrix. Factors include: earnings growth and estimate revisions, StarMine estimates (an indication of estimate stability and dispersion), the Altman Z-score (bankruptcy test), valuation, share price momentum and director dealing. Stocks are assigned a Matrix score between +35 and -35, with scores of +10 to +35 deemed potential buy candidates and scores between -10 and -35 potential sells.

Companies considered for investment undergo thorough fundamental analysis, which includes assessing the resiliency of a company’s business model, including analysis of a company’s market share, barriers to entry and pricing power. The resulting portfolio comprises c 55 high-conviction holdings, which the manager believes can be held for the long term. At end-February 2018, SLS had a 94.6% active share (a measure of how a portfolio differs from its benchmark, with 100% representing no commonality and 0% representing full index replication). SLS’s holdings are regularly reviewed to check that their Matrix scores remain attractive. They may be sold or trimmed if there is deterioration in the Matrix score, the original investment thesis no longer holds true, or if the position size has grown larger than 5% of the portfolio.

Current portfolio positioning

At end-February 2018, SLS’s top 10 positions made up 33.4% of the portfolio, which was in line with a year earlier and five positions were common to both periods. The trust’s unconstrained investment approach is reflected in Exhibit 3 and there continues to be zero exposure in the basic materials, oil & gas and utilities sectors. The manager considers that the financial metrics of resource companies are often unattractive and that many have weak corporate governance track records. Over the last 12 months the largest changes in sector exposure are industrials (+3.8pp) and consumer services (-4.9pp).

Exhibit 3: Portfolio sector exposure (ex-cash and gearing, % unless stated)

Portfolio end-February 2018

Portfolio end- February 2017

Change (pp)

Industrials

25.8

22.0

3.8

Consumer services

18.8

23.7

(4.9)

Consumer goods

16.2

17.2

(1.0)

Information technology

13.9

13.5

0.4

Healthcare

13.4

11.0

2.5

Financials

7.7

7.5

0.2

Telecommunications

4.2

5.2

(1.0)

100.0

100.0

Source: Standard Life UK Smaller Companies Trust, Edison Investment Research

While stocks are selected on a bottom-up basis, there are growth themes represented within the portfolio. These include ‘vets and pets’, where SLS has holdings in CVS (veterinary services in the UK and the Netherlands), Dechra (veterinary pharmaceuticals) and Eco Animal Health (medicines for disease control in livestock and companion animals), and ‘consumer choice and provenance’ with holdings in Cranswick (pork products), Hilton Food Group (meat processing) and Fevertree Drinks (premium drink mixers).

Companies within the retail sector are experiencing mixed fortunes, particularly as a result of increased ecommerce at the expense of traditional ‘bricks and mortar’ revenues, but SLS has an overweight retail exposure. Holdings include Ted Baker, which has been in the portfolio since 2003. The manager says that business is rebounding, after a more muted operational performance. Another retail position is Joules, which along with Ted Baker has a successful online operation and is now a prominent player on the UK High Street. It has also expanded operations overseas such as in Germany and the US. The holding in auto retailer Motorpoint was initiated at its May 2016 initial public offering (IPO). Motorpoint is the largest independent vehicle retailer in the UK, primarily selling nearly-new cars: up to two years old with low mileage. In an industry which does not always have a good reputation, Motorpoint is unusual – its focus on everyday low pricing and customer service means that it gets high client referral ratings. While the company had a profits warning following the IPO, the manager says the business has since recovered and the current share price is now above the level at the time of the offering.

Nimmo notes that there has not been a lot of activity in the portfolio over the last six months; he says that sometimes “less is more” and he believes it is beneficial to run winning positions. The most recent new holding is Blue Prism, purchased in January 2018. It was acquired via a placing and has subsequently performed well. The manager met the company prior to its IPO, but considered it to be too early stage ‘blue sky’. Blue Prism offers productivity tools and has been successful in replacing white collar workers with software that automates manual administrative processes. It is the only company in the portfolio that is not yet profitable.

Performance: Long-term record of outperformance

In H118 (six months ending 31 December 2017), SLS’s NAV and share price total returns of 14.2% and 16.6% respectively were meaningfully ahead of the Numis Smaller Cos ex-ICs Index total return of 8.9%. The outperformance was driven by positive trading results from portfolio companies, which outweighed the effect of SLS’s lack of exposure to resource stocks. The strongest contributors to performance were: software and services company First Derivatives, which continues to have a strong matrix score; private healthcare provider NMC Health, which is performing well, but SLS has reduced its holding due to the position size; and Fevertree Drinks, which is now the leading mixer brand in the UK with a growing international presence.

As shown in Exhibit 4, over the 12 months to end-February 2018, SLS’s 24.3% NAV total return is more than double the benchmark’s 10.3% total return. SLS’s share price total return has been even stronger (+26.5%), which is reflected in the reduction in the trust’s discount over the period.

Exhibit 4: Investment trust performance to 28 February 2018

Price, NAV and benchmark total return performance, one-year rebased

Price, NAV and benchmark total return performance (%)

Source: Thomson Datastream, Edison Investment Research. Note: Three, five and 10-year performance figures annualised.

SLS’s relative returns are shown in Exhibit 5. The trust has meaningfully outperformed its benchmark in both NAV and share price total return terms over all periods shown (with the exception of the last month).

Exhibit 5: Share price and NAV total return performance, relative to indices (%)

 

One month

Three months

Six months

One year

Three years

Five years

10 years

Price relative blended benchmark*

(0.9)

1.3

13.3

14.7

38.2

22.4

73.6

NAV relative to blended benchmark*

0.9

4.1

7.3

12.7

30.6

26.3

54.8

Price relative to Numis Smaller Cos plus AIM ex-ICs

(0.9)

1.8

13.4

13.9

34.3

29.1

127.1

NAV relative to Numis Smaller Cos plus AIM ex-ICs

0.9

4.6

7.4

11.9

26.9

33.3

102.5

Price relative to FTSE AIM

(1.2)

(1.6)

9.6

9.1

19.6

39.7

330.2

NAV relative to FTSE AIM

0.7

1.2

3.8

7.2

13.0

44.2

283.5

Price relative to FTSE All-Share

(0.6)

0.4

14.3

21.2

52.6

46.7

158.6

NAV relative to FTSE All-Share

1.2

3.2

8.2

19.1

44.3

51.5

130.5

Source: Thomson Datastream, Edison Investment Research. Note: Data to end-February 2018. Geometric calculation. Benchmark is Numis Smaller Cos ex-ICs to 31 December 2017 and Numis Smaller Cos plus AIM ex-ICs thereafter.

Exhibit 6: NAV total return performance relative to blended benchmark over 10 years

Source: Thomson Datastream, Edison Investment Research

Discount: Now trading close to par

As shown in Exhibit 7, SLS’s share price discount to cum-income NAV has been in a narrowing trend over the last 18 months. The current 1.7% discount compares to the range over the last 12 months of a 10.0% discount to a 1.4% premium. SLS’s discount is narrower than its averages over the last one, three, five and 10 years (range of 4.2% to 5.7%) and is currently the narrowest in its peer group (see Exhibit 8). SLS’s board actively manages the discount, aiming to keep it below 8% in normal market conditions. Share repurchases are the preferred method, but these may be supplemented with discretionary six-monthly tender offers (last conducted in July 2015).

Exhibit 7: Share price premium/discount to NAV (including income) over three years (%)

Source: Thomson Datastream, Edison Investment Research

Capital structure and fees

SLS currently has 69.2m ordinary shares and £11.1m 3.5% convertible unsecured loan stock (CULS) in issue. The final conversion date for the CULS is 29 March 2018 and all stock is expected to be converted given that the trust’s current share price is well above the 237.2542p conversion price. Full conversion would result in the number of shares in issue increasing by c 6.7%. Coupled with the proceeds of the CULS conversion, at the current price this would imply NAV dilution of c 3% and the shares trading at a small premium.

On 15 December 2017, SLS announced that it had drawn down £15m of the £20m revolving credit facility that it agreed with the Royal Bank of Scotland on 1 November 2017. Combined with the £10m of the £25m five-year, fixed-term loan drawn in November 2017, the weighted average interest rate on drawn borrowings is c 1.9%. Nimmo commented that he was able to employ gearing to acquire high-quality companies at attractive valuations due to an element of stock market ‘fatigue’, which was partially due to a high level of share issuance. The board has delegated the decision on the level of net gearing to the manager – a range of 5% of NAV in cash to 25% debt, at the time of drawdown, is permitted. At end-February 2018, net gearing was 7.4%, which is towards the higher end of the range over the last 10 years.

SLS has a tiered management fee structure of 0.85% of gross assets up to £250m and 0.65% above £250m. The performance fee was removed in 2012. In H118, the annualised ongoing charge was 1.06%, which compares to 1.08% in FY17.

Dividend policy and record

SLS aims to generate long-term capital growth, but also pays dividends twice a year in April and October/November. The FY17 dividend of 6.7p was a modest 1.5% increase versus FY16. However, this should be considered in a wider context, as over the last 10 years, dividends have compounded at an annual rate of 23.7%.

An H118 interim 1.5p dividend has been announced, which is in line with H117. The manager continues to reduce exposure to larger, more mature companies, reinvesting the proceeds in newer, faster-growing companies, which he believes will deliver improved capital and dividend growth in the future. At end-H118, SLS had revenue reserves of £4.7m, which is equivalent to c 1x the FY17 dividend payment. Based on its current share price, the trust has a 1.4% dividend yield.

Peer group comparison

Exhibit 8 shows the 10 largest trusts in the AIC UK Smaller Companies sector. SLS’s NAV total return is above the peer group average over all periods shown, ranking second over one year and three years, fifth over five years and at the top of the peer group over 10 years (c 97pp above average). SLS’s ongoing charge is higher than average, although no performance fee is payable. The trust has an average level of gearing and a lower than average dividend yield, which is consistent with its objective to generate long-term capital growth.

Exhibit 8: Selected peer group as at 23 March 2018*

% unless stated

Market cap £m

NAV TR
1 year

NAV TR
3 year

NAV TR
5 year

NAV TR
10 year

Discount (ex-par)

Ongoing charge

Perf.
fee

Net gearing

Dividend yield (%)

Standard Life UK Smaller Cos

335.5

20.9

64.3

105.0

367.6

(3.2)

1.1

No

107

1.4

Aberforth Smaller Companies

1,198.6

7.5

26.7

77.2

189.4

(10.1)

0.8

No

101

2.2

BlackRock Smaller Companies

636.8

19.8

62.8

119.9

350.9

(9.8)

0.7

Yes

110

1.6

BlackRock Throgmorton Trust

349.6

19.8

63.6

115.5

328.1

(12.7)

0.9

Yes

130

1.9

Henderson Smaller Companies

629.0

15.3

42.8

94.7

279.3

(9.2)

0.4

Yes

111

2.3

Invesco Perpetual UK Smaller

160.5

13.2

54.1

100.7

236.6

(5.5)

0.8

Yes

100

1.6

JPMorgan Smaller Companies

176.5

21.4

43.4

77.7

213.3

(13.4)

1.1

No

112

2.1

Montanaro UK Smaller Companies

183.1

9.8

22.3

37.5

169.5

(18.1)

1.2

No

103

1.9

Rights & Issues Investment Trust

171.4

12.7

81.3

162.5

325.5

(10.3)

0.5

No

100

1.5

Strategic Equity Capital

153.5

12.0

31.8

118.1

244.4

(13.6)

1.3

Yes

100

0.3

Average

399.5

15.2

49.3

100.9

270.5

(10.6)

0.9

107

1.7

Rank (out of 10 funds)

5

2

2

5

1

1

4

5

9

Source: Morningstar, Edison Investment Research. Note: Performance as at 22 March 2018. TR=total return. Net gearing is total assets less cash and equivalents as a percentage of net assets.

The board

Following the retirement of former chairman David Woods at the October 2017 AGM, there are now four directors on SLS’s board; all are non-executive and independent of the manager. Chairman Allister Langlands was appointed as a director in July 2014 and assumed his current role in August 2017. The senior independent director is Carol Ferguson, who was appointed to the board in February 2009. The other two directors and their dates of appointment are Caroline Ramsay (August 2016) and Tim Scholefield (February 2017). Ferguson has announced her intention to step down following the October 2018 AGM and the board is actively seeking a new director.

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Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Standard Life UK Smaller Companies Trust and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable; however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors.
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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority (Financial Conduct Authority). Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Standard Life UK Smaller Companies Trust and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable; however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors.
This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Research: Healthcare

AFT Pharmaceuticals — Improving profitability

AFT recently announced an agreement with Baxter Healthcare to divest to Baxter some of its non-core and low-margin hospital products in New Zealand. An agreement for similar products is expected in Australia in the coming weeks. Once both are complete, the company expects the divestments to represent approximately 7.5% of operating revenue (likely between NZ$5m and NZ$6m). The divestments are expected to generate NZ$5m in cash and make a positive contribution of “several million dollars” to EBITDA. Whatever is lost in revenues is likely to be made up in higher overall gross margin, and lower sales and marketing expenses.

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