Fidelity Special Values

Fidelity Special Values PLC

Half-Yearly Results for the six months ended 29 February 2024 (unaudited)

Financial Highlights:

• The Board of Fidelity Special Values PLC (the “Company”) recommends an interim dividend of 3.24 pence per share, an increase of 28.1% from last year’s interim dividend.
• During the six months ended 29 February 2024, the Company reported a Net Asset Value (NAV) of +4.0% and ordinary share price total return of +4.8%.

• The Benchmark, the FTSE All-Share Index, had a total return of +3.9% over the same period.

• Mergers and acquisitions activity contributed to performance with five of the top ten contributors to performance attracting bids.

Contacts

For further information, please contact:

Smita Amin

Company Secretary

01737 836347

FIL Investments International

Portfolio Manager’s Half-Yearly Review

Performance
In the six month reporting period to 29 February 2024, the Company recorded a net asset value (“NAV”) per ordinary share return of +4.0% and a share price return of +4.8%, compared to a +3.9% return for the Benchmark FTSE All-Share Index (all on a total return basis). This report seeks to summarise the period, highlight the key drivers of performance and set out the Portfolio Manager’s forward-looking views.

Stock Market and Portfolio Review
UK equities advanced during the period despite persistent global challenges including geopolitical tensions, economic uncertainty, high borrowing costs and China’s sluggish post pandemic economy. Nevertheless, the market narrative was supported by decelerating inflationary pressures that allowed the Bank of England (“BoE”) to keep interest rates unchanged during the review period after fourteen successive rate hikes. This has led to expectations that we may have reached the peak of rate increases, while improving economic data increased conviction in the soft-landing narrative, providing a tailwind for equities.

From a sector perspective, market gains were led by technology, industrials and consumer discretionary, while basic materials and consumer staples were the biggest detractors. While both the value and growth segments showed gains, the technology-led rally from November meant that growth outperformed over the period. Similarly, small cap stocks rebounded strongly following two years of significant underperformance.

The period started with UK equities posting gains in September as easing inflation prompted the BoE to keep its policy interest rate unchanged at 5.25%. The decision to leave rates unchanged surprised the market, as previous expectations factored in a high likelihood of an imminent rate hike. Encouragingly, positive inflationary developments extended beyond the UK, with the eurozone and the US also reporting decelerating price pressures, which heightened investor optimism over a soft landing. By the end of November, markets had priced in a peak in current interest rates, with expectations of cuts in 2024, both at home and abroad.

However, equities started off 2024 on a weak note. This shift was underpinned by investors recalibrating their expectations for imminent and substantial interest rate cuts by major central banks. A desire for firmer evidence that inflation was under control and the lack of commitment on the timing of rate adjustments by central banks contributed to an atmosphere of uncertainty among market participants. Meanwhile, geopolitical concerns remained centre stage as a result of disruption of commercial shipping in the Red Sea, leading to some supply chain bottlenecks.

Economic indicators in the UK painted a mixed picture. Preliminary estimates revealed a 0.3% contraction in UK GDP (quarter-on-quarter) in the fourth quarter of 2023, driven by declines in both consumer and government spending. While this marked the second consecutive quarter of contraction (defined as a technical recession), nevertheless, GDP is estimated to have increased overall in 2023 but only by 0.1%. On a positive note, the preliminary data for January was more encouraging showing a 0.2% month-on-month GDP expansion. UK inflation has also fallen rapidly from its peak of more than 11% in late 2022 to just 3.4% in February, but it is still above the Bank of England’s 2% target and wage inflation remains stubbornly higher than the headline rate.

Over the period, the Company’s NAV marginally outperformed its Benchmark. Irish support services group DCC was the leading contributor as its shares benefited from an improving outlook, delivering on ambitious new targets for its energy division. Its aim to evolve its strategy towards lower carbon energy solutions was underlined by its acquisition of Progas GmbH, a leading distributor of LPG in Germany, considerably expanding its customer base in the country. Ryanair Holdings continued to benefit from the post-pandemic recovery in demand for international travel, as a strong Easter, record summer traffic and the growth in air fares offset higher fuel costs. The company also announced it would pay its first ever dividend, as it continued to benefit from the constrained supply environment and higher cost of new planes. Similarly, defence contractor Babcock International Group paid its first dividend in four years, as it reaped the benefits of a turnaround plan, becoming a more predictable business, that is well placed for higher military spending amid rising geopolitical tensions.

Mergers and acquisitions (“M&A”) activity continued to be a significant performance driver during the period with five of the top ten contributors attracting bids, or becoming subject to takeover speculation. Smart Metering Systems agreed to a £1.3 billion deal from US private equity firm KKR (Kohlberg Kravis Roberts) while ten-pin bowling operator Ten Entertainment Group was taken over by another US private equity firm Trive Capital. Shares in Direct Line Insurance Group rose on news that Belgian insurer Ageas was considering making a takeover offer. Meanwhile, shares in Aviva, the UK’s biggest insurer, rose after reports that it could be the target of a takeover by a foreign buyer. Media and events company Ascential also added value after the company agreed to sell its digital commerce business to Omnicom Group and its product design business to funds advised by Apax Partners. Once the transactions are complete, Ascential intends to distribute £850 million to its shareholders.

Conversely, the holding in Swiss pharmaceuticals group Roche Holdings detracted from performance, as investors weighed the company’s more modest than expected 2024 outlook. Group sales, which include diagnostics, were expected to grow by a mid-single digit percentage, when adjusted for currency swings, but the projections were lower than consensus estimates. Nevertheless, results showed the company was overcoming a slump in demand for its COVID-19 products and a decline in sales of a trio of established cancer drugs.

Shares in merchant banking group Close Brothers declined sharply after the Financial Conduct Authority announced that it would review historic claims of unfair costs on discretionary car finance commissions and ensure that consumers received compensation if it uncovers evidence of widespread misconduct. Although we had significantly reduced our holding having identified this risk, the estimated fines are likely to be higher than previously thought and the residual position proved a drag on returns given the significant sell-off.

Industrial threads maker Coats Group was another detractor. The company has seen a decline in trading revenues, but there are signs of a gradual recovery, while its balance sheet and cash generation remain strong. Elsewhere, Victrex was weighed down by weakness across the chemical sector.

Meanwhile, shares in health and beauty products company PZ Cussons fell following the devaluation of Nigeria’s currency, the naira, before the company’s results announcement in February and this led to a reduction in its dividend and a paring back of profit forecasts. The company counts Nigeria as one of its four major markets, although it now only represents 15% of profits. PZ Cussons is undergoing a turnaround having reinvested in its core brands, professionalised the organisation and has started to simplify its operations.

Use of gearing
During the review period, we continued to use contracts for difference to gear the portfolio’s long exposure and eliminate some of the currency exposure for those holdings listed outside the UK. Overall, there was a small reduction in the Company’s gearing level over the period. Gearing remains low at 5.9% at the end of February (compared to 6.5% at the end of August 2023). While valuations are attractive and we are finding new ideas, we are conscious of the increased cost of borrowing and want to retain some dry powder to take advantage of opportunities and any short-term volatility.

Outlook
While there continues to be a degree of economic and geopolitical uncertainty, the attractiveness of UK valuations versus history and compared to other markets, as well as the large divergence in performance between different parts of the market, continue to create good opportunities for attractive returns from UK stocks on a three-to-five-year view. Their unloved status means we continue to find overlooked companies with good upside potential across industries and the market cap spectrum. What is more, the lack of interest from other investors means that, despite our focus on attractive valuations, we do not have to compromise on quality.

While the value in the UK market is not being recognised by investors, it is being acknowledged by other market participants. Overseas corporates and private equity firms are seeing the value and are taking advantage of those attractive valuations. As noted previously, we have had a lot of success with M&A across the portfolio in the last six months. After a lull in the middle of last year, activity has picked up. The low valuations are also reflected in the substantial buyback activity among UK corporates.

From a portfolio perspective, we remain disciplined, taking profits in stocks that have performed well and where the risk/reward is no longer as attractive. We are particularly wary of stocks where fundamentals and margins have been strong, and a deterioration is not priced in. A stock we sold after strong returns was Marks & Spencer, where we felt the investment thesis had played out. The stock had doubled having taken market share in the clothing, home and food segments which had benefited from the exit of the likes of New Look, Arcadia and Debenhams, favourable weather conditions as well as a switch from shopping online back to shops after the pandemic. Market sentiment was becoming overwhelmingly positive and after such a strong run, we felt the risk/return was more skewed to the downside given a wide range of scenarios in a relatively weak economic environment. Elsewhere, higher interest rates have benefited sectors such as banks and life insurers, which had been shunned since the global financial crisis. While they continue to be well represented in our portfolios, we have taken some profits following strong returns, and changed some of our positions, for instance reducing our NatWest Group position in favour of Standard Chartered, given better revenue growth prospects, and switching some of our Phoenix Group Holdings exposure into Just Group, a move that paid off handsomely in light of the very strong set of results they recently announced.

Conversely, we have been on the lookout for companies that have seen their earnings rebased and which trade on low valuations with limited downside and the potential for significant upside once the environment normalises. We have been finding new ideas in cyclical areas such as industrials, media, and staffing and adding back into some UK housing related names of late, where demand appears to be stabilising and valuations remain low.

Overall, we continue to see potential for attractive returns given the upside/downside profile of our portfolio. We are encouraged by the performance of our holdings in the recent reporting season. We have seen a strong full year 2023 reporting season, and in particular excellent results from some of our financials positions. With the exception of high-end and big-ticket consumer goods, where spend is under pressure, generally the results season has painted a fairly robust economic picture, with things actually starting to look more positive in most areas into the fourth quarter of 2023 and first quarter of 2024, compared to 2023 as a whole. The one exception is China where poor economic conditions on the ground appear to be deteriorating further. Our holdings have low revenue exposure to China (much lower than the UK market) given our low exposure to big staples, financials and mining companies that are driven primarily by Chinese demand. Overall, we have been encouraged by the robustness of earnings in the portfolio and indeed the market as a whole.

Alex Wright
Portfolio Manager
25 April 2024

Twenty Largest Investments as at 29 February 2024

The Asset Exposures shown below measure exposure to market price movements as a result of owning shares, bonds and derivative instruments. The Fair Value is the actual value of the portfolio as reported in the Balance Sheet. Where a contract for difference (“CFD”) is held, the Fair Value reflects the profit or loss on the contract since it was opened and is based on how much the share price of the underlying share has moved.

1 Asset Exposure is expressed as a percentage of Shareholders’ Funds.

Fair Value and Asset Exposure of Investments as at 29 February 2024

The Company uses gearing through the use of long CFD positions. Gross gearing as at 29 February 2024 was 5.9% (31 August 2023: 6.5% and 28 February 2023 5.3%).

1 Asset Exposure is expressed as a percentage of Shareholders’ Funds.

2 The asset exposure column for cash at bank has been adjusted to assume the Company traded direct holdings rather than exposure being gained through long CFD positions. The amount is derived by taking the cost of the shares underlying the long CFDs when the contracts were opened less the cash at bank balance at the period end.

Interim Management Report and Directors’ Responsibility Statement

Board Changes
Nigel Foster will have completed his nine year tenure on the Board during this year and will step down at the conclusion of the Annual General Meeting in December 2024. A recruitment process for his replacement will be carried out during the course of the year.

Interim Dividend
Dividends are an important component of long-term returns and the Board’s policy is to pay dividends twice yearly in order to smooth the dividend payments for the Company’s financial year.

The Company’s revenue return for the six months to 29 February 2024 was 3.34 pence per share.

The Board has declared an interim dividend of 3.24 pence per share which is 28.1% higher than the 2.53 pence per share paid as the interim dividend in 2023. This will be paid on 20 June 2024 to shareholders on the register on 10 May 2024 (ex-dividend date 9 May 2024). Shareholders should note that the Board will review the final dividend payment later in the year based on dividend receipts from the companies held in the portfolio. However, based on current forecasts, the Board would hope to maintain at least the same level of dividend as paid in the prior year and would intend to pay it entirely from the revenue earned in the reporting period.

Discount Management and Share Repurchases
Investment trust discounts continue to remain wide and the Company has not been immune to this trend. As at 29 February 2024, the average discount for the companies in the UK All Companies peer group was 10.8%. However, in the six months under review, the Company’s discount to NAV has remained relatively stable beginning the year at 8.8% and ending it at 8.3%. Under the Company’s discount management policy, the Board seeks to maintain the discount in single digits in normal market conditions and will repurchase shares to help stabilise the share price discount. As the discount remained in single digits in the reporting period, the Company did not repurchase any shares.

The Board continues to monitor the level of the Company’s discount closely and will take action when it believes to do so will be effective and to the benefit of shareholders.

Principal Risks and Uncertainties
The Board, with the assistance of the Manager (FIL Investment Services (UK) Limited), has developed a risk matrix which, as part of the risk management and internal controls process, identifies the key existing and emerging risks and uncertainties faced by the Company.

The Board considers that the principal risks and uncertainties faced by the Company continue to fall into the following categories: market, economic and political; investment performance (including the use of derivatives and gearing); cybercrime and information security; environmental, social and governance (“ESG”); competition; business continuity; key person and operational support; discount control regulatory risks. Information on each of these risks is given on pages 23 to 25 in the Strategic Report section of the Annual Report for the year ended 31 August 2023, a copy of which can be found on the Company’s pages of the Manager’s website at www.fidelity.co.uk/specialvalues.

While the principal risks and uncertainties are the same as those at the last year end, the uncertainty continues to be heightened by the global implications of the ongoing Russia and Ukraine conflict dominating political risks and industry concerns as well as the Middle East conflict. There is geopolitical and economic uncertainty, in addition to events currently being faced globally such as the cost of living, inflation, interest rate rises, food supply crisis and the threat of cyberattacks on critical infrastructure. There continues to be tension between China and the US. The quantum of risks continues to change and the Board remains vigilant in monitoring such risks.

Climate change continues to be a key principal risk, that is confronting asset managers and their investors. Globally, climate change effects are already being experienced in the form of changing weather patterns. Climate change patterns can potentially impact the operations of investee companies, their supply chains and their customers. Additional risks may also arise from increased regulations, increased costs and net-zero programmes which can all impact investment returns. The Board notes that the Manager has integrated ESG considerations, including climate change, into the Company’s investment process. The Board will continue to monitor how this may impact the Company as a risk, the main risk being the impact on investment valuations and shareholder returns.

Investors should be prepared for market fluctuations and remember that holding shares in the Company should be considered to be a long-term investment. Risks are somewhat mitigated by the investment trust structure of the Company which means that no forced sales need to take place to deal with any redemptions. Therefore, investments in the Company’s portfolio can be held over a longer time horizon.

The Manager has appropriate business continuity and operational plans in place to ensure the uninterrupted provision of services. This includes investment team key activities which also covers portfolio managers, analysts and trading/support functions. The Manager reviews its operational resilience strategies on an ongoing basis and continues to take all reasonable steps in meeting its regulatory obligations, assess its ability to continue operating and the steps it needs to take to serve and support its clients, including the Board. It has an appropriate control environment in place.

The Company’s other third-party service providers also have similar measures to ensure that business disruption is kept to a minimum.

Transactions with the Manager and Related Parties
The Manager has delegated the Company’s portfolio management and company secretariat services to FIL Investments International. Transactions with the Manager and related party transactions with the Directors are disclosed in Note 13 to the Financial Statements below.

Going Concern Statement
The Directors have considered the Company’s investment objective, risk management policies, liquidity risk, credit risk, capital management policies and procedures, the nature of its portfolio, its expenditure and cash flow projections. The Directors, having considered the liquidity of the Company’s portfolio of investments (being mainly securities which are readily realisable) and the projected income and expenditure, are satisfied that the Company is financially sound and has adequate resources to meet all of its liabilities and ongoing expenses and can continue in operational existence for a period of at least twelve months from the date of this Half-Yearly Report.

This conclusion also takes into account the Board’s assessment of the ongoing risks as outlined above.

Accordingly, the Financial Statements of the Company have been prepared on a going concern basis.

Continuation votes are held every three years and the next continuation vote will be put to shareholders at the AGM in 2025.

By Order of the Board
FIL Investments International
25 April 2024

Directors’ Responsibility Statement
The Disclosure and Transparency Rules (“DTR”) of the UK Listing Authority require the Directors to confirm their responsibilities in relation to the preparation and publication of the Interim Management Report and Financial Statements.

The Directors confirm to the best of their knowledge that:

a) the condensed set of Financial Statements contained within the Half-Yearly Report has been prepared in accordance with the Financial Reporting Council’s Standard: FRS 104: Interim Financial Reporting; and

b) the Portfolio Manager’s Half-Yearly Review and the Interim Management Report above, include a fair review of the information required by DTR 4.2.7R and 4.2.8R.

In line with previous years, the Half-Yearly Report has not been audited by the Company’s Independent Auditor.

The Half-Yearly Report was approved by the Board on 25 April 2024 and the above responsibility statement was signed on its behalf by Dean Buckley, Chairman.

Financial Statements

Income Statement for the six months ended 29 February 2024

The Company does not have any other comprehensive income. Accordingly, the net return on ordinary activities after taxation for the period is also the total comprehensive income for the period and no separate Statement of Comprehensive Income has been presented.

The total column of this statement represents the Income Statement of the Company. The revenue and capital columns are supplementary and presented for information purposes as recommended by the Statement of Recommended Practice issued by the AIC.

No operations were acquired or discontinued in the period and all items in the above statement derive from continuing operations.

Statement of Changes in Equity for the six months ended 29 February 2024

Balance Sheet as at 29 February 2024 Company number 2972628

Cash Flow Statement for the six months ended 29 February 2024

Notes to the Financial Statements

1 Principal Activity
Fidelity Special Values PLC is an Investment Company incorporated in England and Wales with a premium listing on the London Stock Exchange. The Company’s registration number is 2972628, and its registered office is Beech Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey KT20 6RP. The Company has been approved by HM Revenue & Customs as an Investment Trust under Section 1158 of the Corporation Tax Act 2010 and intends to conduct its affairs so as to continue to be approved.

2 Publication of Non-statutory Accounts
The Financial Statements in this Half-Yearly Report have not been audited by the Company’s Independent Auditor and do not constitute statutory accounts as defined in section 434 of the Companies Act 2006 (the “Act”). The financial information for the year ended 31 August 2023 is extracted from the latest published Financial Statements of the Company. Those Financial Statements were delivered to the Registrar of Companies and included the Independent Auditor’s Report which was unqualified and did not contain a statement under either section 498(2) or 498(3) of the Act.

3 ACCOUNTING POLICIES
(i) Basis of Preparation
The Company prepares its Financial Statements on a going concern basis and in accordance with UK Generally Accepted Accounting Practice (“UK GAAP”) and FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland, issued by the Financial Reporting Council. The Financial Statements are also prepared in accordance with the Statement of Recommended Practice: Financial Statements of Investment Trust Companies and Venture Capital Trusts (“SORP”) issued by the Association of Investment Companies (“AIC”) in July 2022. FRS 104: Interim Financial Reporting has also been applied in preparing this condensed set of Financial Statements. The accounting policies followed are consistent with those disclosed in the Company’s Annual Report and Financial Statements for the year ended 31 August 2023.

(ii) Going Concern
The Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for a period of at least twelve months from the date of approval of these Financial Statements. Accordingly, the Directors consider it appropriate to adopt the going concern basis of accounting in preparing these Financial Statements. This conclusion also takes into account the Directors’ assessment of the risks faced by the Company as detailed in the Interim Management Report above.

4 Income

No special dividends have been recognised in capital during the period (year ended 31 August 2023: £1,904,000 and six months ended 28 February 2023: £nil).

5 Investment Management Fees

FIL Investment Services (UK) Limited is the Company’s Alternative Investment Fund Manager and has delegated portfolio management to FIL Investments International (“FII”). Both companies are Fidelity group companies.

FII charges investment management fees at an annual rate of 0.60% of net assets. Fees are accrued on a daily basis and payable monthly.

6 Finance Costs

7 Taxation on Return on Ordinary Activities

8 Return per Ordinary Share

The return per ordinary share is based on the net return on ordinary activities after taxation for the period divided by the weighted average number of ordinary shares held outside of Treasury during the period, as shown below:

9 Dividends Paid to Shareholders

The Company has declared an interim dividend for the six month period to 29 February 2024 of 3.24 pence per ordinary share (2023: 2.53 pence). The interim dividend will be paid on 20 June 2024 to shareholders on the register at the close of business on 10 May 2024 (ex-dividend date 09 May 2024). The total cost of this interim dividend, which has not been included as a liability in these Financial Statements, is £10,501,000 (2023: £8,200,000). This amount is based on the number of ordinary shares in issue held at the date of this report.

10 Fair Value Hierarchy
The Company is required to disclose the fair value hierarchy that classifies its financial instruments measured at fair value at one of three levels, according to the relative reliability of the inputs used to estimate the fair values.

Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant asset. The valuation techniques used by the Company are as disclosed in the Company’s Annual Report for the year ended 31 August 2023 (Accounting Policies Notes 2 (k) and 2 (l) on pages 60 and 61). The table below sets out the Company’s fair value hierarchy:

11 Share Capital

During the period, no new ordinary shares were issued (year ended 31 August 2023: nil shares and six months to 28 February 2023: nil shares). At 29 February 2024, no shares were held in Treasury.

12 Net Asset Value per Ordinary Share
The calculation of the net asset value per ordinary share is based on the total shareholders’ funds divided by the number of ordinary shares held outside of Treasury.

It is the Company’s policy that shares held in Treasury will only be reissued at net asset value per ordinary share or at a premium to net asset value per ordinary share and, therefore, shares held in Treasury have no dilutive effect.

13 Transactions with the Manager and Related Parties
FIL Investment Services (UK) Limited is the Company’s Alternative Investment Fund Manager and has delegated portfolio management and the role of Company Secretary to FIL Investments International (“FII”). Both companies are Fidelity group companies.

Details of the fee arrangements are given in Note 5 above. During the period, fees payable to FII for portfolio management services of £2,863,000 (year ended 31 August 2023: £5,698,000 and six months ended 28 February 2023: £2,806,000). At the Balance Sheet date, fees for portfolio management services of £459,000 (year ended 31 August 2023: £483,000 and six months ended 28 February 2023: £459,000).

FII also provides the Company with marketing services. The total amount payable for these services during the period was £132,000 (year ended 31 August 2023: £303,000 and six months ended 28 February 2023: £134,000). At the Balance Sheet date, marketing services of £98,000 (year ended 31 August 2023 and six months ended 28 February 2023: £nil) were accrued and included in other creditors.

As at 29 February 2024, the Board consisted of five Non-Executive Directors (as shown in the Directory in the Half-Yearly Report), all of whom are considered to be independent. None of the Directors have a service contract with the Company. The Chairman receives an annual fee of £44,500, the Audit Committee Chairman an annual fee of £35,000, the Senior Independent Director receives an annual fee of £31,500 and each other Director an annual fee of £29,500.

As at the date of this report, the following members of the Board held ordinary shares in the Company: Claire Boyle 7,466 shares, Dean Buckley 50,000 shares, Nigel Foster 88,000 shares, Ominder Dhillon 7,750 shares and Alison McGregor 30,000 shares.

The financial information contained in this Half-Yearly Results Announcement does not constitute statutory accounts as defined in section 435 of the Companies Act 2006. The financial information for the six months ended 29 February 2024 and 28

February 2023 has not been audited or reviewed by the Company’s Independent Auditor.

The information for the year ended 31 August 2023 has been extracted from the latest published audited financial statements, which have been filed with the Registrar of Companies, unless otherwise stated. The report of the Auditor on those financial statements contained no qualification or statement under sections 498(2) or (3) of the Companies Act 2006.

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

A copy of the Half-Yearly Report will shortly be submitted to the National Storage Mechanism and will be available for inspection at www.morningstar.co.uk/uk/NSM

The Half-Yearly Report will also be available on the Company's website at www.fidelity.co.uk/specialvalues where up to date information on the Company, including daily NAV and share prices, factsheets and other information can also be found.