Final Results
Perpetual UK Smaller Companies Investment Trust
Preliminary Announcement
of Final Results
Chairman's Statement
There is very little to say of a positive nature about 2001. It was another
poor year for stock markets, following hard on the heels of the declines
experienced in 2000. The last time we saw two consecutive years of negative
market returns in the UK was in 1973-74, a period characterised by soaring
inflation, power cuts and a three-day week. Economic conditions are mixed, but
not as bleak as then. Nevertheless, making progress from an investment
perspective has been extremely difficult.
The tragic events of 11 September clearly overshadowed all other events of the
year. As I commented in my interim report, these events accelerated the
economic slowdown that had already begun. The policy responses by central banks
and governments have been swift, with seven interest rate cuts in the UK during
the Company's year. These actions have encouraged an economic recovery which is
being led by the U.S.A.
Against this difficult market background, your Company's Net Asset Value
('NAV') fell by 13% from 617.5p to 537.5p per share which, although
disappointing in absolute terms, compares favourably with falls of 20.8% in the
Extended Hoare Govett Smaller Companies Index excluding investment trusts (our
benchmark) and 17.6% in the FTSE Actuaries All-Share Index over the same
period. The Company's share price also fell, by 14%, from 517.5p to 445p and
the discount to NAV widened from 16.2% to 17.2%.
Looking ahead, we believe that the economic prospects for the UK appear to be
more promising: with low interest rates, government pledges to increase
spending and few signs of any inflationary pressures combining to place the UK
as the fastest growing developed economy for the second year running. Smaller
companies in particular are likely to benefit from the more benign economic
background and this, coupled with their relative undervaluation at present
levels, makes us cautiously optimistic.
In spite of the testing market conditions that your Company endured, your Board
is seeking your approval for the payment of a final dividend of 6.5p (2001:
7.7p) to be paid on 17 June 2002 to shareholders on the register on 17 May
2002. This dividend is lower than that paid last year, due to falling dividend
levels from smaller companies generally and increased interest costs arising
from higher average gearing levels in the Company. However, given the market
conditions, we believe that it represents a satisfactory return. Future
dividends will, of course, remain dependent on the dividend levels of the
companies in which we invest and prevailing interest rates.
The Company's level of gearing has ranged during the year between 8% and 18%,
reflecting the manager's views on the market. The current level of gearing is
14%, and the Managers will use borrowing actively to take advantage of
opportunities in the market as the year unfolds.
Your Company's new financial year has had a promising start. I am pleased to
report that in the three months to 30 April 2002, the Company's NAV increased
by 7% to 575.0p per share, exceeding our benchmark index by more than two
percentage points.
Your Fund Manager
Shareholders will be aware that Mark Niznik, who managed the Company's
portfolio during its last financial year, left INVESCO Perpetual in April 2002.
I would like to thank him on behalf of shareholders and wish him well for the
future. INVESCO Perpetual is recruiting a successor and expects to make an
announcement shortly.
Special Business
I would like to draw your attention to some items of special business at the
forthcoming Annual General Meeting.
First, your Board proposes that the name of the Company be changed, in order to
create a closer identity with its investment manager. It is proposed that the
name of the Company be changed to INVESCO Perpetual UK Smaller Companies
Investment Trust plc.
Second, your Board will be seeking to renew shareholders' approval of the
authorities granted at last year's AGM to issue new ordinary shares in the
Company within the prescribed limits. This power will not be exercised at an
issue price below net asset value, so that the interests of existing
shareholders are not diluted.
Third, your Board wishes to renew the authority to buy back up to 14.99% of the
Company's issued ordinary shares. Although we have not used these powers during
the year under review, a purchase of 70,000 ordinary shares, representing 0.5%
of the issued share capital, was made on 4 April 2002. We continue to believe
that share buy-backs can be a useful tool in maintaining and enhancing
shareholder value.
Jamie Berry
Chairman
10 April 2002
Manager's Report
Perpetual UK Smaller Companies Investment Trust plc is managed by INVESCO Asset
Management Limited ('INVESCO'). Day to day management is the responsibility of
the UK Equity Management team based in Henley-on-Thames.
Investment Process
The prime investment objective of the Company is long-term capital growth
through investment in a selected list of quoted investments drawn predominantly
from the UK equity markets. Investments will normally be in smaller companies.
In implementing this policy, the Manager generally selects stocks using a
`bottom-up' approach. This indentifies individual companies which the Manager
believes to be well run and shows good potential for growth.
Management Agreement
The Manager was appointed under an agreement dated 14 November 2000 between
Perpetual UK Smaller Companies Investment Trust plc and PPML whereby PPML will
provide investment management and secretarial services and will carry on the
general administration of Perpetual UK Smaller Companies Investment Trust.
Under an agreement dated 12 December 2001 INVESCO has taken over the management
with effect from 1 January. The agreement is terminable by either party upon
expiry of not less than one year's written notice.
Investment Review
2001 was a poor year for investors in the UK stock market in most sectors. This
difficult environment was exacerbated by the US terrorist attacks, where
investor fears of a long-term global terrorist campaign pushed shares still
lower. Following the September lows, share prices strengthened as the situation
stabilised. Generally, companies in the TMT sectors faced tough market
conditions in 2001, as managements looked to cut advertising, IT and telephony
budgets as their businesses faced more difficult trading conditions. UK
consumer spending and government-backed construction spending were the main
areas of strength in the economy, as interest rate cuts fuelled an already
optimistic consumer.
Investment Strategy
The Company's main themes were unchanged over the year under review. The large
absolute and relative exposure to the house-building and construction sector
remained (22.5% of the portfolio vs. 8.5% benchmark sector weighting). We are
confident that the long-term trends, as outlined at the interim stage and
identified a year ago, are still in place today. We expect these to over-ride
any short-term concerns about demand should interest rates rise later in the
year. Retailing the next largest sector exposure (12% vs. 9% benchmark) also
performed well over the period. However, we are more concerned about a possible
slowing in retail spending later in 2002, in what is an area with low barriers
to entry. We may look to reduce holdings selectively as the year progresses. We
have maintained an overweight position in the aerospace and defence sector (7%
vs 1% benchmark) with, the theme being, an increase in US and UK defence
spending for the first time in many years coupled with low ratings in an
unfashionable sector. The large holding in Meggitt, a company serving the
aerospace industry, was adversely affected by poor sentiment following the
terrorist attacks; however the company's underlying trading remained resilient.
The previously underweight positions in media and software companies were
increased somewhat, following share price falls after the September attacks.
The Company remains marginally underweight in both sectors.
Company Risk Profile
The Company's objective is to achieve long-term capital growth by investing
predominately in the shares of quoted UK smaller companies. Smaller companies'
shares tend to be moderately traded and, as such, the market in these shares
can at times prove illiquid. Shifts in investor sentiment, or the announcement
of new information, can result in significant movements in share prices, and
make dealing difficult. By investing in a broad range of companies, the Company
seeks to minimise so-called stock-specific risk.
Current Prospects
Our view remains that the UK economy will avoid a recession and continue to
register growth, albeit lower, during 2002. Coupled with low historic ratings
relative to larger companies, we believe that modest gains are possible this
year. The Fund's gearing was around 14% over the second half of 2001 to reflect
this optimism and will be increased if suitable opportunities present
themselves.
INVESCO Asset Management Limited
Trust Manager
10 May 2002
Statement of Total Return (incorporating the revenue account)
for the year ended 31 January
2002 2001
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
(Losses)/Gains on - (10,541) (10,541) - 3,428 3,428
investments
Income 2,469 - 2,469 2,511 - 2,511
Investment management
fee (897) (669) (1,566) (878) (179) (1,057)
Other expenses (178) - (178) (144) (9) (153)
Net return before finance
costs and taxation 1,394 (11,210) (9,816) 1,489 3,240 4,729
Interest payable
- bank overdraft (485) - (485) (236) - (236)
Return on ordinary
activities for
the financial year before
and
after tax 909 (11,210) (10,301) 1,253 3,240 4,493
Dividends in respect of
ordinary shares (906) - (906) (1,078) - (1,078)
Transfer to/(from) 3 (11,210) (11,207) 175 3,240 3,415
reserves
Return per ordinary share
Basic 6.5p (80.0)p (73.5)p 8.9p 23.1p 32.0p
The revenue column of this statement is the profit and loss account of the
Company.
All revenue and capital items in the above statement derive from continuing
operations.
No operations were acquired or discontinued in the year.
Reconciliation of Movement in Shareholders' Funds
for the year ended 31 January
2002 2001
£'000 £'000
Revenue return for the year 3 175
Capital return for the year (11,210) 3,240
Shares purchased for cancellation - (129)
Net movement in Shareholders' funds (11,207) 3,286
Opening Shareholders' funds 86,473 83,187
Closing Shareholders' funds 75,266 86,473
Balance Sheet
as at 31 January
2002 2001
£'000 £'000
Fixed assets
Investments 87,256 99,059
Current assets
Debtors 646 571
Cash at bank - 253
646 824
Creditors: amounts falling due within one (12,636) (13,410)
year
Net current liabilities (11,990) (12,586)
Net assets 75,266 86,473
Capital and reserves
Called-up share capital 14,003 14,003
Share premium account 21,244 21,244
Other reserves:
Capital redemption reserve 25 25
Capital reserves - realised 40,150 38,007
Capital reserves - unrealised (1,329) 12,024
Revenue reserve 1,173 1,170
Equity shareholders' funds 75,266 86,473
Net asset value per ordinary share
Basic 537.5p 617.5p
These financial statements were approved by the Board of Directors on 10 May
2002.
Signed on behalf of the Board of Directors
Jamie Berry - Chairman
Richard Brooman - Director
Cash Flow Statement
for the year ended 31 January
2002 2001
£'000 £'000
Cash inflow from operating activities 1,294 673
Servicing of finance (501) (208)
Taxation 5 -
Capital expenditure and financial 1,674 (6,865)
investment
Equity dividends paid (1,078) (1,501)
Net cash inflow before management of liquid 1,394 (7,901)
resources and financing
Financing (104) -
Increase/(decrease) in cash 1,290 (7,901)
Reconciliation of net cash flow to movement
in net debt
Increase/(decrease) in cash 1,290 (7,901)
Net debt at beginning of year (11,069) (3,168)
Net debt at end of year (9,779) (11,069)
The accompanying notes are an integral part of this statement.
The financial information set out above does not constitute the Company's
statutory accounts for the year ended 31 January 2002 or 2001. The financial
information for 2001 is derived from the statutory accounts for 2001 which have
been delivered to the Registrar of Companies. The auditors have reported on the
2001 statutory accounts and their report was unqualified and did not contain a
statement under s237(2) or (3) of the Companies Act 1985. The statutory
accounts for 2002 will be finalised on the basis of the information presented
by the Directors in this preliminary announcement and will be delivered to the
Registrar of Companies following the Company's Annual General Meeting.
1. Income
2002 2001
£'000 £'000
Income from listed investments
UK dividends 2,440 2,446
UK unfranked investment income - 20 32
interest
2,460 2,478
Other income
Deposit interest 4 14
Underwriting commission 5 19
9 33
Total income 2,469 2,511
Total income comprises:
Dividends 2,440 2,446
Interest 24 46
Other income 5 19
2,469 2,511
2. Taxation
The tax charge for the year is nil (2001: nil), as allowable expenses exceed
taxable income.
2002 2001
£'000 £'000
Revenue on ordinary activites before 909 1,253
taxation
Theoretical tax at UK Corporation Tax 273 376
rate of 30% (2001:
30%)
Effects of:
- UK dividends which are not taxable (732) (734)
- Revenue account expenses in excess of 459 358
taxable income
Actual current tax amount - -
Factors that may affect future tax charges
The Company has excess management expenses of £5,967,000 (2001: £3,757,000)
that are available to offset future taxable revenue. A deferred tax asset has
not been recognised in respect of these expenses since they are recoverable
only to the extent that the Company has sufficient future taxable revenue.
3. Net asset value per ordinary share
The net asset value per ordinary share and the net assets attributable at
the year end were as follows:
Net asset value per share Net assets attributable
2002 2001 2002 2001
pence pence £`000 £`000
Ordinary shares 537.5 617.5 75,266 86,473
4. Notes to the cash flow statement
(a) Reconciliation of operating profit to
operating cash flows
2002 2001
£'000 £'000
Net revenue before finance costs and 1,394 1,489
taxation
Decrease/(increase) in debtors 38 (97)
Increase in creditors 52 21
Investment management fee charged to capital (188) (740)
Tax on unfranked investment income (2) -
Net cash inflow from operating activities 1,294 673
(b) Analysis of cash flow for headings netted in
the cash flow statement
2002 2001
£'000 £'000
Servicing of finance
Interest paid on overdrafts 501 208
501 208
2002 2001
£'000 £'000
Net financial investment
Purchase of investments (30,796) (47,391)
Sale of investments 32,470 40,526
1,674 (6,865)
2002 2001
£'000 £'000
Financing
Shares purchased for cancellation (104) -
(104) -
(c) Analysis of changes in net debt
1 Cash 31
February flow
January
2001 2002
£'000 £'000 £'000
Cash at bank 253 (253) -
Debt due within one year (11,322) 1,543 (9,779)
Net debt (11,069) 1,290 (9,779)
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