Final Results
INVESCO Perpetual UK Smaller Companies Investment Trust plc
Preliminary Announcement of Final Results
for the year ended 31 January 2004
Chairman's Statement
For many investors, 2003 was an opportunity to recoup some of the lost ground
made during the three very difficult prior years, whilst for new investors it
provided an encouraging start to meeting longer-term objectives. Your Company's
Net Asset Value ('NAV') increased by 50.3%, which compares with an increase in
our benchmark, the Extended Hoare Govett Smaller Companies Index (excluding
Investment Trusts), of 54.7%. Over the same period, the FTSE All Share Index
rose by 27.0%.
In our review last year, we thought that 2003 would see a modest recovery in
global economic growth. This expectation has been fulfilled, although it was
difficult twelve months ago to foresee the big turnaround in confidence that we
have clearly now witnessed. As 2003 progressed it was evident that the backdrop
for investment was improving steadily: with the war in Iraq `settled' by the
end of the first quarter, the impact of the SARS virus more clearly understood
and the release of more encouraging economic data, confidence in financial
markets has been rebuilt.
Against this background, your Manager, Richard Smith, maintained a somewhat
cautious outlook, because although markets looked set for a technical recovery,
this was far from clear, and many observers believed that markets would in fact
fall to even lower levels. For these reasons, we were inclined to keep the
gearing of the Trust to relatively low levels during the year, compared with
those of some of our peer group. During the year, gearing ranged from 5% to 7%,
and at 24 March 2004 stood at 3.14%.
Although your Company's NAV fell slightly short of the benchmark index, I
believe that the absolute returns achieved in 2003 were satisfactory, and
should be seen in the context of a well diversified portfolio, whose Manager
has been disinclined to invest in some of the more volatile areas of the
smaller company universe.
Dividend policy
Your Board is seeking approval for the payment of a final dividend of 6.0p
(2003: 5.5p) to be paid on 28 May 2004 to shareholders on the register on 30
April 2004. This dividend is 9.1% higher than last year's, although it remains
the case that the pursuit of dividends is a secondary objective of the Manager.
Your Directors
On 5 January 2004, we appointed Ian Barby as a Director of your Company. Ian
has spent a large part of his career in the investment industry and brings to
your Board a wealth of knowledge of the investment trust sector. He will be
seeking election by shareholders at the Annual General Meeting, and I commend
him to you.
Special business
I would like to draw your attention to some items of special business at the
forthcoming Annual General Meeting.
Resolution 9 seeks the renewal of the Directors' authority to allot up to an
aggregate nominal amount of £696,660 new ordinary shares, or 5% of the issued
ordinary share capital, whilst disapplying pre-emption rights. To take account
of the possibility of treasury shares (also mentioned in relation to Resolution
10), the disapplication of pre-emption rights has been extended to apply to the
resale of treasury shares (if any) in the same way as to the allotment of new
securities.
Resolution 10 seeks the renewal of the Directors' authority to purchase up to
2,088,587 or 14.99% of its own shares. Legislative changes mean that companies
may now hold shares repurchased as treasury shares with a view to possible
resale at a future date as an alternative to simply having to cancel them. The
Directors might consider holding repurchased shares pursuant to the authority
conferred by this resolution as treasury shares with a view to possible resale.
In any event, shares will only be repurchased at a price per share below the
prevailing net asset value per share.
Resolution 11 seeks to adopt new Articles of Association for the Company.
Following a review of the Company's existing Articles, the Board considers it
appropriate to make a number of changes to bring them more into line with
current practice and reflecting recent changes in legislation. The main
differences between the proposed new and the existing Articles of Association
are summarised in the Annual Report.
Outlook
As Richard Smith rightly points outs in his review which follows my statement,
smaller companies have substantially outperformed in the last year; as a
result, valuation levels are now somewhat less attractive. However, I believe
that we have in place a well balanced and diversified portfolio which is
capable of continuing to produce satisfactory returns, if the overall economic
and stockmarket outlook remains favourable.
Jamie Berry
Chairman
25 March 2004
Manager's Report
Investment Review
The year to January 2004 produced a surprisingly strong performance from
financial markets in general and, in particular, the smaller companies sector.
2003 had begun on a depressed note with stockmarkets weighed down by domestic
and international uncertainties, especially the forthcoming invasion of Iraq.
In the event there was a quick resolution of the campaign and this, together
with further cuts in interest rates and a strong recovery in the US economy,
led to a sharp recovery in financial markets. After the fall in the markets
over the previous three years, a rally was always on the cards. The surprising
element was however the return of speculative appetite amongst investors. This,
in turn, led to strong outperformance by smaller companies in most of the major
markets.
The UK stockmarket fully participated in these trends, rising strongly
throughout the year to January 2004. Large capitalisation shares, as shown by
the FTSE 100 Index, rose 23.1%. However, in line with global trends,
performance was stronger amongst smaller capitalisation shares. The Extended
Hoare Govett Smaller Companies Index (excluding Investment Trusts) ('the HGSC
Index'), which measures the bottom 10% of the UK stockmarket, gained 54.7% and
the HG 1000 (excluding Investment Trusts) Index, which measures the bottom 29%
of the HGSC Index, rose 72.4%. These rallies were supported by continued growth
in the economy, albeit heavily dependent on consumer and government spending.
Against this background, the net asset value of the Trust has enjoyed a large
absolute increase of 50.3% but this performance has lagged the benchmark index
and the peer group average. We had anticipated a rally in shares in 2003 but
had felt that this would be a cautious affair, with the best performances
coming from quality companies with reasonable dividend yields. In the event,
the market's appetite for risk was far stronger than we had imagined and on
occasion was somewhat reminiscent of the heady days of 1999/2000. Most of the
best performances came from companies whose very survival was questioned in
2002 and who, in many cases, paid no dividend at all. Not surprisingly, the
Trust's quality portfolio failed to keep pace. Moreover, our cautious approach
extended to the Trust's gearing where only a modest level of borrowing has been
maintained throughout the year.
Investment Strategy
We continue to believe that the UK economy will experience slow growth, at
best. Indeed, after 46 consecutive quarters of growth, it could be argued that
the economy is closer to a peak rather than the start of a recovery.
Confusingly, there are certain industries, such as advertising, financial
services and technology, which have had a difficult time and may experience a
cyclical bounce but this should not be allowed to obscure the overall picture.
Consumer spending, which has been the backbone of the economy, has grown
steadily over recent years, with an attendant rise in consumer debt levels.
This growth now seems set to slow on the back of higher taxes and rising
interest rates. Indeed, probably the main intent behind the recent interest
rate increases is to bring about a slowdown in the rate of consumer borrowing.
Government spending has also accelerated as the government has sought to
bolster public services. Because of disappointing revenues, however, the budget
deficit is now likely to exceed 3% of GDP. With the Chancellor now in danger of
breaching his own rules regarding borrowing for other than capital projects,
government spending growth is likely to decelerate sharply. With consumer and
government spending accounting for about 90% of GDP, economic activity
therefore seems almost certain to disappoint, leading to inevitable pressure on
corporate profits. Companies also face rising costs in the form of wages, raw
materials, insurance and pensions.
Reflecting this background, we continue to wish to run a broadly diversified
portfolio, with an emphasis on quality companies with strong financial
characteristics and with stable revenue sources. There are currently 144 active
holdings. The portfolio has a weighted average market capitalisation of £376
million and an estimated dividend yield for 2004 of 2.9%. There has been a
gradual reduction in companies selling large ticket durables such as houses,
kitchens and furniture, areas which will find life more difficult during a
consumer slowdown. The Trust remains overweight in construction services and
support services which are benefiting from government and private outsourcing,
gaining long-term contracts for day-to-day services. Other sectors being
favoured include healthcare, transport and utilities, all of which are
generally less economically sensitive. Defence remains overweight but is likely
to be reduced in coming months reflecting fears that this is one area that
could suffer as the Chancellor struggles to restrain government spending.
Current Prospects
The 'engine' of global economic growth is the US economy on the back of low
interest rates, tax cuts and a weak US dollar. Even here, however, it is quite
likely that the optimists will be disappointed due to the stretched nature of
consumer spending and underlying finances. Nevertheless, and despite high
valuations, it is hard to see a major setback in the US stockmarket whilst the
authorities are pushing so hard for economic recovery and the re-election of
George Bush. A more meaningful correction, however, is long overdue and, in any
case, the market is likely to grow increasingly cautious of the prospects for
2005.
The UK stockmarket has enjoyed a strong rally over the last 12 months. The
immediate prospects seem less favourable than in the US, due to rising taxes
and interest rates and the current high level of the pound. These factors,
together with rising costs, combine to produce a lacklustre corporate profits
outlook. However valuations are much lower in the UK and should provide support
for the stockmarket.
UK smaller companies have substantially outperformed in the period under
review. As a result, the valuation discount has largely disappeared. However we
firmly believe that small companies have greater flexibility to handle the more
difficult environment we see ahead. As if to prove the point, a number of major
UK companies (Shell, Prudential and Abbey National for example) have recently
released statements which point a distinctly lacklustre outlook. We therefore
expect small companies to trade at a premium to larger companies as investors
search for better growth prospects. Our relative enthusiasm for smaller
companies needs to be tempered, however, by a rising level of new issues and
other corporate financings.
Richard Smith
INVESCO Asset Management Limited
25 March 2004
Statement of Total Return (incorporating the revenue account)
for the year ended 31 January
2004 2003
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Gains/(losses) on - 26,708 26,708 - (21,628) (21,628)
investments
Income 2,127 - 2,127 2,247 - 2,247
Investment management
fee (784) - (784) (810) - (810)
Other expenses (219) - (219) (212) - (212)
Net return before
finance
costs and taxation 1,124 26,708 27,832 1,225 (21,628) (20,403)
Interest payable and
similar
charges (149) - (149) (424) - (424)
Return on ordinary
activities for
the financial year
before and
after tax 975 26,708 27,683 801 (21,628) (20,827)
Dividends in respect of
ordinary shares (836) - (836) (766) - (766)
Transfer to/(from) 139 26,708 26,847 35 (21,628) (21,593)
reserves
Return per ordinary
share
Basic 7.0p 191.7p 198.7p 5.8p (155.1)p (149.3)p
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
2004 2003
£'000 £'000
Revenue return for the year 139 35
Capital return for the year 26,708 (21,628)
Shares purchased for cancellation - (324)
Net movement in Shareholders' funds 26,847 (21,917)
Opening Shareholders' funds 53,349 75,266
Closing Shareholders' funds 80,196 53,349
Balance Sheet
as at 31 January
2004 2003
£'000 £'000
Fixed assets
Investments 85,041 56,752
Current assets
Debtors 445 699
445 699
Creditors: amounts falling due within one year (5,290) (4,102)
Net current liabilities (4,845) (3,403)
Net assets 80,196 53,349
Capital and reserves
Called-up share capital 13,933 13,933
Share premium account 21,244 21,244
Other reserves:
Capital redemption reserve 95 95
Capital reserves - realised 25,391 26,300
Capital reserves - unrealised 18,186 (9,431)
Revenue reserve 1,347 1,208
Equity shareholders' funds 80,196 53,349
Net asset value per ordinary share
Basic 575.6p 382.9p
Cash Flow Statement
for the year ended 31 January
2004 2003
£'000 £'000
Cash inflow from operating activities 1,194 541
Servicing of finance (144) (451)
Taxation - -
Capital expenditure and financial investment (1,884) 8,288
Equity dividends paid (766) (906)
Net cash inflow before management of liquid (1,600) 7,472
resources and financing
Financing - (324)
(Decrease)/increase in cash (1,600) 7,148
Reconciliation of net cash flow to movement in
net debt
(Decrease)/increase in cash (1,600) 7,148
Net debt at beginning of year (2,631) (9,779)
Net debt at end of year (4,231) (2,631)
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 2004 or 2003. The financial
information for 2003 is derived from the statutory accounts for 2003, which
have been delivered to the Registrar of Companies. The Auditors have reported
on the 2003 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 2004 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.
Notes
1. Income
2004 2003
£'000 £'000
Income from listed investments
UK dividends 2,124 2,223
UK unfranked investment income - interest 2 16
2,126 2,239
Other income
Deposit interest - 2
Underwriting commission 1 6
1 8
Total income 2,127 2,247
Total income comprises:
Dividends 2,124 2,223
Interest 2 18
Other income 1 6
2,127 2,247
2. Investment management fee
2004 2003
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Investment 667 - 667 690 - 690
management fee
Irrecoverable VAT 117 - 117 120 - 120
thereon
784 - 784 810 - 810
INVESCO Asset Management Ltd ('IAML') provides investment and administration
services to the Group from a novated agreement dated 14 November 2000. This
agreement was novated such that IAML replaced Perpetual Portfolio Management
Limited on 12 December 2001. The agreement is normally terminable by either
party giving not less that one year's notice. Under the agreement, the Managers
receive a management fee of 1 per cent. per annum on the first £50 million,
0.75 per cent. per annum on the next £50 million and 0.50 per cent. per annum
on a further £100 million of the Company's funds under management as defined in
the amended agreement. At 31 January 2004, £74,000 (2003: £46,000) was due for
payment in respect of management fees.
A performance-related fee is payable annually in arrears, if the Company's
performance exceeds the Extended Hoare Govett Smaller Companies Index (capital
gains excluding Investment Trusts) performance. The performance-related fee is
equal to 10 per cent. of the value of outperformance, but may not exceed 0.75
per cent. of the value of the Company's funds under management at the relevant
performance fee calculation date (which is usually the Company's balance sheet
date). Any such performance-related fee is based on the outperformance over the
benchmark index, after taking into account any previous underperformance. No
performance-related fee is payable for the year ended 31 January 2004 (2003:
nil).
3. Taxation
The tax charge for the year is nil (2003: nil), as allowable expenses exceed
taxable income.
4. Dividends on ordinary shares
2004 2003
£'000 £'000
Proposed dividend of 6.0p per ordinary share (2003: 5.5p) 836 766
Notes continued
5. Return per ordinary share
2004 2003
Revenue Capital Total Revenue Capital Total
Basic - pence 7.0 191.7 198.7 5.8 (155.1) (149.3)
Basic revenue return per ordinary share is based on the net revenue return on
ordinary activities after taxation of £975,000 (2003: £801,000), and on the
weighted average number of shares in issue during the year of 13,933,206 (2003:
13,945,288).
Basic capital return per ordinary share is based on the net capital gains for
the financial year of £26,708,000 (2003: net capital losses: £21,628,000), and
on the weighted average number of shares in issue during the year of 13,933,206
(2003: 13,945,288).
6. Investments
2004 2003
£'000 £'000
Investments listed on a recognised stock 84,382 54,954
exchange
AIM investments 659 1,798
Total investments 85,041 56,752
£'000 £'000
Opening book cost 66,183 88,585
Opening unrealised depreciation (9,431) (1,329)
Opening valuation 56,752 87,256
Movements in year:
Purchases at cost 29,340 27,673
Sales - proceeds (27,759) (36,549)
- net realised losses on sales (909) (13,526)
Movement in unrealised appreciation/ 27,617 (8,102)
(depreciation)
Closing valuation 85,041 56,752
Closing book cost 66,855 66,183
Closing unrealised appreciation/ 18,186 (9,431)
(depreciation)
Closing valuation 85,041 56,752
Realised losses based on historical cost (909) (13,526)
Amounts recognised as unrealised depreciation
in the previous year 4,538 6,727
Realised gains /(losses) based on carrying
value at previous
balance sheet date 3,629 (6,799)
Movement in unrealised appreciation/ 27,617 (8,102)
(depreciation) in year
Amounts recognised in previous year (4,538) (6,727)
Net movement in unrealised appreciation/ 23,079 (14,829)
(depreciation)
Gains /(losses) on investments 26,708 (21,628)
Notes continued
7. 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 Net assets
share attributable
2004 2003 2004 2003
pence pence £`000 £`000
Ordinary shares 575.6 382.9 80,196 53,349
Net asset value per ordinary share is based on net assets at the year end and
on 13,933,206 (2003: 13,933,206) ordinary shares, being the number of ordinary
shares in issue at the year end.
8. Notes to the cash flow statement
(a) Reconciliation of operating profit to
operating cash flows
2004 2003
£'000 £'000
Net revenue before finance costs and 1,124 1,225
taxation
Decrease in debtors 48 79
Increase/(decrease) in creditors 22 (94)
Investment management fee charged to capital - (669)
Net cash inflow from operating activities 1,194 541
(b) Analysis of cash flow for headings netted in the cash flow statement
2004 2003
£'000 £'000
Servicing of finance
Interest paid on overdrafts (144) (451)
(144) (451)
2004 2003
£'000 £'000
Net financial investment
Purchase of investments (29,849) (28,135)
Sale of investments 27,965 36,423
(1,884) 8,288
2004 2003
£'000 £'000
Financing
Shares purchased for cancellation - (324)
- (324)
(c) Analysis of changes in net debt
1 Cash 31January
February flow
2003 2004
£'000 £'000 £'000
Bank overdraft (2,631) (1,600) (4,231)
Net debt (2,631) (1,600) (4,231)
9. The Annual General Meeting of the Company will be held at 12.00 noon on 26
May 2004 at 30 Finsbury Square, London EC2A 1AG.
10. The Annual Report and Accounts for the year ended 31 January 2004 will be
available from the Registered Office shortly.
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