Final Results
INVESCO Perpetual UK Smaller Companies Investment Trust plc
Unaudited Preliminary Announcement of Final Results
for the year ended 31 January 2005
Chairman's Statement
It has been an encouraging and satisfactory year for your Company. I am pleased
to report an increase of 23.1% in its Net Asset Value (NAV), and a 29.1%
increase in the mid market price per ordinary share. The NAV return compares
very favourably with an increase in our benchmark, the Extended Hoare Govett
Small Companies Index (excluding investment trusts), of 15.6%. That the year
was one which especially favoured smaller companies, is evidenced by the return
of the FTSE All Share Index, which increased 11.6% in the period.
In common with our peer group, the discount to NAV also narrowed, and at the
year end stood at 15.1%, compared with 19.0% last year. The total net assets of
the Company are now £98.7m, and the ordinary share price recently reached a new
all time high.
At the half way point in the year, we renegotiated the fee arrangement that we
have in place with the Manager, which has resulted in a lower annual fee,
coupled with a higher performance fee. In my view, this aligns the interests of
the Manager with our shareholders more closely, especially as the performance
fee is calculated on share price returns, and not NAV returns. As a result of
the reduced annual fee, we are in a position to increase the final dividend
more than in the past. We are proposing a payment of 7.5p per ordinary share,
which represents an increase of 25% on last year.
After a year of such returns, it would be tempting to assume that it is all
over, but your Manager remains optimistic of further outperformance in the
current year. Although the apparent valuation anomaly of smaller companies has
closed, Richard Smith believes that overall valuations remain fair, and that
the nimble footed nature of smaller companies will enable them to handle the
more challenging economic picture ahead. However, he has used the recent
strength in the market to eliminate the modest gearing in the portfolio for the
time being. I have every confidence that he will continue to manage the
Company's portfolio to good effect.
After 18 years of serving as a Director, and latterly Chairman, of this Company
in its various guises, I have decided not to seek re-election at the Annual
General Meeting. Ian Barby will be taking the Chair, and I am confident that he
will serve the Company well. I have enjoyed my time as Chairman enormously and
it has been a privilege. I wish Ian and the rest of the Board every success in
guiding your Company in the future.
Jamie Berry
Chairman
16 March 2005
Manager's Report
Investment Objectives and Style
My goal is to produce above average performance over a full stockmarket cycle.
This will be achieved by identifying well managed, financially strong and
growing companies which have unique characteristics or clear competitive
advantages, and whose share prices are reasonable in relation to the quality
and growth of their earnings. We seek to moderate risk by this prudent approach
and by investing in a wide range of stocks. Gearing will be used carefully to
take advantage of rising markets or special situations.
Investment Review
The year to January 2005 produced a continuation of the recovery in financial
markets that began in 2003. After a dull first half, markets picked up sharply
from August onwards. However, the pattern was not uniform. In the year when
George Bush was re-elected President, the US economy grew strongly, benefiting
from the stimulatory effects of lower interest rates and taxes. By contrast,
the US stockmarket rose only modestly and has begun 2005 relatively weakly.
European stockmarkets performed better than the US, in spite of still very
sluggish economic activity. Asian and Japanese stockmarkets rallied well,
though in the case of Japan there are still many doubts about the durability of
its economy. In general, markets seemed less speculative and better balanced
with defensive shares doing as well as growth shares. However, the year was
consistent with 2003/4 in that smaller companies again significantly
outperformed.
The UK stockmarket has been one of the better performers amongst the major
world stockmarkets, with the FTSE All- Share Index rising 11.6%. The same dull
first half was followed by a vigorous rally which has continued into 2005. Were
it not for the global pattern, one would have been tempted to explain the rise
as a reaction to a growing feeling that UK interest rates had reached a peak,
from which declines were possible. However, whilst the stability of interest
rates since August has been helpful, we must also point to the steady growth in
the economy and corporate profits and, in particular, the strength of corporate
balance sheets as contributing to the rally. Our benchmark of smaller
companies, as measured by the Extended Hoare Govett Smaller Companies Index
(excluding Investment Trusts), rose by 15.6%. This means that smaller companies
have outperformed in five out of the last six years. In line with other
markets, activity in smaller companies seemed better balanced and less
speculative than in 2003. Of late, however, investor sentiment seems to have
become much more bullish and this can easily be seen through the current
enthusiasm for small oil exploration companies.
Against this background, the net asset value of the Company rose significantly
by 23.1%. The net asset value and the share price have now increased to all
time highs, above the peaks reached in 2000 and substantially better than that
achieved by the main UK stockmarket over the same time period. Given the benign
market conditions, performance was achieved across the portfolio. A surprising
feature was the strength of the defensive utility sector which gained from the
new pricing regime established by Ofwat as well as the takeover of South
Staffordshire Water, in which the Company also had a holding. Other strong
sectors included healthcare, property and transport. Corporate activity
benefited the Trust not only through takeovers but also share repurchase
resulting from the substantially improved balance sheets that many companies
now have. New issues have also been a positive factor but care is taken to
participate only in those issues that meet the overall investment criteria of
the Trust.
Investment Strategy
The UK economy grew at a somewhat faster rate than we had expected in 2004,
with corresponding benefits for corporate profits. However, the characteristics
of this growth remain the same, in that it is being fuelled by an overstretched
consumer and a less than prudent government. Consumer spending, which has been
the backbone of the economy, is now showing some signs of slowing, particularly
as it relates to large ticket items such as houses and cars. Household cash
flow, which has been positive for over a decade, is now coming under pressure
from five rises in interest rates, as well as higher energy costs and taxes.
However this remains a 'slow motion' economy in the sense that the required
adjustment to consumer spending is likely to take place over an extended period
rather than anything more precipitous, because wages are still growing faster
than prices and unemployment, interest rates and inflation remain relatively
low. It would require an 'accident' such as a sharp fall in house prices or a
significant decline in sterling to force a faster deterioration in spending.
Similar circumstances apply to government spending. It is not prudent that
budget deficits still amount to in excess of 3% of GDP after 12 years of
continuous economic expansion. Government spending has started to slow but is
still growing at over 4% in real terms. Moreover, public sector wages are still
growing far too fast, especially in an era when the ancillary costs of
employment are becoming so apparent. Unfunded pension liabilities of the UK
government now exceed the total national debt and this is happening at a time
when the ratio of those paying taxes and those receiving pensions is beginning
to change unfavourably. While we will no doubt be treated to 'bullish'
statements about the economy at the forthcoming election, it seems inevitable
that higher taxes and a reduced rate of growth in government spending will
follow over the medium term.
With the consumer and government accounting for 90% of GDP, the UK economy
seems set for a period of slowing growth and, possibly, maybe a long overdue
recession. Unfortunately for the corporate sector, this is going to come at a
time of rising cost pressures. Indeed, a potential squeeze on profits is
already apparent, as input costs are seen to be rising faster than output
prices. Either prices or productivity must improve or the outlook for corporate
profits growth is modest, at best. To give a proper balance to this cautious
outlook, one should add that many UK companies have been focused on improving
profitability and balance sheets in recent years and therefore are in
reasonable shape to withstand a period of profit uncertainty. The same will not
be true for those companies who now operate with a high level of financial
gearing as a result of private equity activity.
With such a background, we continue to want to run a diversified portfolio of
quality companies, with a growing emphasis on those that are less sensitive to
the UK economy. As a result, the Trust is overweight in sectors such as
utilities, healthcare, construction, defence and support services, areas where
their recurring revenue makes them more stable than the general economy. At the
same time the Company is underweight in the leisure and retail sectors which
will suffer in the event of a consumer slowdown. There are currently 143 active
holdings and the portfolio has a weighted average market capitalisation of £450
million, with an estimated dividend yield of 2.5 %.
Current Prospects
In recent years world growth has been driven by the US economy as cheap money
and lower taxes have sustained consumer demand. In the process, the US economy
has built a number of imbalances - trade and budget deficits - which have been
substantially funded by overseas savings. As these imbalances have grown, so
the strain has shown through with weakness in the dollar. This, in turn, has
encouraged speculators to borrow dollars to invest in almost any tangible
assets with the hope of making a double profit, one from the fall in the dollar
and the other from the investment itself. Now the circumstances may be
beginning to change. Firstly, the Federal Reserve is raising interest rates,
with a Chairman seeming to adopt a fairly hawkish tone. Secondly, the
administration is starting to talk about reducing the structural deficits. The
likely consequences of such action would be lower growth in the US and pressure
on speculators to unravel some of their dollar short positions. Quite often,
post election years can be difficult for the US stockmarket and the weakness in
January is not a good omen.
The UK stockmarket has enjoyed two years of recovery after the poor start to
the decade. Now it is faced with slowing economic growth and probably a
developing pressure on corporate profits. Valuations, however, remain
reasonable in a historic context and, similar to the US, the strength of
corporate balance sheets helps to support the stockmarket through higher
dividends, share repurchase and takeovers.
UK small companies have substantially outperformed over the last two years and
the valuation discount, which reached a peak in 1998, has now disappeared. We
still continue to believe that small companies have the greater flexibility to
handle the more difficult economic circumstances that we see ahead. This,
combined with greater choice of companies to invest in, gives the managers
confidence that the Company will once again outperform the main UK stockmarket
in 2005/6. However, given the scale of the gains seen in the last two years, we
feel it is appropriate to go to just a 'fully invested' position, thereby
eliminating our small level of gearing completely during the current period of
seasonal strength of the UK stockmarket.
Richard Smith
INESCO Asset Management Limited
16 March 2005
Statement of Total Return (incorporating the revenue account)
for the year ended 31 January
2005 2004
Note Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Gains on investments 6 - 19,418 19,418 - 26,708 26,708
Income 1 2,390 - 2,390 2,127 - 2,127
Investment management fee 2 (809) (1,001) (1,810) (784) - (784)
Other expenses (275) - (275) (219) - (219)
Net return before finance
costs and taxation 1,306 18,417 19,723 1,124 26,708 27,832
Interest payable and similar
charges (156) - (156) (149) - (149)
Return on ordinary activities
for
The financial year before and
after tax 1,150 18,417 19,567 975 26,708 27,683
Dividend in respect of equity
shares 4 (1,045) - (1,045) (836) - (836)
Transfer to reserves 105 18,417 18,522 139 26,708 26,847
Return per ordinary share
Basic 5 8.3p 132.2p 140.5p 7.0p 191.7p 198.7p
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
2005 2004
£'000 £'000
Revenue transfer to reserves for the year 105 139
Capital return for the year 18,417 26,708
Net movement in Shareholders' funds 18,522 26,847
Opening Shareholders' funds 80,196 53,349
Closing Shareholders' funds 98,718 80,196
Balance Sheet
as at 31 January
Note 2005 2004
£'000 £'000
Fixed assets
Investments 6 102,501 85,041
Current assets
Debtors 483 445
Creditors: amounts falling due within one year (4,266) (5,290)
Net current liabilities (3,783) (4,845)
Net assets 98,718 80,196
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 31,780 25,391
Capital reserves - unrealised 30,214 18,186
Revenue reserve 1,452 1,347
Equity shareholders' funds 98,718 80,196
Net asset value per ordinary share
Basic 708.5p 575.6p
Cash Flow Statement
for the year ended 31 January
2005 2004
Note £'000 £'000
Cash inflow from operating activities 8(a) 1,261 1,194
Servicing of finance 8(b) (165) (144)
Capital expenditure and financial investment 8(b) 2,142 (1,884)
Equity dividends paid (836) (766)
Increase/(decrease) in cash 2,402 (1,600)
Reconciliation of net cash flow to movement in net
debt
Increase/(decrease) in cash 2,402 (1,600)
Net debt at beginning of year (4,231) (2,631)
Net debt at end of year (1,829) (4,231)
The accompanying notes are an integral part of this statement.
Notes to the Financial Statements
1. Income
2005 2004
£'000 £'000
Income from listed investments
UK dividends 2,377 2,124
UK unfranked investment income - interest - 2
2,377 2,126
Other income
Underwriting commission 13 1
Total income 2,390 2,127
Total income comprises:
Dividends 2,377 2,124
Interest - 2
Other income 13 1
2,390 2,127
2. Investment management fee
2005 2004
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Investment management 689 - 689 667 - 667
fee
Performance-related - 852 852 - - -
fee
Irrecoverable VAT 120 149 269 117 - 117
thereon
809 1,001 1,810 784 - 784
IAML provides investment and administration services to the Company. Details of
the Investment Management Agreement can be found in the Annual Report. At 31
January 2005, £64,000 (2004: £74,000) was due for payment in respect of
management fees and £1,001,000 (2004: £nil) was due for payment in respect of
performance-related fees.
3. Taxation
The tax charge for the year is nil (2004: nil), as allowable expenses exceed
taxable income.
4. Dividends on ordinary shares
2005 2004
£'000 £'000
Proposed dividend of 7.5p per ordinary share (2004: 1,045 836
6.0p)
5. Return per ordinary share
2005 2004
Revenue Capital Total Revenue Capital Total
Basic - pence 8.3 132.2 140.5 7.0 191.7 198.7
Basic revenue return per ordinary share is based on the net revenue return on
ordinary activities after taxation of £1,150,000 (2004: £975,000), and on the
number of shares in issue during the year of 13,933,206 (2004: 13,933,206).
Basic capital return per ordinary share is based on the net capital gains for
the financial year after taxation of £18,417,000 (2004: £26,708,000), and on
the number of shares in issue during the year of 13,933,206 (2004: 13,933,206).
6. Investments
2005 2004
£'000 £'000
Investments listed on a recognised stock exchange 98,209 84,382
AIM investments 4,292 659
102,501 85,041
£'000 £'000
Opening book cost 66,855 66,183
Opening unrealised appreciation/(depreciation) 18,186 (9,431)
Opening valuation 85,041 56,752
Movements in year:
Purchases at cost 26,962 29,340
Sales - proceeds (28,920) (27,759)
- net realised gains/(losses) on sales 7,390 (909)
Movement in unrealised appreciation 12,028 27,617
Closing valuation 102,501 85,041
Closing book cost 72,287 66,855
Closing unrealised appreciation 30,214 18,186
Closing valuation 102,501 85,041
Realised gains/(losses) based on historical cost 7,390 (909)
Amounts recognised as unrealised in the previous 7,030 4,538
year
Realised gains based on carrying value at previous 14,420 3,629
balance sheet date
Movement in unrealised appreciation in year 12,028 27,617
Amounts recognised in previous year (7,030) (4,538)
Net movement in unrealised appreciation 4,998 23,079
Gains on investments 19,418 26,708
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 Net assets
per share attributable
2005 2004 2005 2004
pence pence £'000 £'000
Ordinary shares 708.5 575.6 98,718 80,196
Net asset value per ordinary share is based on net assets at the year end and
on 13,933,206 (2004: 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
2005 2004
£'000 £'000
Net revenue before finance costs and taxation 1,306 1,124
(Increase)/decrease in debtors (41) 48
Increase in creditors 997 22
Performance fee charged to capital (1,001) -
Net cash inflow from operating activities 1,261 1,194
(b) Analysis of cash flow for headings netted in the cash flow statement
2005 2004
£'000 £'000
Servicing of finance
Interest paid on overdrafts (165) (144)
(165) (144)
2005 2004
£'000 £'000
Net financial investment
Purchase of investments (26,782) (29,849)
Sale of investments 28,924 27,965
2,142 (1,884)
(c) Analysis of changes in net debt
1 February Cash flow 31January
2004 2005
£'000 £'000 £'000
Bank overdraft (4,231) 2,402 (1,829)
Net debt (4,231) 2,402 (1,829)
9. The Annual General Meeting of the Company will be held at 12.00 noon on 24
May 2005 at 30 Finsbury Square,
London, EC2A 1AG.
10. The financial information set out above does not constitute the Company's
statutory accounts for the year ended 31 January 2005 or 2004. The financial
information for 2004 is derived from the statutory accounts for 2004 which have
been delivered to the Registrar of Companies. The Auditors have reported on the
2004 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 2005 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.
11. The Annual Report and Accounts for the year ended 31 January 2005 will be
available from the Registered Office
shortly.
12. The final dividend of 7.5p per share will be paid on 27 May 2005 to
shareholders on the Register on 29 April 2005.
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