Final Results
INVESCO Perpetual UK Smaller Companies Investment Trust plc
Unaudited Preliminary Announcement of Final Results
for the year ended 31 January 2006
Chairman's Statement
It has been another satisfactory and encouraging year of performance for your
Company.
In the year ended 31 January 2006, the net asset value per ordinary share (NAV)
increased by 30.9% from 711.2p to 931.1p, and the mid-market share price rose
by 30.7% from 601.5p to 786.0p. This compares favourably with our benchmark,
which rose by 24.6% over the same period. This outperformance was achieved
through superior stock selection, rather than through any material level of
gearing. Over the period, net assets grew to £127.6 million, exceeding £100
million for the first time and making the Company's shares attractive to a
broader universe of potential investors.
Despite this strong NAV performance, your Company's shares' discount to NAV
widened very slightly from 15.4% to 15.6% and remained greater than the
weighted average discount of the Company's peer group of 13.4% during the
period. However, given that consistent outperformance is likely to be the
strongest determinant of a tighter discount, and that as at 31 January 2006,
the Company was ranked 4th out of 26 in its universe (source: Cazenove), your
Board notes that, as at 15 March 2006, the discount to NAV has subsequently
narrowed to 14.6%, against an average competitor level of 13.3%.
In his report on the following pages, the Manager reviews the market during the
period under review, explains his investment strategy and looks at prospects
for the coming year.
Changes during the year
As already mentioned in the Company's last interim report, the Board has
reviewed the allocation of expenses between revenue and capital. With the
exception of any performance-related fee payable to the Investment Manager,
which will remain wholly chargeable against capital profits, all other costs
have historically been charged to revenue. With effect from 1 February 2005,
the base investment management fee, which includes within it a substantial
element of administrative cost, is being allocated 50% to capital and 50% to
revenue, while the cost of any borrowing (almost exclusively undertaken to
achieve capital appreciation) is being allocated 80% to capital and 20% to
revenue. These amended cost allocations are in accordance with the expected
long-term split of returns as between capital gains and income.
Dividend
I am pleased to announce that, for the year ended 31 January 2006, the
Directors will be proposing a dividend of 12.0p per ordinary share, to be paid
on 26 May 2006 to shareholders on the register on 28 April 2006. This is an
increase of 60% on last year's dividend of 7.5p per ordinary share and reflects
the Company's aim to continue to grow the income it pays its shareholders.
However, shareholders should not expect this rate of increase to be repeated.
The prime objective of the Trust remains long term capital growth.
Discount management
During the year under review, the Company bought back and cancelled 222,500
shares, representing 1.6% of the issued share capital, at an average discount
of 14.9%. The effect has been to increase NAV per share by 0.3% and to help
keep the discount to NAV relatively stable.
Special Business at the Annual General Meeting
In order to help the Board with ongoing discount management, the Directors wish
to renew the authorities to undertake buybacks of the Company's ordinary shares
in the market and to issue new ordinary shares if required, whilst disapplying
pre-emption rights, within the set limits as set out in Special Resolutions 7
and 8 in the Notice of Annual General Meeting. New shares will not be issued at
prices below, nor will shares be repurchased at prices higher than the
prevailing net asset value.
As in previous years, the Directors might consider holding repurchased shares
as treasury shares with a view to possible resale. To take account of the
possibility of treasury shares, the disapplication of pre-emption rights has
therefore been extended to apply to the resale of treasury shares (if any) in
the same way as to the allotment of new securities.
With Resolutions 9 and 10, the Board is seeking the approval of shareholders of
amendments to the Company's Articles of Association.
The first amendment concerns the maximum total amount permitted to be paid to
Directors as annual fees, the current limit of £100,000 having been in place
since 2004. Although there is no immediate prospect that this would need to be
exceeded, the Directors consider that it would be prudent to allow for the
possibility that an additional Director might be appointed to the Board or that
future fee reviews might require an aggregate amount in excess of the current
limit, and therefore propose an increase in the maximum level to £150,000 p.a.
As set out in the Directors' Remuneration Report in the Annual Report and
Accounts, fees are set with reference to prevailing market rates, workloads and
responsibilities undertaken.
The second amendment takes account of The Companies (Audit, Investigations and
Community Enterprise) Act 2004 which came into force on 6 April 2005. This Act
amends the Companies Act 1985 by permitting the grant of Qualifying Third Party
Indemnity Provisions ("QTPIP") by a company to its directors. Such indemnities
extend, amongst other things, to the payment of a Directors' defence costs in
an action brought by the Company or by a third party, subject to the repayment
of such costs in certain circumstances. The Board believes that it is in the
best interests of the Company to attract and retain its Directors by offering
competitive terms of engagement, including the granting of indemnities on terms
consistent with the latest statutory provisions. Although the existing Articles
of Association already permit the granting of standard indemnities, the
proposed amendments will update the Articles of Association to take account of
the QTPIP rules.
Outlook
The UK smaller companies sector has now experienced an extended period of
relative outperformance of the main UK stock market. While this argues for some
caution going forward, the Manager continues to run a balanced and
well-diversified portfolio, which is capable of producing positive returns in
current conditions, and the Board remains cautiously optimistic about the year
ahead.
We look forward to seeing shareholders at the Company's AGM on 10 May 2006,
where there will be opportunities to meet with members of the Board and the
Investment Manager.
Ian Barby
Chairman
20 March 2006
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 also by investing in a wide range of stocks. Gearing will be used carefully
to take advantage of favourable markets or special situations.
Investment Review
The year to January 2006 produced yet another fine performance from the major
world stockmarkets. After a dull start, most stockmarkets bottomed in April and
thereafter made steady progress. The feature was the Japanese market which
advanced 49%, as confidence returned, that the years of deflation were coming
to an end and that the economy was at last showing some upward momentum. This
performance, together with the continued economic strength of China, helped to
push other Asian stockmarkets to an aggregate gain of 24%. Europe ex-UK rose
28% as survey data and the weakness of the euro pointed to better economic
progress, particularly in 2006. The laggard for the second year running, but
nevertheless up 8%, was the US stockmarket, weighed down by the steady increase
in interest rates as well as the stronger dollar. Market sentiment was also not
helped by the devastation caused by the hurricanes and the intractable problems
of Iraq. In general, markets and economies seemed to have shrugged off the
negative effects of rising energy prices and it is to be hoped that oil prices
have peaked.
The UK stockmarket has been one of the weaker performers amongst world
stockmarkets, with the FTSE All-Share Index rising just 20% in the year under
review. There were setbacks from February to April and in October, but
otherwise the market made steady upward progress, shrugging off rising energy
costs and the terrorist attacks in London. The economic background remained
relatively benign with stable interest rates, but growth disappointed as
consumers reined in their spending. The best performances came from the mid 250
sector (up 28%) and larger small companies. This area benefited from increased
corporate activity from trade and private equity buyers. By contrast, the AIM
market peaked in February and, following a pronounced setback in the period
from March to May, only managed a gain of 6% for the year to 31 January 2006.
The main characteristic of the AIM market remains a steady stream of new issues
and fund raisings as less restrictive listing requirements and tax advantages
continue to attract UK and overseas companies. Our benchmark index, the
Extended Hoare Govett Smaller Companies Index (excluding investment trusts)
rose 24.6%. By this measure, smaller companies have outperformed the general
market three years in a row and in six out the last seven years. Against this
background, the net asset value per share of your Company rose by 30.9%. The
main sector contributors were support services, oil and gas, aerospace and
defence, engineering and machinery and construction and building materials. In
terms of individual companies, the leading performers were Chemring, a defence
company which profited from a series of contract wins and some earnings
enhancing acquisitions, CSR, the leading company in bluetooth technology,
Venture Production and Paladin Resources which were positively impacted by
rising oil and gas prices and Gyrus, a medical instruments company which,
following a large acquisition, has finally achieved critical mass in the
important US market. Your Company benefited from 14 completed takeovers during
the year but the positive impact on the return achieved by the Company should
not be overstated. In a similar vein, new issues also made a modest but useful
contribution. Care is taken to participate only in those issues that meet the
overall investment criteria of the Company. The net asset value and the share
price are once again at all time highs, above the peaks reached in 2000 and
with a return substantially better than that achieved by the main UK
stockmarket over the same period.
Investment Strategy
The investment backdrop has changed very little since last year's annual
report. We expected the slowdown in the growth of the UK economy that has taken
place. We continue to believe the UK consumer is in an extended period of
adjustment to lower spending levels. This reflects high levels of personal
borrowing, low savings and less scope for mortgage equity withdrawal. A
precipitous decline is still not expected as wages continue to grow ahead of
inflation. Unemployment, albeit rising, is low historically and inflation and
interest rates remain stable. Indeed, interest rates may decline now that
inflation is back below the crucial 2% level. In tandem with slowing growth in
consumer spending, we also expect lower growth in government spending. No
matter how he redraws the boundaries, the Chancellor is clearly under pressure
with his "golden rule" of government spending and the strain can clearly be
seen in the cutbacks within the NHS. The Chancellor will also be anxious to
avoid overtly increasing taxes before he seeks to become prime minister. With
consumer and government spending accounting for 90% of GDP, a further period of
sluggish economic growth may lie ahead.
One aspect of the last 12 months that has surprised us has been the resilience
of corporate profits. Weaker companies serving the consumer have clearly
suffered but, in general, companies, through a combination of price increases
and greater efficiency, have managed to offset cost pressures. The problem is
that these cost pressures - wages, pensions, energy and raw materials, are all
ongoing; it remains to be seen how successful companies will be in 2006. What,
however, is true is that corporate profitability is high and, given the current
reluctance to increase capital expenditure, balance sheets for quoted companies
overall are strong. Surplus cash is being used to generate increased
shareholder value through higher dividends and share repurchases. This,
together with low interest rates, is proving to be an attractive environment
for private equity buyers. Such corporate activity, supplemented by the usual
trade buyers, has been one of the driving forces for the UK stockmarket over
the last year and this looks likely to continue in the year ahead.
With such a background, we continue to want to run a diversified portfolio of
quality companies. This is becoming more difficult due to the contraction in
the number of main market listed companies, with new companies tending to go to
the AIM market due to less stringent listing requirements. We still wish to
steer away from the cyclical parts of the UK economy, particularly the consumer
related areas, and look for contracted income where possible. This leaves the
portfolio structured in a similar way to that of a year ago. Whilst we do not
target sectors, the net effect of our purchases and sales is to leave the
portfolio overweight in aerospace and defence, healthcare, utilities,
industrial transportation and support services. Underweight sectors would
include general retailers, real estate, general financial, food producers and
telecommunications. There are currently 139 active holdings and the portfolio
has a weighted average market capitalisation of £526 million, with an estimated
dividend yield of 2.0%.
Current Prospects
The prospects for the UK stockmarket are at least as much determined by
international economies as by the domestic UK economy. Growth in world
economies seems likely to slow as the still dominant US economy begins to
decelerate under the impact of 14 successive increases in interest rates. The
US economy has similar characteristics to the UK economy in that there has been
a considerable rise in house prices and the consumer has become heavily
indebted. Similarly, the US has substantial trade and budget deficits which
form a large part of the global imbalances that are so potentially threatening
but with which the world has so far lived. Without a major altercation, the
economic background is likely to remain benign and UK corporate profitability
should continue to be high, even if under pressure from rising costs.
Valuations in the UK stockmarket remain reasonable in an historical context and
particularly versus bond yields. Against this background and with corporate
activity remaining high, the market should be capable of making, at least,
modest further progress in 2006 and the performance in the first two months is
encouraging in this respect. Investors should remain mindful that the rise in
equity prices, and asset prices in general, owes much to the current low level
of long-term bond yields. Should these yields rise materially, then the outlook
for the UK stockmarket would deteriorate.
UK small companies have outperformed in the last three years and in six out of
the last seven years. In the process, valuations for the sector have moved from
discount to a premium to the main market. In spite of this, the growth
characteristics and flexibility that many smaller companies exhibit give your
Manager confidence that 2006/7 can be another year of positive returns for your
Company. Given the rises experienced in the last three years, together with the
build-up in risks globally and in the UK, it still seems appropriate not to
make use of gearing.
Richard Smith
INVESCO Asset Management Limited
20 March 2006
Income Statement
for the year ended 31 January
2006 2005
(Unaudited) (Restated)
*
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Gains on - 31,109 31,109 - 19,440 19,440
investments at fair
value through
profit or loss
Income 2,448 - 2,448 2,390 - 2,390
Investment (418) (1,803) (2,221) (809) (1,001) (1,810)
management fee
Other expenses (262) (2) (264) (275) - (275)
Net return before
finance
costs and taxation 1,768 29,304 31,072 1,306 18,439 19,745
Interest payable
and similar
charges (3) (13) (16) (156) - (156)
Return on ordinary
activities for
the financial year
before and
after tax 1,765 29,291 31,056 1,150 18,439 19,589
Transfer to 1,765 29,291 31,056 1,150 18,439 19,589
reserves
Return per ordinary
share
Basic 12.8p 212.1p 224.9p 8.3p 132.3p 140.6p
The total column of this statement represents the Company's Income Statement,
prepared in accordance with UK Accounting Standards. The supplementary revenue
and capital columns are both prepared under guidance published by the
Association of Investment Trust Companies. All items in the above statement
derive from continuing operations and the Company has no other gains or losses
therefore no statement of total recognised gains or losses is presented. No
operations were acquired or discontinued in the year.
* Restated for new UK Accounting Standards
Reconciliation of Movements in Shareholders' Funds
From 1 February 2004to 31 January 2006
Capital Capital Capital
Share Share Redemption Reserve Reserve - Revenue
Capital Premium Reserve realised unrealised Reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Balance as at 1
February 2004
(as previously 13,933 21,244 95 25,391 18,186 1,347 80,196
stated)
Effects of
revaluing
investments to bid - - - - (687) - (687)
prices
Add final dividend - - - - - 836 836
for 2004(1)
Restated balance as 13,933 21,244 95 25,391 17,499 2,183 80,345
at
1 February 2004
Net return from
ordinary
activities - - - 6,389 12,050 1,150 19,589
Final dividend for (836) (836)
2004(1)
Restated balance as 13,933 21,244 95 31,780 29,549 2,497 99,098
at
1 February 2005
Shares bought back
and
cancelled - note 13 (222) - 222 (1,450) - - (1,450)
Net return from
ordinary
activities - - - 11,589 17,702 1,765 31,056
Final dividend for - - - - - (1,038) (1,038)
2005(2)
At 31 January 2006 13,711 21,244 317 41,919 47,251 3,224 127,666
(1) The final dividend for the year ended 31 January 2004 was declared and paid
in the year ended 31 January 2005.
(2) The adjusted final dividend for the year ended 31 January 2005 was declared
and paid in the year ended 31 January 2006.
Balance Sheet
as at 31 January
2006 2005
(Unaudited) (Restated)*
£'000 £'000
Fixed assets
Investments at fair value 128,189 101,836
through profit or loss
Current assets
Debtors 705 483
Cash at bank 1,225 -
1,930 483
Creditors: amounts falling due (2,453) (3,221)
within one year
Net current liabilities (523) (2,738)
Net assets 127,666 99,098
Capital and reserves
Called-up share capital 13,711 13,933
Share premium account 21,244 21,244
Other reserves:
Capital redemption reserve 317 95
Capital reserves - realised 41,919 31,780
Capital reserves - unrealised 47,251 29,549
Revenue reserve 3,224 2,497
Equity shareholders' funds 127,666 99,098
Net asset value per ordinary
share
Basic 931.1p 711.2p
* Restated for new UK Accounting Standards.
Cash Flow Statement
for the year ended 31 January
2006 2005
(Unaudited)
£'000 £'000
Cash flow from operating 452 1,261
activities
Servicing of finance (25) (165)
Net financial investment 5,115 2,142
Equity dividends paid (1,038) (836)
Cash inflow before financing 4,504 2,402
Financing (1,450) -
Increase in cash 3,054 2,402
Reconciliation of net cash
flow to movement in net funds
/(debt)
Increase in cash 3,054 2,402
Net debt at beginning of year (1,829) (4,231)
Net funds/(debt) at end of 1,225 (1,829)
year
Notes to the Financial Statements
1. Income
2006 2005
£'000 £'000
Income from listed
investments
UK dividends 2,419 2,377
Other income
Deposit interest 28 -
Underwriting commission 1 13
Total income 2,448 2,390
Total income comprises:
Dividends 2,419 2,377
Other income 29 13
2,448 2,390
2. Investment management fee
2006 2005
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Investment 356 356 712 689 - 689
management fee
Performance-related - 1,179 1,179 - 852 852
fee
Irrecoverable VAT 62 268 330 120 149 269
thereon
418 1,803 2,221 809 1,001 1,810
INVESCO Asset Management Limited provides investment and administration
services to the Company. Details of the Investment Management Agreement can be
found in the Annual Report. From 1 February 2005 the investment management fee
was allocated 50% to capital and 50% to revenue (previously not allocated). The
performance related fee is charged wholly to capital. At 31 January 2006, £
162,000 (2005: £64,000) was due for payment in respect of management fees and £
1,385,000 (2005: £1,001,000) was due for payment in respect of the
performance-related fee.
3. Interest payable
2006 2005
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Interest on bank
loans and
overdrafts 3 13 16 156 - 156
3 13 16 156 - 156
From 1 February 2005 finance costs were allocated 80% to capital and 20% to
revenue (previously these were not allocated).
4. Return per ordinary share
2006 2005
(Restated)
Revenue Capital Total Revenue Capital Total
Basic - pence 12.8p 212.1p 224.9p 8.3p 132.3p 140.6p
Basic total return per ordinary share is based on the net total return for the
financial year at £31,056,000 (2005: £19,589,000).
Basic revenue return per ordinary share is based on the net revenue return on
ordinary activities after taxation of £1,765,000 (2005: £1,150,000).
Basic capital return per ordinary share is based on the net capital gains for
the financial year after taxation of £29,291,000 (2005: £18,439,000
(restated)). All three returns are based on the weighted average number of
shares in issue during the year of 13,811,384 (2005: 13,933,206).
5. 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
2006 2005 2006 2005
(Restated) (Restated)
pence pence £'000 £'000
Ordinary shares 931.1p 711.2p 127,667 99,098
Net asset value per ordinary share is based on net assets at the year end and
on 13,710,706 (2005: 13,933,206) ordinary shares, being the number of ordinary
shares in issue at the year end.
6. Change in accounting policies
The accounts have been prepared under the historical cost convention modified
to include the revaluation of investments, in accordance with applicable United
Kingdom Accounting Standards and in accordance with the Statement of
Recommended Practice "Financial Statements of Investment Trust Companies"
issued by the Association of Investment Trust Companies ("the SORP") in 2003.
The same accounting policies used for the year ended 31 January 2006 have been
applied, with the following exceptions:
(a) Investments are classified as fair value through profit or loss. As the
Company's business is investing in financial assets with a view to profiting
from their total return in the form of interest, dividends or increases in fair
value, listed equities and fixed income securities are designated as fair value
through profit or loss on initial recognition. Investments are recognised on
the date they are traded and are listed on a recognised stock exchange.
Financial assets designated as at fair value through profit or loss, are
measured at subsequent reporting dates at fair value, which is the bid price.
Prior to 1 January 2005 these were valued at middle market prices. Comparatives
have been restated to reflect this change as disclosed in note 7.
FRS 26 "Financial Investments: Measurement" requires that transaction costs for
financial investments at fair value through profit or loss be expressed. The
Company's policy is to capitalise transaction costs on acquisition and the
profit or loss on disposal is calculated net of transaction costs on disposal.
Whilst there is no overall impact on the total return for the year or net
assets, this does result in an overstatement of investment book cost and a
misallocation between realised and unrealised capital reserves. This departure
from FRS 26 does not have a material impact on the Company's results and these
transaction costs amounted to £164,000 (2005:£141,000) on purchases and £78,000
(2005: £59,000) on sales of investments.
Any gains or losses whether realised or unrealised, arising on fixed asset
investments are taken direct to capital reserves.
b. Dividends - Following the introduction of FRS 21 "Events After the Balance
Sheet Date", dividends are not accrued in the accounts unless there is an
obligation to pay dividends at the balance sheet date. As a result, the
accounts for the year ended 31 January 2005 have been restated to reflect
this change.
7. Restatement of previously reported balances for effects of new UK Accounting
Standards
(a) Summarised balance as at 31 January 2004
Previously Adjustments Restated
reported £'000 31
January
31 January
2004
2004
£'000
£'000
Notes
Total equity Shareholders' (i), 80,196 149 80,345
funds (ii)
Net asset value per
ordinary share:
Basic 575.6p 1.1p 576.6p
(b) Summarised balance as at 31 January 2005
Previously
reported Restated
31 January 31
January
2005 Adjustments 2005
Notes £'000 £'000 £'000
Total equity Shareholders' (i), 98,718 380 99,098
funds (ii)
Net asset value per
ordinary share:
Basic 708.5p 2.7p 711.2p
(c) Summarised Income Statement for the year ended 31 January 2005
For the
year ended
31 January
2005
Notes £'000
Revenue returns as previously reported 105
Capital returns as previously reported 18,417
Total return as previously reported 18,522
Dividend recognised in 2005 and paid (ii) 1,045
in 2006
Adjustment for revaluation of (i) 687
investments to fair value for 31
January 2004
Adjustment for revaluation of (i) (665)
investments to fair value for 31
January 2005
Restated total return 19,589
(i) Investments are classified as held at fair value being the bid price for
all listed investments. Previously they were carried at middle market price
(ii) Dividends are not recognised until they are declared and approved by
shareholders, accordingly no provision is made for the proposed final dividend
and it is added back to revenue reserves for the period.
8. The financial information set out above does not constitute the Company's
statutory accounts for the year ended 31 January 2006 or 2005. The financial
information for 2005 is derived from the statutory accounts for 2005 which have
been delivered to the Registrar of Companies. The Auditors have reported on the
2005 statutory accounts and their report was unqualified, did not include a
reference to any matter to which the auditors drew attention by way of emphasis
without qualifying their report and did not contain a statement under s237(2)
or (3) of the Companies Act 1985. The statutory accounts for 2006 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.
9. The Annual General Meeting of the Company will be held at 2.30pm on 10 May
2006 at 30 Finsbury Square, London EC2A 1AG.
10. The audited Report and Accounts will be posted to shareholders shortly.
Copies may be obtained during normal business hours from the Company's
Registered Office, 30 Finsbury Square, London EC2A 1AG.
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