Final Results
INVESCO Perpetual UK Smaller Companies Investment Trust plc
Unaudited Preliminary Announcement of Final Results
for the year ended 31 January 2007
Chairman's Statement
I am pleased to report another encouraging year of performance for your
Company.
In the year ended 31 January 2007, the Company achieved a total return of 27.2%
in the price of its ordinary shares and of 24.7% in their net asset value
("NAV"). This result builds on last year's excellent return of 31% and
represents the third consecutive year of outperformance against our benchmark,
the extended Hoare Govett Smaller Companies Index (excluding Investment
Trusts), which advanced by a lesser 22.9% over the same period. This
outperformance was, once again, attributable to good stock selection, rather to
any material level of gearing. As a result, over the period, net assets grew
from £127.7 million to £151.2 million.
Due to the market price of the Company's ordinary shares growing more strongly
than their NAV, their discount to NAV narrowed during the year from 15.6% to
13.6% as at 31 January 2007, though it continued to remain greater than the
weighted average discount of the Company's peer group of 11.4% as at the same
date. (source: JP Morgan Cazenove). Turbulent market conditions since the end
of the period have contributed to a subsequent widening of the discount to NAV
to a level of 14.8% as at 21 March 2007, though the Board has attempted to
reduce both the volatility and absolute level of the discount by increasing the
level of buy back of the Company's shares in the market.
In his Report on the following pages, the Manager reviews the nature of the
investment environment during the period, explains his investment strategy and
considers the prospects for the coming year.
While there can never be any guarantee as to the future, the Board is confident
that the Manager's investment style is well suited to those investors seeking
long term returns for a reasonable level of risk. In this context, it is
notable that your Manager has consistently produced above average returns for a
relatively low level of volatility, as is illustrated in the chart set out in
the Annual Report, comparing the five year returns, and the relative
volatility, of a number of investment trusts in the same sector.
Sub-division of share capital
During the year under review, an Extraordinary General Meeting of the Company
held on 6 December 2006, approved the sub-division of the Company's ordinary
shares of £1 each into five new ordinary shares of 20p each. This sub-division
of shares took effect on 7 December 2006. As detailed in the Circular to
Shareholders at the time, the intention of the Board was to enhance the
liquidity and tradability of your Company's shares in the market.
Dividend
In addition to capital growth, which has been the prime objective of the
Company, the Board also recognises the importance of dividends to shareholders.
I am therefore pleased to announce that, for the year ended 31 January 2007,
the Directors will be proposing a final dividend of 1.75p per ordinary share of
20p each, to be paid on 10 May 2007 to shareholders on the register on 13 April
2007. Together with the interim dividend equivalent to 1.4p per ordinary share
of 20p each paid in October 2006, this gives a total dividend of 3.15p per 20p
share, a 31% increase on the previous year. However, shareholders should
remember that future dividends, as well as investment performance, will depend
entirely on market conditions and the ability of the Manager to achieve
satisfactory results.
Discount management
During the year ended 31 January 2007, the Company bought back and cancelled
305,361 ordinary shares of £1 each and 230,000 new ordinary shares of 20p each,
representing 2.59% of the issued share capital, at an average discount of
15.2%. The effect has been to increase NAV per share by 0.39% and to help keep
the discount to NAV relatively stable. Since the year end, a further 489,585
ordinary shares of 20p each have been bought back for cancellation. It remains
an objective of the Board to keep both the volatility of the discount as well
as its absolute level as low as is consistent with prevailing market
conditions.
Special Business at the Annual General Meeting
In order to help the Board with its commitment to discount management, the
Directors wish to renew the authorities to undertake buy backs 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 9 and 10 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
been extended to apply to the resale of treasury shares (if any) in the same
way as to the allotment of new securities.
In addition, the Board is proposing an ordinary resolution to amend the
Company's investment objective. As noted above, the Board recognises the
importance of dividends to shareholders and, as stated last year in my
Chairman's Statement, it is the Company's aim to continue to grow the income it
pays its shareholders. Therefore, the Board considers it appropriate to record
this formally by adopting a new investment objective of achieving total return
rather than capital growth alone. However, shareholders should be aware that
the investment style and process of the Manager will not be changed by the
change in objective.
The Directors have carefully considered all the resolutions proposed in the
Notice of the AGM and consider them all to be in the best interest of
shareholders. The Directors accordingly recommend that shareholders vote in
favour of each resolution.
Outlook
The UK smaller companies sector continues to offer some attraction relative to
the broader market, notwithstanding its current price premium. Barring an
overall economic setback, and a possible shift into larger capitalisation
stocks, we believe that it will remain underpinned by its constituents' faster
growth of underlying profits, as well as by continuing high levels of M&A
activity.
We look forward to seeing shareholders at the Company's AGM on 9 May 2007,
where there will be opportunities to meet with members of both the Board and of
the Investment Manager.
Ian Barby
Chairman
26 March 2007
Manager's Report
Investment Review
Perhaps the feature of the year to January 2007 was the weakness of the dollar,
which fell 12% against sterling, and this has certainly led to mixed returns
for UK investors. Moreover, it has been quite detrimental to the many UK large
and small companies with overseas earnings. In general, most stockmarkets had a
severe setback in May 2006, as investors had a temporary loss of appetite for
risk, reflecting rapidly rising energy prices and volatile commodity prices
which provided an excuse for profit-taking. Thereafter, markets recovered their
poise and rallied through to the end of the year. The weakest of the major
markets was Japan, which fell 12% in sterling terms, reflecting concerns about
the strength of the economic recovery. Next came the US, which rose just 2% as
investors worried that the weakness in housing would spread to the economy as a
whole. The star has been Europe ex UK, which rose 14% as confidence in the
economic recovery grew, particularly in the lethargic German economy.
The UK stockmarket has been a stronger than average performer, rising 10% as
measured by the FTSE All-Share Index in the period under review. In common with
world markets, there was a setback in May/June 2006, but otherwise it has made
steady upward progress. Concerns about rising interest rates and the strength
of sterling have been shrugged off as the economic background has remained
benign. The pattern of the market remained similar to the previous year, in
that the best performances came from the FTSE 250 sector (up 21%) and larger
small companies on the back of corporate activity by trade and private equity
buyers. By contrast, the AIM market had another disappointing year, falling 5%.
Our benchmark index, the Extended Hoare Govett Smaller Companies Index
(excluding investment trusts) rose 22.9%. By this measure, smaller companies
have outperformed the general market four years in a row and in seven out of
the last eight years.
Against this background, the net asset value per share and the share price are
once again at all time highs and the returns generated by your Company
significantly exceed those of the general market over the reporting period,
rising by 24.7%. The main sector contributors were support services, real
estate, industrial engineering, aerospace & defence and non-life insurance. In
terms of individual companies, the main contributor for the second year in a
row was Chemring. This company which produces consumable countermeasures for
the defence industry is using its windfall from the current hostilities to
diversify its product range via acquisitions. The other main contributors
include RPS Group, an environmental, health, safety and risk consulting group,
Aveva Group, a producer of 3-D design software for major industrial plants, and
Synergy Healthcare which provides sterilisation and linen hire services to the
NHS and which has now successfully completed the acquisition of another
portfolio company, Isotron. Similar to last year, takeover activity and new
issues have played a positive part in the Trust's activities but in neither
case is the contribution all that significant.
Investment Strategy
The UK economy has now enjoyed 14 consecutive years of growth. 2006 was
stronger than we expected. And although unemployment has been rising, the total
number of people in work has increased due to immigration and greater
participation by older workers. This, coupled with rising wage rates, produced
a recovery in household expenditure from the weaker trends seen in the latter
part of 2005. Even the widely expected slowdown at Christmas failed to
materialise and current retail sales remain reasonably buoyant. We, however,
continue to believe that this is still part of a gradual weakening in consumer
spending, reflecting high personal borrowing, rising interest costs and low
savings. Indeed, mortgage repayments as a percentage of net income are now back
close to the high levels of the early 1990s, resulting mainly from higher
capital repayments on the higher level of debt being incurred. In addition,
interest rates are rising, as the Bank of England seeks to dampen inflationary
pressures and house price rises. At the same time, government spending also
appears to be coming under some pressure, seen most notably through cutbacks to
the NHS, but also through the Chancellor's exhortation for the moderation of
public sector pay awards. We believe this Chancellor will do everything in his
power to avoid raising taxes overtly before the next election. In short, we
begin 2007, much as we did 2006, expecting slower growth this year, but we have
to admit that the international background is currently more buoyant than we
forecast, as the US economy appears to be shrugging off the decline in housing,
and falling energy prices are providing a welcome boost.
Against such a background, we seek to run a portfolio of quality companies. We
still wish to steer away, or apply a higher hurdle rate, to cyclical parts of
the UK economy, particularly consumer related areas, and look for companies
that have a high predictability of revenues. This means that the portfolio
structure has remained broadly similar for some time. Whilst we are essentially
stock-pickers and do not target sectors, the net effect of our purchases and
sales is to leave the portfolio overweight in aerospace and defence,
healthcare, industrial engineering and support services. Underweight sectors
would include general retailers, real estate, general financial, food producers
and telecommunications. There are currently 137 active holdings and the
portfolio has an average weighted capitalisation of £621 million, with an
estimated yield of 1.9%.
About 16% of the portfolio is in companies listed on the AIM market. This
market has had two disappointing years in a row and indeed has produced little
overall return for investors since its inception. Of course, there have been
many successful AIM companies and it should be remembered that this market has
taken a big hit from the demise of the internet gambling stocks. AIM has been
very successful in attracting new companies to list on the exchange, including
many that could have listed on the main market, but who were attracted to the
tax and corporate governance advantages available. However, the
under-performance and the absence of corporate activity has meant that the
funds required both to finance the new entrants and increase the value of
existing constituents have simply not been available. Now there are signs that
a number of companies feel tarnished by their association with AIM and are
considering moving up to the main market. This then is the first signal for
contrarian based optimism for this market. Our attitude to AIM, however,
remains unchanged. As investors, we are not great proponents of the exchange,
but we will invest provided the company concerned meets our investment
criteria. The only concession we make to AIM companies is to accept that our
investments will be less liquid. As a result, we believe, we have had a number
of successes over the last year and we would highlight Synergy Healthcare,
Genus, James Halstead and newcomer, Just Retirement. In spite of this, it is
likely that the portfolio's weighting in AIM shares may fall this year as a
number of our companies are considering moving up to the main market.
Current Prospects
Bull markets are often characterised as "climbing a wall of worry" and this is
no less applicable today. Will the US economy eventually succumb to the
weakness of its housing sector and current concerns about the sub-prime market?
Will the Chinese economy overheat? The weakness of the dollar in 2006 reminds
us that the global imbalances are still present and growing. To this we must
add concern over the future direction of the Yen. The Yen has been weaker than
its fundamentals would dictate and further weakness could well incite
protectionist moves by Europe and the US. On the other hand, sudden, sharp
gains by the Yen would also cause problems for the so called "Yen carry trade",
by which speculators borrow Yen to invest in higher yielding assets in other
parts of the world. On top of this, there have been clear signs of asset price
inflation, as nearly all asset classes have appreciated significantly over the
last four years. This, together with low interest rates, has encouraged a major
increase in leverage, spurred on by the activities of hedge funds and private
equity. There are, therefore, many reasons to remain vigilant. Given the
strength of the UK stockmarket since June, an intermediate correction can occur
at anytime, but anything more severe seems unlikely. The economy remains benign
and interest rates, whilst rising, are still relatively low. Valuations are
reasonable on an historical basis, balance sheets of public companies are
strong, with surplus cash being used to increase dividends and finance share
repurchases and corporate activity is continuing at high levels. We expect the
UK stockmarket to make moderate gains in 2007. However, given the uncertainties
that exist and the significant gains experienced over the last few years, we
feel the use of gearing is unwarranted and indeed we may build up some modest
cash balances, should the market strength persist.
UK smaller companies have outperformed the general market four years in a row
and in seven out of the last eight years. The sector now sells at a reasonable
premium valuation to the main market. We feel this is justified by the faster
growth in profits that small companies are achieving and also by the continuing
high levels of mergers and acquisitions. Barring a move into larger
capitalisation stocks in much changed economic circumstances, we would expect
smaller companies to perform at least as well as their larger brethren over the
next twelve months.
Richard Smith
INVESCO Asset Management Limited
26 March 2007
Income Statement
for the year ended 31 January
2007 2006
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Gains on
investments
at fair value
through
profit or loss - 28,516 28,516 - 31,109 31,109
Income Note 1 2,976 - 2,976 2,448 - 2,448
Investment
Management fee (515) (1,705) (2,220) (418) (1,803) (2,221)
Note 2
Other expenses (320) (7) (327) (262) (2) (264)
Profit before
finance
costs and 2,141 26,804 28,945 1,768 29,304 31,072
taxation
Finance costs (1) (3) (4) (3) (13) (16)
Profit before and 2,140 26,801 28,941 1,765 29,291 31,056
after tax
Return per
ordinary
share
Basic Note 3 3.2p 39.6p 42.8p 2.6p 42.4p 45.0p
The total column of this statement represents the Company's Income Statement,
prepared in accordance with International Financial Reporting Standards. The
supplementary revenue and capital columns are both prepared under guidance
published by the Association of Investment 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.
Statement of Changes in Equity
for the year ended 31 January 2007
Capital Capital Capital
Share Share Redemption Reserve Reserve - Revenue Total
-
Capital Premium Reserve Unrealised Reserve £'000
Realised
£'000 £'000 £'000 £'000 £'000
£'000
As at 1 February 13,933 21,244 95 31,780 29,549 2,497 99,098
2005
Final dividend - - - - - (1,038) (1,038)
Shares bought
back
and cancelled (222) - 222 (1,450) - - (1,450)
Profit for the - - - 11,589 17,702 1,765 31,056
year
As at 31 January 13,711 21,244 317 41,919 47,251 3,224 127,666
2006
Final dividend - - - - - (1,640) (1,640)
Shares bought
back
and cancelled
-
(note 4) (352) - 352 (2,863) - - (2,863)
Profit for the - - - 10,039 16,762 2,140 28,941
year
Interim dividend - - - - - (939) (939)
At 31 January 13,359 21,244 669 49,095 64,013 2,785 151,165
2007
Balance Sheet
as at 31 January 2007
2007 2006
£'000 £'000
Non-current assets
Investments at fair value through profit or 149,902 128,189
loss
Current assets
Other receivables 281 705
Cash and cash equivalents 2,580 1,225-
2,861 1,930
Total assets 152,763 130,119
Current liabilities
Other payables (1,598) (2,453)
(1,598) (2,453)
Total assets less current liabilities 151,165 127,666
Issued capital and reserves
attributable to equity holders
Share capital 13,359 13,711
Share premium account Note 4 21,244 21,244
Other reserves:
Capital redemption reserve Note 4 669 317
Capital reserves - realised Note 4 49,095 41,919
Capital reserves - unrealised Note 4 64,013 47,251
Revenue reserve Note 4 2,785 3,224
Total Shareholders' funds 151,165 127,666
Net asset value per ordinary share
Basic Note 5 226.3p 186.2p*
* adjusted for 5:1 share sub-division.
Cash Flow Statement
for the year ended 31 January 2007
2007 2006
£'000 RESTATED*
£'000
Cash flow from operating activities
Profit before and after tax 28,941 31,056
Adjustments for:
Purchases of investments (29,735) (32,094)
Sales of investments 36,482 37,209
6,747 5,115
Gains on investments (28,516) (31,109)
Finance costs 4 16
Operating cash flows before movements in 7,176 5,078
working capital
(Increase)/decrease in receivables (146) 1
(Decrease)/increase in payables (230) 488
Net cash flows from operating activities 6,800 5,567
before and after tax
Cash flows from financing activities
Interest paid (3) (25)
Buy-back of shares (2,863) (1,450)
Equity dividends (2,579) (1,038)
Net cash used in financing activities (5,445) (2,513)
Net increase in cash and cash equivalents 1,355 3,054
Cash and cash equivalents at the beginning of 1,225 (1,829)
the year
Cash and cash equivalents at the end of the 2,580 1,225
year
* Restated for change to International Financial Reporting Standards
NOTES
1. Income
2007 2006
£'000 £'000
Income from listed investments
UK dividends 2,896 2,419
Other income
Deposit - interest 68 28
Underwriting commission 12 1
Total income 2,976 2,448
Total income comprises:
Dividends 2,896 2,419
Other income 80 29
2,976 2,448
2. Investment management fee
2007 2006
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Investment 438 438 876 356 356 712
management fee
Performance-related - 1,013 1,013 - 1,179 1,179
fee
Irrecoverable VAT 77 254 331 62 268 330
thereon
515 1,705 2,220 418 1,803 2,221
IAML provides investment and administration services to the Company. Details of
the Investment Management Agreement can be found in the Annual Report. The
performance-related fee is charged wholly to capital. At 31 January 2007, £
98,000 (2006: £162,000) was due for payment in respect of management fees and £
1,190,000 (2006: £1,385,000) was due for payment in respect of the
performance-related fee.
3. Return per ordinary share
2006
2007
Restated
Revenue Capital Total Revenue Capital Total
Basic - pence 3.2p 39.6p 42.8p 2.6p 42.4p 45.0p
Basic total return per ordinary share is based on the net total return for the
financial year of
£28,941,000 (2006: £31,056,000).
Basic revenue return per ordinary share is based on the net revenue return on
ordinary activities after taxation of £2,140,000 (2006: £1,765,000).
Basic capital return per ordinary share is based on the net capital gains for
the financial year after taxation of £26,801,000 (2006: £29,291,000).
All three returns are based on the weighted average number of shares in issue
during the year of 67,615,567 (2006: 69,056,920) restated for share
sub-division of each £1 ordinary share to five 20p ordinary shares.
4. Reserves
Share Capital* Capital Capital Revenue
Premium Redemption Reserve Reserve Reserve
Account Reserve
£'000 -Realised -Unrealised £'000
£'000
£'000 £'000
At 1 February 2006 21,244 317 41,919 47,251 3,224
Net gains on - - 2,860 - -
realisation of
investments
Transfer on realisation - - 8,894 (8,894) -
of investment
Movement in unrealised - - - 25,656 -
depreciation on
investments
Expenses charged to - - (1,712) - -
capital
Finance costs charged - - (3) - -
to capital
Share buy backs - 352 (2,863) - -
Revenue profit for the - - - - 2,140
year
Equity dividends paid - - - - (2,579)
in the year
At 31 January 2007 21,244 669 49,095 64,013 2,785
* The capital redemption reserve maintains the equity share capital on the buy
backs of ordinary shares.
5. Net asset value per 20p ordinary share
The net asset value per ordinary share and the net assets attributable at the
year end were as follows:
Net Asset Net Assets
Value per share Attributable
2007 2006 2007 2006
Pence Pence £'000 £'000
Ordinary shares 226.3p 186.2p* 151,165 127,666
* adjusted for 5:1 share sub-division
Net asset value per ordinary share is based on net assets at the year end and
on 66,796,725 (2006: 68,553,530 restated for share sub-division) ordinary
shares of 20p each, being the number of ordinary shares in issue at the year
end.
6. This preliminary statement is not the Company's statutory accounts. The
above results for the year ended 31 January 2007 have been agreed with the
auditors and are an abridged version of the Company's full draft accounts,
which have not yet been approved, audited or filed with the Registrar of
Companies. The financial information for 2006 is derived from the statutory
accounts for 2006 which have been delivered to the Registrar of Companies. The
auditors have reported on the 2006 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 the report, and did not
contain a statement under s.237(2) or (3) of the Companies Act 1985. The
statutory accounts for 2007 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.
The preliminary announcement is prepared in accordance with International
Financial Reporting Standards and the AIC SORP 2005. The audit report on the
full financial statements is yet to be signed.
7. The Annual General Meeting of the Company will be held at 12.00 noon on 9
May 2007 at 30 Finsbury
Square, London EC2A 1AG.
8. 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.
26 March 2007
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