Half-yearly Report
Invesco Perpetual UK Smaller Companies Investment Trust plc
Half-yearly Financial Report Six months to 31 July 2007
FINANCIAL INFORMATION AND PERFORMANCE STATISTICS
The Benchmark Index of the Company is the Extended Hoare Govett Smaller
Companies Index
(excluding investment trusts).
Total return (all income reinvested) At At %
for the six months ended 31 July 31 July 31 January
2007: 2007 2007 Change
Net asset value* +5.5
Benchmark index* +2.4
FTSE All-Share index* +4.3
Net asset value and share price:
Net asset value per ordinary share:
- Balance Sheet 237.3p 226.3p +4.9
- after deducting proposed dividend 235.8p 224.6p +5.0
Mid-market price per ordinary share 198.0p 195.5p +1.3
Discount per ordinary share 16.6% 13.6%
Shareholders' funds (£'000)(1) 149,836 151,165 -0.9
Capital return - Indices:
Benchmark* +1.3
FTSE All-Share Index* +2.4
Six Months Ended
31 July 31 July 2006
2007
Return and dividend per ordinary
share:
Revenue return 2.1p 1.7p
Capital return 8.8p 2.9p
Total return 10.9p 4.6p
Interim dividend 1.5p 1.4p +7.1
At At At
31 July 31 January 31 July
2007 2007 2006
Gearing
Actual gearing (2) 100 100 100
Potential gearing (3) 117 117 120
Asset gearing (4) 98 99 99
1. Includes effects of share buy backs in the period.
2. Actual gearing reflects the amount of loans already arranged and in use by
the Company. A gearing level of 100 indicates there is no gearing.
3. Potential gearing is based on the lower of 30% of net asset value and £25
million.
4. Asset gearing reflects the amount of loans actively invested in assets and
not held in cash.
* Source: Datastream and Fundamental Data
CHAIRMAN'S STATEMENT AND INTERIM MANAGEMENT REPORT
FOR THE SIX MONTHS ENDED 31 JULY 2007
Chairman's Statement
In the six months ended 31 July 2007, the net asset value ("NAV") per share
increased by 5.5% outperforming our benchmark index, the Extended Hoare Govett
Smaller Companies Index (excluding investment trusts) which advanced by 2.4% on
a total return basis. Over the same period, the mid-market price per share rose
by 1.3% and the discount to NAV increased from 13.6% at 31 January 2007 to
16.6% at 31 July 2007. Since then, the discount to NAV has moved back to 14.8%
at 25 September 2007.
The Manager's Report on the following pages gives a more detailed account of
the period, together with a commentary on the investment and portfolio
strategy. The Manager continues to run a balanced and well-diversified
portfolio, with a bias towards non-cyclical businesses with low exposure to the
UK consumer. The Company has proved resilient over this turbulent six month
period.
Share buy backs
During the period under review, the Company bought back and cancelled a total
of 3.65 million shares at an average price of 199.5p and at an average discount
to NAV of over 15.6%. The combined effect has been to buy in 5.6% of the issued
share capital and to enhance NAV by approximately 0.9%.
Since the period end, a further 172,705 shares have been bought back for
cancellation at an average price of 190.4p per share and at an average discount
of 16.9%.
Interim dividend
I am pleased to report that, for the six months ended 31 July 2007, an interim
dividend of 1.5p per share will be paid, on 26 October 2007 to shareholders on
the Register on 28 September 2007, an increase of 7.1% on last years interim
dividend of 1.41p.
Change of investment objective
At the AGM held on 9 May 2007, a resolution was passed to amend the investment
objective of the Company to one of achieving long-term total returns rather
than capital growth alone.
The objective of the Company is now to achieve long-term total return for our
shareholders via an investment vehicle which gives access to a broad cross
section of small to medium sized UK quoted companies.
Outlook
Investors today are rightly concerned about the US sub-prime issue, the
possible contagion to other financial institutions and the impact on economic
growth. Whilst the risks should not be understated, as amply demonstrated by
events at Northern Rock, we believe this liquidity crisis will be overcome with
the appropriate intervention from central banks and that global economies will
escape anything worse than some slowdown. If this is correct, then equity
markets could soon begin to recover their poise. Small companies should
participate in any recovery although, in this more risk aware environment, it
would not be surprising to see them lag their larger counterparts until
confidence is restored. However, reflecting this overall view, the Company has
moved from holding cash balances in July to a modest level of gearing today.
Ian Barby
Chairman
Investment Manager's Report
Investment Review
The six months under review has once again been a volatile period for the UK
stock market. From the low at the beginning of March, the market rallied,
strongly, adding 11% in 3 months. This gain was then largely reversed in June
and July, as a wave of risk aversion swept through the markets, prompted by
fears about inflation, interest rates and the possible knock-on effects of the
sub-prime credit issues impacting the US. The market recovered modestly at the
end of July, finishing the period with a small gain of 2.4%, as measured by the
FTSE All-Share Index.
Smaller companies modestly under performed the general UK market over the
period with the benchmark index, the Extended Hoare Govett Smaller Companies
Index (ex investment trusts), ending the period 1.3% higher. It could be argued
that smaller companies, in any case, were due a set back, having risen more
than 30% over the 12 months to the recent peak in June 2007.
The Company has proved resilient over this turbulent period, increasing net
assets (after deducting dividends payable) by 5.0%. The outperformance relative
to the benchmark was driven by under-weight positions in the Real Estate,
General Financial and Retail sectors, all of which declined over the period,
and by overweight positions in the Healthcare and Aerospace & Defence which
both performed strongly.
At a company level, there were excellent contributions from our two largest
holdings, VT Group, the support services and ship building group, and Synergy
Healthcare which provides outsourced non-clinical services to the healthcare
sector. For once, the Trust was not helped by its relatively underweight
exposure to the AIM market, which increased 10.8% over the period. Around a
third of the AIM market is made up of Mining, Oil & Gas and Basic Materials
stocks which have had a strong run so far this year on the back of rising
commodity prices. None of the Company's AIM holdings are resource companies and
so the Company has not fully benefited from the recent rally of the junior
market. The Trust was ungeared throughout the period.
Investment and Portfolio Strategy
The UK economy has remained buoyant over the period, with the high level of
employment, rising wage levels and a robust UK housing market sustaining
continued growth. However, Government spending is likely to remain under
pressure with the budget deficit remaining in excess of 3% of GDP and with an
overt increase in taxes unlikely before the next general election. Moreover,
with falling real disposable income after interest charges and taxes, it is
clear that consumers have resorted to increased debt levels in order to
maintain their spending. This seems unsustainable, particularly in view of the
recent rises in interest rates. If the UK consumer now decides to save a higher
proportion of income in response to deteriorating credit conditions, a
reduction in the housing wealth effect and concerns about retirement funding,
then economic growth could slow sharply. Additionally, the continued strength
of Sterling has created a headwind for UK exporters and UK companies with
overseas earnings, particularly in US$ denominated markets. Overall, we expect
economic conditions to remain relatively benign but with the risks skewed to
the downside.
After the period-end, there has been a further correction in the equity market
triggered by the US sub-prime mortgage crisis. Much of the sub-prime mortgage
debt was repackaged into collateralised debt obligations and sold on to hedge
funds. The value of some of this debt has now been called into question
prompting margin calls and redemptions which has resulted in forced selling of
equities. In addition, banks have become more cautious about lending to private
equity which has, in the short term at least, put an end to leveraged buy-out
activity. This has had negative implications for company valuations in general
but particularly for those share prices buoyed by takeover hopes. Banks have
also become more cautious of lending to other financial institutions, as events
at Northern Rock show. The difficulties at Northern Rock may well have negative
connotations for UK housing but should also hasten a decline in interest rates.
Our view is that these liquidity issues will be overcome, with the required
intervention by central banks, and that global economic growth will experience
a slowdown rather than anything more serious. However, this episode is a timely
reminder of the folly of a prolonged period of easy money conditions and the
fragility of the financial system that it can engender.
The Company continues to hold a diversified portfolio of profitable, well
established, quality companies with solid balance sheets. Given the potential
for UK economic growth to decline from its currently robust level, the
portfolio bias continues towards non-cyclical businesses with a low exposure to
the UK consumer. With this in mind, we continue to be overweight in Healthcare
which should continue to benefit from demographic trends and an increase in
non-clinical NHS outsourcing, Aerospace and Defence, where a strong aerospace
cycle and on-going geopolitical uncertainty should continue to drive demand
into the medium term, and Support Services where many businesses benefit from a
high level of recurring revenue which affords stability and visibility of
earnings. Key sectors underweight include consumer related sectors such as
Travel & Leisure and Retail for the reasons outlined above.
Outlook
The benchmark index had, by early September, fallen about 14% since the peak in
early June, with many individual shares falling more sharply. This has been
caused by the liquidity crisis spawned by the sub-prime issue. We believe this
will be overcome with the help of central banks and that the world economy will
experience no worse than a slowdown. Against such a background, stockmarkets
should begin to recover in the coming months, which would justify our decision
to move to a modest level of gearing within the Trust.
Richard Smith
Investment Manager - Smaller Companies Team
Related party
INVESCO Asset Management Limited ("IAML"), a wholly owned subsidiary of INVESCO
PLC (formerly AMVESCAP PLC), acts as Manager and Secretary to the Company.
Details of IAML's services and fees arrangements are given in the Annual Report
and Accounts.
Principal Risks and Uncertainties
The majority of the Company's investments are traded on the main market of the
London Stock Exchange. A smaller proportion of investments is traded on the AIM
market. The principal risk for investors in the Company is of a significant
fall in the markets and/or a prolonged period of decline in the markets
relative to other forms of investment, as well as bad performance of individual
portfolio companies.
The Manager's approach to investment is one of individual stock selection.
Market risk is mitigated via the stock selection process, together with the
slow build-up of holdings rather than the purchase of large positions outright.
This allows the Manager to observe more data points from a company before
adding to a position. The overall portfolio is well diversified by company and
sector. The weighting of an investment in the portfolio tends to be loosely
aligned with the market capitalisation of that company. This means that the
largest holdings will often be amongst the larger smaller companies available.
The Manager remains cognisant at all times of the potential liquidity of the
portfolio.
The Manager is relatively risk averse, seeks lower volatility in the portfolio
and aims relatively to outperform in more challenging markets. While investing
in smaller companies can be subject to greater volatility and lower liquidity,
the Company, in comparison to peer group investment trusts, invests in a
portfolio that often has a higher than average market capitalisation and a
lower than average exposure to the AIM market.
The Board cannot influence market movements and the performance of portfolio
companies. However, the performance of the Managers is carefully monitored by
the Board, and the continuation of the Managers' mandate is revisited annually.
The Board has established guidelines to ensure that the investment policy that
it has approved is pursued by the Managers. The Board and the Managers maintain
an active dialogue re the timing and desirability of share buy backs, with a
view to reducing share price volatility and enhancing underlying net asset
value; and there are in place both share buy-back and issuance facilities to
help the management of this process.
The Company is subject to various laws and regulations by virtue of its status
as an investment trust, and its listing on the London Stock Exchange. A breach
of s842 ICTA could lead to the Company being subject to capital gains tax in
the sale of its investments. A serious breach of other regulatory rules might
lead to suspension from the Stock Exchange or a qualified Audit Report. Other
control failures, either by the Managers or any other of the Company's service
providers, may result in operational or reputational problems, erroneous
disclosures or loss of assets through fraud, as well as breaches of
regulations.
The Managers review the level of compliance with s842 ICTA and other financial
regulatory requirements on a daily basis. All transactions, income and
expenditure are reported to the Board. The Board regularly reviews risks, the
measures in place to control them and the possibility of any other risks that
could arise. The Board ensures that satisfactory assurances are received from
service providers. The Managers' Compliance Officer produces regular reports
for review at the Company's Audit Committee.
The Board is of the view that the principal risks and uncertainties noted above
will continue to apply to the Company for the following six month period ending
31 January 2008.
27 September 2007
THIRTY LARGEST INVESTMENTS % of
AT 31 JULY 2007
Ordinary shares unless stated Valuation
otherwise
COMPANY ACTIVITY BY SECTOR £'000 Portfolio
Synergy Healthcare Health Care 5,458 3.7
VT Industrials 4,104 2.8
Fenner Industrials 3,622 2.5
Chemring Industrials 3,151 2.1
RPS Support Services 3,103 2.1
Northgate Support Services 2,965 2.0
Dignity Consumer Services 2,677 1.8
Domestic & General Financials 2,666 1.8
Expro Oil & Gas 2,588 1.8
Cranswick Consumer Goods 2,375 1.6
SIG Industrials 2,366 1.6
Spectris Industrials 2,255 1.5
Charles Taylor 2,116 1.4
Consulting Financials
Mouchel Parkman Support Services 2,099 1.4
Carillion Industrials 2,059 1.4
Homeserve Support Services 1,993 1.4
Care UK Health Care 1,878 1.3
Melrose Industrials 1,825 1.2
Hiscox Financials 1,820 1.2
Foseco Industrials 1,812 1.2
Victrex Basic Materials 1,796 1.2
Aveva Technology 1,625 1.1
Spirax-Sarco Engineering Industrials 1,605 1.1
Gyrus Health Care 1,603 1.1
Serco Industrials 1,553 1.1
Lupus Capital Industrials 1,537 1.0
Babcock Industrials 1,495 1.0
E2V Technologies Industrials 1,491 1.0
Genus Health Care 1,490 1.0
Luminar Consumer Services 1,475 1.0
68,602 46.4
Other Investments (110) 78,655 53.6
Total Investments (140) 147,257 100.00
RESPONSIBILITY STATEMENT
IN RESPECT OF THE PREPARATION OF THE HALF-YEARLY FINANCIAL REPORT
The Directors are responsible for preparing the half-yearly financial report
using accounting policies consistent with applicable law and International
Financial Reporting Standards.
The Directors confirm that to the best of their knowledge:
* the condensed set of financial statements contained within the half-yearly
financial report have been prepared in accordance with the International
Accounting Standard 34 `Interim Financial Reporting';
* the interim management report includes a fair review of the information
required by the Disclosure and Transparency Rules 4.2.7 (indication of
important events and their impact, and description of principal risks and
uncertainties for the remaining six months of the financial year); and
* the interim management report includes a fair review of the information
required on related party transactions.
Signed on behalf of the Board of Directors
Ian Barby
Chairman
27 September 2007
CONDENSED FINANCIAL STATEMENTS
INCOME STATEMENT
Six Months to 31 July 2007
Revenue Capital Total
£'000 £'000 £'000
Gains on investments held at 6,141 6,141
fair value through profit or
loss
Income
UK dividends 1,722 - 1,722
STIC interest 29 - 29
Deposit interest 47 - 47
Underwriting commission 25 - 25
Gross return 1,823 6,141 7,964
Investment management fee - (292) (292) (584)
note 3
Performance fee - note 4 - (92) (92)
Other expenses (124) - (124)
Profit before finance costs 1,407 5,757 7,164
and taxation
Finance costs - note 3 - - -
Profit before and after 1,407 5,757 7,164
taxation
Basic return per ordinary 2.1p 8.8p 10.9p
share - note 5
The total column of this statement represents the Income Statement of the
Company, 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. No operations were acquired or discontinued in the
period.
CONDENSED FINANCIAL STATEMENTS
INCOME STATEMENT
Year to
31 January
January
Six months to 31 July 2006 2007
Revenue Capital Total Total
£'000 £'000 £'000 £'000
Gains on investments held at - 2,589 2,589 28,516
fair
value through profit or loss
Income
UK dividends 1,556 - 1,556 2,896
STIC interest - - - -
Deposit interest 22 - 22 68
Underwriting commission 12 - 12 12
Gross return 1,590 2,589 4,179 31,492
Investment management fee - (243) (243) (486) (1,030)
note 3
Performance fee - note 4 - (350) (350) (1,190)
Other expenses (160) - (160) (327)
Profit before finance costs 1,187 1,996 3,183 28,945
and taxation
Finance costs - note 3 (1) (3) (4) (4)
Profit before and after 1,186 1,993 3,179 28,941
taxation
Basic return per ordinary 1.7p 2.9p 4.6p 42.8p
share - note 5
CONDENSED FINANCIAL STATEMENTS
STATEMENT OF CHANGES IN EQUITY
Share Share Capital Capital Capital Retained Total
Capital Premium Redemption Reserve Reserve Earnings Equity
£'000 £'000 Reserve £ Realised Unrealised £'000 £'000
'000 £'000 £'000
For the Year Ended 31 January 2007
Shareholders' 13,711 21,244 317 41,919 47,251 3,224 127,666
funds at 1
Feb 2006
Final - - - - - (1,640) (1,640)
dividend for
2006
Interim - - - - - (939) (939)
dividend
for 2006
Shares bought (352) - 352 (2,863) - - (2,863)
back and
cancelled
Profit for - - - 10,039 16,762 2,140 28,941
the year
from ordinary
activities
At 31 January 13,359 21,244 669 49,095 64,013 2,785 151,165
2007
For the Six Months Ended 31 July 2007
Shareholders' 13,359 21,244 669 49,095 64,013 2,785 151,165
funds at 1
Feb 2007
Final - - - - - (1,155) (1,155)
dividend for
2007
Shares bought (730) - 730 (7,338) - - (7,338)
back
and cancelled
Profit for - - - 13,525 (7,768) 1,407 7,164
the period
from ordinary
activities
At 31 July 12,629 21,244 1,399 55,282 56,245 3,037 149,836
2007
For the Six Months Ended 31 July 2006
Shareholders' 13,711 21,244 317 41,919 47,251 3,224 127,666
funds at 1
Feb 2006
Final - - - - - (1,640) (1,640)
dividend for
2006
Shares bought (234) - 234 (1,840) - - (1,840)
back
and cancelled
Profit for - - - 4,416 (2,423) 1,186 3,179
the period
from ordinary
activities
At 31 July 13,477 21,244 551 44,495 44,828 2,770 127,365
2006
CONDENSED FINANCIAL STATEMENTS
BALANCE SHEET
At At At
31 July 31 January 31 July
2007 2007 2006
£'000 £'000 £'000
Non-current assets
Investments held at fair value 147,257 149,902 126,427
through profit
or loss
Current assets
Amounts due from brokers 203 - 807
Prepayments and accrued income 348 281 340
Cash and cash equivalents 2,854 2,580 597
3,405 2,861 1,744
Total assets 150,662 152,763 128,171
Current liabilities
Amounts due to brokers (488) (222) (313)
Accruals (246) (1,376) (143)
(734) (1,598) (456)
Total assets less current 149,928 151,165 127,715
liabilities
Provision for performance fee - (92) - (350)
note 3
Net assets 149,836 151,165 127,365
Issued capital and reserves
attributable to
equity holders
Share capital 12,629 13,359 13,477
Share premium 21,244 21,244 21,244
Other reserves:
Capital redemption reserve 1,399 669 551
Capital reserves - realised 55,282 49,095 44,495
Capital reserves - unrealised 56,245 64,013 44,828
Revenue Reserve 3,037 2,785 2,770
Total Shareholders' funds 149,836 151,165 127,365
Net asset value per ordinary share
Basic - see note 5 237.3p 226.3p 189.0p
CONDENSED FINANCIAL STATEMENTS
CASH FLOW STATEMENT
Six months Year to Six months
to 31 July 31 to 31 July
January
2007 2006
2007
£'000 £'000
£'000
Cash flow from operating
activities
Profit before tax 7,164 28,941 3,179
Adjustments for:
Purchases of investments (19,859) (29,735) (13,385)
Sales of investments 28,710 36,482 16,962
8,851 6,747 3,577
Gains on investments (6,141) (28,516) (2,589)
Finance costs - 4 4
Operating cash flows before 9,874 7,176 4,171
movements in working capital
Increase in receivables (73) (146) (179)
Decrease in payables (1,034) (230) (1,138)
Net cash flows from
operating activities
before tax 8,767 6,800 2,854
Cash flow from financing
activities
Interest paid - (3) (3)
Buyback of shares (7,338) (2,863) (1,839)
Equity dividends (1,155) (2,579) (1,640)
Net cash used in financing (8,493) (5,445) (3,482)
activities
Net increase/ (decrease) in 274 1,355 (628)
cash and cash equivalents
Cash and cash equivalents at 2,580 1,225 1,225
the
beginning of period
Cash and cash equivalents at 2,854 2,580 597
the
period end
NOTES
1. These condensed financial statements have been prepared using the same
accounting policies as those adopted in the annual report and accounts for 31
January 2007, which are consistent with International Financial Reporting
Standards, and Standing Interpretation Committee and International Financial
Reporting Interpretation Committee interpretations issued by International
Accounting Standards Board to the extent adopted by the EU.
2. Dividends on Ordinary Shares:
Six Months Year Ended Six Months
Ended 31 31 January Ended 31
July July
2007
2007 2006
£'000
£'000 £'000
Final dividend of 2.4p - 1,640 1,640
paid for 2006
Interim dividend of 1.40p - 939 -
paid for 2007
Final dividend of 1.75p 1,155 - -
paid for 2007
Dividends paid 1,155 2,579 1,640
The interim dividend of 1.5p per ordinary share will be paid on 26 October 2007
to shareholders on the register on 28 September 2007.
3. The investment management fee is allocated 50% to revenue and 50% to capital
and finance costs are allocated 20% to revenue and 80% to capital. As at 31
July 2007, £186,000 (31 January 2007: £98,000; 31 July 2006: £82,000) of the
investment management fee was payable to IAML.
A performance fee provision of £92,000 is recognised as at 31 July 2007 (31
January 2007: £1,190,000 included within accruals, as the fee became due on
that date; 31 July 2006: £350,000). The performance fee is charged wholly to
capital.
4. Basis of Return and Net Asset per Ordinary Share:
Six Months Six Months Year Ended
to 31 July to 31 July to 31
January
2007 2006
2007
£'000 £'000
£'000
Returns:
Revenue return after tax 1,407,000 1,186,000 2,140,000
(£)
Capital return after tax 5,757,000 1,993,000 26,801,000
(£)
Total return after tax (£) 7,164,000 3,183,000 28,941,000
Weighted average number of
shares
in issue during the period 65,472,622 68,706,000 67,615,567
Net Asset Value:
Shareholders' funds (£) 149,836,0000 127,365,000 151,165,000
Number of shares at period 63,145,452 67,386,625 66,796,725
end
5. Ordinary shares of 20p each issued:
Six Months Six Months Year Ended
to 31 July to 31 July to 31
January
2007 2006
2007
£'000 £'000
£'000
(Adjusted)
(Adjusted)
Nominal number of Ordinary
Shares:
Brought forward 66,796,725 68,553,530 68,553,530
Repurchased for (3,651,273) (1,166,905) (1,756,805)
cancellation
Ordinary shares of 20p 63,145,452 67,386,625 66,796,725
each in issue
Average price of shares 199.5p 156.6p 162.1p
repurchased
Adjusted for 1:5 share sub-division
Since 31 July 2007, the Company has also repurchased a further 172,705 ordinary
shares for cancellation for an average price of 190.4p.
6. It is the intention of the Directors to conduct the affairs of the Company
so that it satisfies the conditions for approval as an investment trust
company set out in section 842 of the Income and Corporation Taxes Act
1988.
7. The financial information contained in this half-yearly financial report,
which has not been audited or reviewed by the auditors, does not constitute
statutory accounts as defined in section 240 of the Companies Act 1985. The
financial information for the half years' ended 31 July 2007 and 31 July
2006 has not been audited. The figures and financial information for the
year ended 31 January 2007 are extracted and abridged from the latest
published accounts and do not constitute the statutory accounts for that
year. Those accounts have been delivered to the Registrar of Companies and
included the Report of the Independent Auditors, which was unqualified and
did not include a statement under either section 237(2) or 237(3) of the
Companies Act 1985.
By order of the Board
INVESCO Asset Management Limited
Secretary
27 September 2007
A copy of the half-yearly financial report will be available from Invesco
Perpetual on the following website www.invescoperpetual.co.uk/investmenttrusts
shortly.
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