Interim Results
INVESCO Perpetual UK Smaller Companies Investment Trust plc
Unaudited Preliminary Announcement of Interim Results
Chairman's Statement
In the six months ended 31 July 2006, the net asset value ("NAV") per share
increased by 2.1% (after deducting dividends payable). This compares favourably
with a decline in our benchmark index, the Extended Hoare Govett Smaller
Companies Index (excluding investment trusts), of 0.7%. Over the same period,
the mid-market price per ordinary share rose by 1.8%, reflecting a discount of
15.3% at 31 July 2006. Since then, the discount has moved to 15.4% at 19
September 2006. While this is broadly in line with its peer group average, the
Board continues to aim at keeping the discount level as narrow as possible.
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. While performance has been somewhat volatile in the first six months,
the Board remains cautiously optimistic about the period ahead, both to the end
of the Company's financial year and beyond. The Manager continues to run a
balanced and well-diversified portfolio, which is capable of producing positive
returns in the current market.
Share buybacks
During the period under review, the Company bought back and cancelled a total
of 233,381 shares at an average price of 777.9p and at an average discount to
NAV of in excess of 15%. The combined effect has been to buy in 1.7% of the
issued share capital and to enhance NAV by approximately 0.3%.
Since the half year-end, a further 71,980 shares have been bought back at an
average price of 799.9p.
Interim dividend
I am pleased to announce that, for the six months ended 31 July 2006, an
interim dividend of 7.0p per share will be paid on 27 October 2006 to
shareholders on the Register on 29 September 2006.
Proposed share split and invitation to EGM
Together with the interim report, shareholders will receive an invitation to an
Extraordinary General Meeting ("EGM") to be held on 6 December 2006. At the
EGM, as set out in the Notice of Meeting, your Directors wish to propose a
Special Resolution to split the Company's shares of £1 each into five new
shares of 20p each. The intention is to make the Company's shares more liquid
and tradable in the market for investors, and if approved, shareholders will
receive five new shares of 20p each for each share of £1 each currently owned.
With the proposed share split, a renewal of the current buyback authority will
also be necessary, taking into consideration the new number of shares in issue,
and within prescribed limits as set out in the Notice of Extraordinary General
Meeting. This authority was last given at the Annual General Meeting on 10 May
2006 and, at the EGM, the Directors will again request the authority to buy
back shares up to a maximum of 14.99% of the Company's issued share capital. As
previously, the Directors might consider holding repurchased shares as treasury
shares with a view to possible resale.
Outlook
While the outlook for the UK economy may be subdued, the smaller companies
sector of the stock market continues to offer a wide range of interesting
investment opportunities. Continued corporate activity together with superior
earnings growth should provide the scope for positive returns in the second
half of the Company's year.
Ian Barby
Chairman
21 September 2006
Manager's Report
Investment Review
The six months under review has been a volatile period for the UK stock market.
The strong gains made in the first three months of the period were more than
cancelled out by a sharp correction in May as investors lost their appetite for
risk amidst fears of rising inflation and increased geopolitical tensions. The
market then recovered modestly to end with a small gain for the six months as a
whole.
Although largely following the movements of the main market, smaller companies
underperformed over the period. The decline in May replaced earlier gains with
losses. The index regained some of the lost ground towards the end of the
period but the benchmark index, the Extended Hoare Govett Smaller Companies
Index (ex investment trusts), still finished 0.7% lower. In addition to the
fundamental factors that upset the main market, smaller companies were ripe for
profit-taking, following an almost 40% gain over the 12 months to early May.
Against this background, the Company had a satisfactory first half year,
producing an increase in net asset value (after deducting dividends payable) of
2.1%. The Company benefited from its focus on larger, stable, cash generative
businesses with strong balance sheets, which generally outperformed as
investors became more risk averse. Outstanding performances were recorded by
Chemring, the military countermeasures company, and RPS which provides
environmental services. In addition, our relatively underweight position in the
AIM market, which declined 8.2% over the period, benefited performance when
compared to many of the peer group. The Company has been largely ungeared
throughout the period.
Investment and Portfolio Strategy
The recent performance of the UK economy has been stronger than we expected.
Although unemployment has been rising, the number of people in work has
increased as immigration and a greater participation by older workers has
increased the pool of available labour. This, along with rising wage rates, has
produced a recovery in household spending from the weaker trends seen in the
second half of 2005. We view this as a temporary respite within a longer term
adjustment to lower growth in consumer spending as the negative influences of
overindebtedness, high energy costs and rising taxes, combined with a growing
appreciation of the need to save more for retirement continue to exert downward
pressure. The Bank of England left interest rates unchanged throughout the
period but has since put through a modest increase in response to rising
inflationary fears.
Although GDP is forecast to grow at a healthy 2.5% in 2006, we remain of the
opinion that there will be a gradual slow down in the UK economy. Consumer and
Government spending accounts for around 90% of GDP and with the budget deficit
remaining in excess of 3%, the Chancellor will be forced either to raise taxes
or restrain government spending. Either way, combined with higher interest
rates, a return to more subdued consumer spending and the strength of Sterling
generating a headwind for exporters, it seems inevitable that the overall
economy will slow.
Despite the underperformance of smaller companies relative to the UK market
over the last few months, the sector still trades at a p/e premium to larger
companies. Whilst it is difficult to be overwhelmingly bullish about the
relative prospects for smaller companies in the short term, there are a number
of factors which we believe will contribute to satisfactory returns for careful
investors. Firstly, corporate profitability remains high, with earnings amongst
smaller companies still forecast to grow rapidly this year and through 2007.
Secondly, balance sheets remain strong, offering the scope for increased
shareholder returns in the form of dividends or share buy backs. Thirdly,
ongoing corporate activity from both trade buyers and private equity looks set
to continue.
Notwithstanding these positive points, our natural caution will once again
dictate the composition of the portfolio, with an emphasis on established,
quality companies with stable earnings and strong balance sheets. We will
continue to limit exposure to the cyclical parts of the UK economy and, in
particular, the UK consumer. The portfolio continues to be overweight in
support services which includes outsourcing companies that benefit from long
term contracts, aerospace and defence where the strong civil aviation market
and continued investment in military technology are driving growth, and
healthcare which is benefiting from increased government spending and long term
demographic trends. At the same time, the Trust is underweight in real estate,
where transactions are taking place at historically low yields and retail and
travel and leisure because of our caution towards consumer spending. We
continue to have no exposure to the telecommunications sector, believing that
the pricing environment within the industry remains challenging.
Outlook
Overall, while the outlook for the UK economy remains subdued, we believe that
the smaller company sector will continue to provide positive returns for the
next half of the Company's year.
Richard Smith
Investment Manager - Smaller Companies Team
INVESCO Asset Management Limited
21 September 2006
Income Statement
Six months to 31 July 2006
(unaudited)
Revenue Capital Total
£'000 £'000 £'000
Gains on investments held at fair value through - 2,589 2,589
profit or loss
Income
UK dividends 1,556 - 1,556
Interest and underwriting commission 34 - 34
Gross return 1,590 2,589 4,179
Investment management fee - note 3 (243) (243) (486)
Performance fee - note 4 - (350) (350)
Other expenses (160) - (160)
Profit before finance costs and taxation 1,187 1,996 3,183
Finance costs - note 3 (1) (3) (4)
Profit before and after taxation 1,186 1,993 3,179
Basic return per ordinary share - note 5 8.6p 14.5p 23.1p
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 Trust 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.
Income Statement
Six months to 31 July 2005 Year to
(unaudited) 31 January
2006
(audited)
Revenue Capital Total Total
£'000 £'000 £'000 £'000
Gains on investments held at - 10,164 10,164 31,109
fair value through profit or
loss
Income
UK dividends 1,275 - 1,275 2,419
Interest and underwriting 14 - 14 29
commission
Gross return 1,289 10,164 11,453 33,557
Investment management fee
- note 3 (194) (194) (388) (836)
Performance fee - note 4 - (510) (510) (1,385)
Other expenses (119) - (119) (264)
Profit before finance costs and 976 9,460 10,436 31,072
taxation
Finance costs
- note 3 (3) (13) (16) (16)
Profit before and after 973 9,447 10,420 31,056
taxation
Basic return per ordinary share 7.0p 68.1p 75.1p 224.9p
- note 5
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 Six
Months ended 31
July 2005
(Unaudited)
Shareholders' 13,933 21,244 95 31,780 29,549 2,497 99,098
funds at 1 Feb
2005
Return for the - - - 6,693 2,754 973 10,420
period from
ordinary
activities
Final dividend - - - - - (1,038) (1,038)
for 2005
Shares bought (110) - 110 (683) - - (683)
back and
cancelled
At 31 July 2005 13,823 21,244 205 37,790 32,303 2,432 107,797
For the Year
Ended 31 January
2006 (Audited)
Shareholders' 13,933 21,244 95 31,780 29,549 2,497 99,098
funds at 1 Feb
2005
Return for the - - - 11,589 17,702 1,765 31,056
year from
ordinary
activities
Final dividend - - - - - (1,038) (1,038)
for 2005
Shares bought (222) - 222 (1,450) - - (1,450)
back and
cancelled
At 31 January 13,711 21,244 317 41,919 47,251 3,224 127,666
2006
For the Six
Months Ended 31
July 2006
(Unaudited)
Shareholders' 13,711 21,244 317 41,919 47,251 3,224 127,666
funds at 1 Feb
2006
Return for the - - - 4,416 (2,423) 1,186 3,179
period from
ordinary
activities
Final dividend - - - - - (1,640) (1,640)
for 2006
Shares bought (234) - 234 (1,840) - - (1,840)
back and
cancelled
At 31 July 2006 13,477 21,244 551 44,495 44,828 2,770 127,365
Balance Sheet
At At At
31 July 31 January 31 July
2006 2006 2005
£'000 £'000 £'000
Non-current Assets
Investments held at fair value through 126,427 128,189 108,267
profit or loss
Current assets
Amounts due from brokers 807 570 733
Prepayments and accrued income 340 135 256
Cash and cash equivalents 597 1,225 74
1,744 1,930 1,063
Total assets 128,171 130,119 109,330
Current liabilities
Amounts due to brokers (313) (848) (888)
Accruals and deferred income (143) (220) (135)
Provision for performance fee - note 4 (350) (1,385) (510)
(806) (2,453) (1,533)
Net assets 127,365 127,666 107,797
Issued capital and reserves attributable
to
equity holders
Share capital 13,477 13,711 13,823
Share premium 21,244 21,244 21,244
Other reserves:
Capital redemption reserve 551 317 205
Capital reserves - realised 44,495 41,919 37,790
Capital reserves - unrealised 44,828 47,251 32,303
Retained earnings 2,770 3,224 2,432
Total Shareholders' funds 127,365 127,666 107,797
Net asset value per ordinary share
Basic - see note 6 945.0p 931.1p 779.8p
Cash Flow Statement
Six months Year to Six months
to 31 July 31 January to 31 July
2006 2006 2005
(unaudited) (audited) (unaudited)
£'000 £'000 £'000
Cash flow from operating
activities
Profit before tax 3,179 31,056 10,420
Adjustments for:
Purchases of investments (13,385) (32,094) (17,036)
Sales of investments 16,962 37,209 21,005
3,577 5,115 3,969
Gains on investments (2,589) (31,109) (10,164)
Finance costs 4 16 16
Operating cash flows before 4,171 5,078 4,241
movements in working capital
(Increase)/decrease in (179) 1 (71)
receivables
Increase/(decrease) in payables (1,138) 488 (523)
Net cash flows from operating
activities
before tax 2,854 5,567 3,647
Cash flow from financing
activities
Interest paid (3) (25) (23)
Buyback of shares (1,839) (1,450) (683)
Equity dividends (1,640) (1,038) (1,038)
Net cash used in financing (3,482) (2,513) (1,744)
activities
Net (decrease)/ increase in (628) 3,054 1,903
cash and cash equivalents
Cash and cash equivalents at
the
beginning of the year
of the period/year 1,225 (1,829) (1,829)
Cash and cash equivalents at 597 1,225 74
the
period/year end
NOTES
1. The accounts have been prepared in accordance with International Financial
Reporting Standards ("IFRS"), and Standing Interpretation Committee and
International Financial Reporting Interpretation Committee interpretations
issued by International Accounting Standards Board ("IASB").
To the extent that there is no material impact on the accounting policies in
adopting International Financial Reporting Standards and the previously adopted
UKGenerally Accepted Accounting Practice ("GAAP"), the same accounting policies
used for the year ended 31 January 2006 have been applied. Where presentational
guidance set out in the Statement of Recommended Practice ("SORP") for
investment trusts issued by the Association of Investment Trust Companies
("AITC") in December 2005 is consistent with the requirements of IFRS, the
Directors have sought to prepare the Financial Statements on a basis compliant
with the recommendations of the SORP. The supplementary information which
analyses the Income Statement between items of revenue and capital in nature
has been presented alongside the Income Statement, in accordance with guidance
issued by the AITC.
2. Dividends on Ordinary Shares:
Six Months Year Ended Six Months
Ended 31 July 31 January Ended 31 July
2006 2006 2005
£'000 £'000 £'000
Final dividend of 7.5p paid - 1,038 1,038
for 2005
Final dividend of 12.0p paid 1,640 - -
for 2006
Interim dividend of 7.0p 938 - -
The interim dividend of 7.0p each per ordinary share will be paid on 27 October
2006 to shareholders on the register on 29 September 2006.
3. The investment management fee is allocated 50% to revenue and 50% to capital
and interest payable and similar charges are allocated 20% to revenue and 80%
to capital.
4. A performance fee provision of £350,000 has been made (31 July 2005: £
510,000; 31 January 2006: £1,385,000 included within accruals and deferred
income, as the fee became due on that date). The performance fee is charged
wholly to capital.
5. The revenue, capital and total return per ordinary share are based on each
of the profits after tax and on 13,741,200 (31 July 2005: 13,878,178, 31
January 2006: 13,811,384) ordinary shares, being the weighted average number of
ordinary shares in issue in the period.
6. The basic net asset value per ordinary share of 100p is calculated on the
net assets at the end of the period and on 13,477,325 (31 July 2005:
13,823,206, 31 January 2006: 13,710,706) shares in issue.
7. In the period the Company repurchased 233,381 ordinary shares of 100p each
for cancellation as follows:
Date Number of Shares Price
28 March 06 40,000 829.63
19 May 06 50,000 770.00
23 May 06 8,100 764.65
7 June 06 10,000 770.00
19 June 06 10,700 761.38
28 June 06 5,000 780.00
29 June 06 50,000 780.00
17 July 06 12,550 770.00
19 July 06 47,031 775.00
Since 31 July 2006, the Company has also repurchased a further 71,980 ordinary
shares of 100p each for cancellation as follows:
Date Number of Shares Price
4 August 06 31,500 795.00
21 August 06 5,000 804.60
24 August 06 35,480 800.00
8. 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.
9. The foregoing information at 31 January 2006 is an abridged version of the
Company's full Accounts which carry an unqualified Auditor's report and did not
contain statements under s237(2) and (3) of the Companies Act 1985 and have
been filed with the Registrar of Companies.
By order of the Board
INVESCO Asset Management Limited
Secretary
21 September 2006
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