Interim Results
INVESCO Perpetual UK Smaller Companies Investment Trust plc
Unaudited Preliminary Announcement of Interim Results
Chairman's Statement
In my first statement as Chairman, it is my pleasure to note a continuing
marked improvement in the net asset value ('NAV') of your Company.
In the six months ended 31 July 2005, the basic NAV per share increased by
9.6%, and by 10.8% on a total return basis. This compares favourably with a
rise in our benchmark index, the Extended Hoare Govett Smaller Companies Index
(excluding investment trusts), of 6.1%. Over the same period, the share price
rose by 7.7%, slightly widening the discount to net assets at which your
Company's shares traded - from 15.4% at 31 January 2005 to 16.9% as at 31 July
2005. Since then, the discount has moved to 13.8% at 23 September 2005. While
this is broadly in line with the sector average, your Board is very conscious
of the desirability of keeping any discount level as narrow as possible and has
therefore authorised an increased marketing resource to seek to capitalise on
the Manager's current strong absolute and relative performance.
The Manager's report, which follows, gives a more detailed analysis of the
period, together with some comments about the future outlook. Your Company has
had a good first half-year and the Board remains cautiously optimistic about
the months ahead. Your Manager continues to run a balanced and well-diversified
portfolio, which is capable of producing positive returns in a volatile market.
During the period under review, your Company bought back and cancelled a total
of 110,000 shares at an average price of 617p and an average discount to net
asset value in excess of 15%. Since 31 July 2005, a further 60,000 shares have
been purchased for cancellation at an average price of 684p and a discount of
over 15%. The combined effect has been to buy-in 1.2% of the issued share
capital and to enhance NAV by approximately 0.2%.
Your 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 and expenses of running your Company have historically been charged to
revenue. As both the base investment management fee and any interest expense
arise primarily from efforts to enhance the capital value of your Company's
investments, the Board has decided to allocate their cost between capital and
revenue more in accordance with the expected long term split of returns as
between capital gains and income. Consequently, 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 revenue and 50% to
capital, while the interest cost of any borrowing (which is undertaken for the
almost exclusive purpose of achieving capital appreciation), is being allocated
80% to capital and 20% to revenue.
The interim figures have been prepared under UK GAAP, incorporating new
Financial Reporting Standards. Accordingly, investments are now shown at fair
value (bid price). Prior period balance sheet adjustments have also been made
to implement the new accounting treatment of proposed dividends. Further
details can be found in the notes.
At the Annual General Meeting in May 2005, Jamie Berry retired from the Board
as Chairman and Director of the Company. The Board thanks him for his
significant contribution to the development of the Company during the past 18
years and we wish him very well for the future.
Ian Barby
Chairman
28 September 2005
Manager's Report
Investment Review
The six months under review has been a volatile period for the UK stockmarket.
The market experienced a modest setback through to the end of April, but has
since risen over 10%. This reversal in fortunes appears to reflect strength in
resource shares, a more benign outlook for UK interest rates and renewed
optimism towards the US economy, in spite of rising interest rates there.
Smaller companies have largely followed the main market. The Extended Hoare
Govett Smaller Companies Index (excluding investment trusts) rose 6.1% and it
is noteworthy that, at the end of July 2005, this index had reached an all-time
high. Smaller companies have indeed enjoyed a period of significant
outperformance since the lows of early 2003. The junior AIM market had a more
pronounced setback, probably reflecting an excess of new issues, and has yet to
fully recover the 19% decline that took place between March and May 2005.
Against this background, your Company has had a good first half, with a rise of
9.6% in the basic net asset value per share. Many of the portfolio companies
experienced good growth in profits and their share prices have responded
accordingly. The Company has also been a beneficiary of corporate activity with
a number of companies having received takeover bids. While the timing of such
events cannot be predicted, this validates the stock selection process used to
manage the Company's portfolio such that it identifies many companies that are
also attractive to competitor companies and to private equity. The portfolio
has been largely ungeared throughout the period under review.
Investment and Portfolio Strategy
We have been, and remain, of the view that there will be a gradual slowdown in
the UK economy. Consumer spending is now clearly decelerating, with a fall in
housing transactions and a flattening of retail volumes, not helped by the
impact on London of the recent terrorist attacks. The rise in personal
bankruptcies is testimony to the over-indebtedness of many consumers, who are
now faced with rising utility and petrol costs and higher local taxes.
Consumers in general need to save more and spend less but any adjustment is
likely to be gradual and protracted while unemployment remains low and wages
are rising faster than prices. After years of significant growth, government
spending is also likely to decelerate, particularly as the General Election has
taken place. With the Chancellor redrawing his own fiscal rules to increase his
flexibility to delay the inevitable tax increases, the budget deficit is likely
to remain in excess of 3% of GDP, putting pressure on government to restrain
spending. With the consumer and government spending accounting for about 90% of
GDP, it seems inevitable that the overall economy will slow. This will lead to
some strain on corporate profits, not least because it will happen at a time of
rising cost pressures for such items as energy, raw materials and pensions.
We accept that this 'stuttering' economy may not be all that negative for the
UK stockmarket which, in any case, has performed strongly of late. We attribute
this to a number of factors. Firstly, for many, particularly leading UK
companies (e.g. resource and pharmaceutical companies), the international
economy, where prospects seem brighter than in the UK, is a more important
factor than the domestic economy. Secondly, stockmarket valuations still seem
reasonable in a historical context and dividend yields are competitive with
other savings vehicles. Thirdly, corporate profits are high, balance sheets are
strong and yet companies seem reluctant to spend on capital equipment. The
immediate benefit from this is that there is ample scope to increase dividends
and to fund share repurchases. Finally, private equity has raised substantial
new funds recently, so that takeover activity looks to remain high.
These positive factors seem likely to persist for the time being, but the
potential slowdown in the UK economy and the rise in US interest rates prevent
an entirely bullish stance towards markets. We therefore feel it is appropriate
to be fully invested but ungeared. However, we believe portfolio composition
will be more important than the level of investment in the coming months. Our
natural caution dictates that, in the main, we stick with quality companies
with robust balance sheets. The other theme is to continue to emphasise
companies that are less dependent on the UK economy and the UK consumer in
particular. As a result, the portfolio is currently overweight in aerospace and
defence which is benefiting from a recovery in commercial aircraft sales, in
healthcare which continues to receive increased government funding, in support
services which includes many outsourcing companies with long term contracts and
in water utilities where the current regulatory regime will allow above average
dividend yields to grow faster than inflation. At the same time, the portfolio
is underweight in retail, housebuilders and in specialty finance because of
exposure to the UK consumer and in resources and biotechnology due to the
speculative, exploration-based nature of the companies available. Also, given
the relative attractions of the underlying companies, it is underweight in
telecommunications, but overweight in information technology.
Outlook
While we remain wary in view of the outlook for the UK economy, we still
believe that modest positive returns are possible in the second half of the
Company's financial year. This reflects not only the favourable supply/demand
balance within the stockmarket, but also the wide variety of companies
available within the smaller companies sector.
Richard Smith
Investment Manager - Smaller Companies Team
INVESCO Asset Management Limited
28 September 2005
Statement of Total Return
(Incorporating the Revenue Account)
Six months to 31 July 2005
(Unaudited)
Revenue Capital Total
£'000 £'000 £'000
Gains on investments - 10,164 10,164
Income
UK dividends 1,275 - 1,275
Interest and underwriting commisson 14 - 14
Gross return 1,289 10,164 11,453
Investment management fee - note 5 (194) (194) (388)
Performance fee - note 6 - (510) (510)
Other expenses (119) - (119)
Net return before finance costs and taxation 976 9,460 10,436
Interest payable and similar charges (3) (13) (16)
Return on ordinary activities before
and after taxation 973 9,447 10,420
Transfer to reserves 973 9,447 10,420
Basic return per ordinary share - note 7 7.0p 68.1p 75.1p
The revenue column of this statement is the profit and loss account of the
Company. All revenue and capital items in the above statement derive from
continuing operations. No operations were acquired or discontinued in the
period.
Statement of Total Return
(Incorporating the Revenue Account)
Year to
31 January
Six months to 31 July 2004 2005
(Unaudited (Audited &
&
Restated)* Restated)*
Revenue Capital Total Total
£'000 £'000 £'000 £'000
Gains on investments - 1,484 1,484 19,440
Income
UK dividends 1,336 - 1,336 2,377
Interest and underwriting commission 1 - 1 13
Gross return 1,337 1,484 2,821 21,830
Investment management fee - note 5 (453) - (453) (809)
Performance fee - note 6 - - - (1,001)
Other expenses (133) - (133) (275)
Net return before finance costs and 751 1,484 2,235 19,745
taxation
Interest payable and similar charges (73) - (73) (156)
Return on ordinary activities before
and after taxation 678 1,484 2,162 19,589
Transfer to reserves 678 1,484 2,162 19,589
Basic return per ordinary share - note 4.9p 10.6p 15.5p 140.6p
7
* Details of the restatement are shown in notes 1 and 2.
Balance Sheet
At At At
31 July 31 January 31 July
2005 2005 2004
(Audited & (Unaudited &
(Unaudited) Restated)* Restated)*
£'000 £'000 £'000
Fixed Assets
Investments 108,267 101,836 84,625
Current assets
Amounts due from brokers 733 347 192
Prepayments and accrued income 256 136 282
Cash 74 - -
1,063 483 474
Creditors: amounts falling due within
one year
Bank overdraft and short-term loans - (1,829) (3,173)
Amounts due to brokers (888) (266) (139)
Accruals and deferred income (135) (1,126) (116)
Proposed dividends - - -
(1,023) (3,221) (3,428)
Net current liabilities 40 (2,738) (2,954)
Total assets less current liabilities 108,307 99,098 81,671
Provisions for liabilities - note 6 (510) - -
Net assets 107,797 99,098 81,671
Capital and reserves
Called up share capital 13,823 13,933 13,933
Share premium account 21,244 21,244 21,244
Capital redemption reserve 205 95 95
Other reserves:
Capital reserve - realised 37,790 31,780 29,561
Capital reserve - unrealised 32,303 29,549 14,813
Revenue reserve 2,432 2,497 2,025
Equity Shareholders' funds 107,797 99,098 81,671
Net asset value per ordinary share -
note 8
Basic 779.8p 711.2p 586.2p
Cash Flow Statement
Six Months Year to Six Months
to 31 July 31 January to 31 July
2005 2005 2004
(Audited (Unaudited)
(Unaudited) & Restated)* & Restated)*
£'000 £'000 £'000
Cash inflow from operating activities (322) 1,261 546
Returns on investments and servicing of (23) (165) (76)
finance
Capital expenditure and financial
investment
Purchase of investments (17,036) (26,782) (13,581)
Sale of investments 21,005 28,924 15,005
Equity dividends paid (1,038) (836) (836)
Increase in cash before financing 2,586 2,402 1,058
Financing
Buyback of shares (683) - -
Net debt at beginning of the period (1,829) (4,231) (4,231)
Net funds/(debt) at end of period 74 (1,829) (3,173)
* Details of the restatement are shown in notes 1 and 2.
Notes to the Interim Accounts
1. The accounts have been prepared under the historical cost convention
modified to include the revaluation of fixed assets and in accordance with
applicable UK Accounting Standards and with the Statement of Recommended
Practice 'Financial Statements of Investment Trust Companies'.
The same accounting policies used for the year ended 31 January 2005 have been
applied, with the following exceptions:
(a) Investments - Following the introduction of FRS 26 'Financial Instruments:
Recognition and Measurement', listed investments are now valued at fair value
deemed to be bid market prices, with effect from 1 January 2005. Prior to this
the investments were valued at middle market prices. Comparatives have been
restated to reflect this change as per note 2 below. Where investments are held
at fair value through profit or loss, FRS 26 also requires that the transaction
costs, included in gains and losses on investments, should be disclosed. The
transaction costs included within gains and losses on investments, amount to £
81,000 (31 January 2005 (restated): £106,000; 31 July 2004 (restated) £54,000.
(b) Dividends - Following the introduction of FRS 21 'Events After the Balance
Sheet Date', dividends are not accrued in the accounts unless they have been
declared prior to the balance sheet date. Proposed final dividends are thus
recognised in the period in which they are declared. As a result, the accounts
for the year ended 31 January 2005 and the period ended 31July 2004 have been
restated as per note 2 below.
2. Prior Period Restatement - Changes in UK Accounting Standards
Year Ended Six Months
31 January Ended 31 July
2005 2004
£'000 £'000
Effect on Statement of Total Return
Increase in unrealised gain on investments 22 44
Recognition of final dividend for 2004/2003 (836) (836)
De-recognition of proposed final dividend for 1,045 n/a
2005
Effect on Balance Sheet
Decrease in fixed assets - move to fair value (665) (643)
(bid) basis
De-recognition of proposed final dividend for 1,045 n/a
2005
Increase/(decrease) in equity Shareholders' 380 (643)
funds
3. Statement of Changes in Equity Shareholders' Funds:
Capital Capital Capital
Share Share Redemption Reserve- Reserve- Revenue
Capital Premium Reserve Realised unrealised Reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
At 31 January 2004 13,933 21,244 95 25,391 18,186 1,347 80,196
(as previously
stated)
Revaluation of - - - - (687) - (687)
investments to fair
value
Add final dividend - - - - - 836 836
2004 declared in 2005
At 31 January 2004 13,933 21,244 95 25,391 17,499 2,183 80,345
(restated)
Final dividend for - - - - - (836) (836)
2004 paid in 2005
Net return from - - - 6,389 12,050 1,150 19,589
ordinary activities
At 31 January 2005 13,933 21,244 95 31,780 29,549 2,497 99,098
(restated)
Final dividend for - - - - - (1,045) (1,045)
2005 declared and
paid
Adjustment to final
dividend due to
shares
bought back for - - - - - 7 7
cancellation
Net return from - - - 6,693 2,754 973 10,420
ordinary activities
Shares bought back (110) - 110 (683) - - (683)
and cancelled
At 31 July 2005 13,823 21,244 205 37,790 32,303 2,432 107,797
4. Dividends on Ordinary Shares
Six Months Year Ended Six Months
Ended 31 July 31 January Ended 31 July
2005 2005 2004
£'000 £'000 £'000
Final dividend for 2004 - 836 836
Final dividend for 2005 1,045 - -
Adjustment to final dividend (7) - -
1,038 836 836
5. With effect from 1 February 2005, 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 (previously these expenses were
allocated 100% to revenue).
6. Performance fee provision of £510,000 (31 July 2004: £nil; 31 January 2005:
£1,001,000 included within accruals and deferred income, as the fee became due
on that date).
7. The revenue return per ordinary share is based on the net revenue return on
ordinary activities after taxation and on 13,878,178 (31 July 2004: 13,933,206,
31 January 2005: 13,933,206) ordinary shares, being the weighted average number
of ordinary shares in issue in the period.
The capital return per ordinary share is based on the net capital return on
ordinary activities after taxation and on 13,878,178 (31 July 2004: 13,933,206,
31 January 2005: 13,933,206) ordinary shares, being the weighted average number
of ordinary shares in issue in the period.
8. The basic net asset value per ordinary share of 100p is calculated on net
assets of £107,797,000; (31 July 2004 (Restated): £81,671,000, 31 January 2005
(restated): £99,098,000) and on 13,823,206 (31 July 2004: 13,933,206, 31
January 2005: 13,933,206) shares in issue.
9. In the period the Company repurchased 110,000 ordinary shares of 100p each
for cancellation, as follows:
Date Number of Shares Price
21 March 2005 20,000 614p
22 March 2005 20,000 610p
15 April 2005 45,000 607p
22 July 2005 25,000 643p
Since 31 July 2005, the Company has repurchased a further 60,000 ordinary
shares of 100p each for cancellation, as follows:
Date Number of shares Price
05 September 2005 10,000 674p
14 September 2005 50,000 686p
10. Reconciliation of Published NAV(1) per share to Reported NAV(2):
31 July 31 January 31 July
2005 2005 2004
£'000 £'000 £'000
Published NAV 107,661 99,614 81,636
Adjustments:
Transfer to reserves for period 766 105 678
Proposal final dividend - 1,045 -
Performance fee - (1,001) -
Accounting for investments at (635) (665) (643)
fair value
Minor period-end accounting 5 - -
differences
Reported Interim or Final Accounts 107,797 99,098 81,671
NAV
pence pence pence
per share per share per share
Published NAV 778.9 714.9 585.9
Adjustments:
Transfer to reserves for period 5.5 0.8 4.9
Accounting for investments at (4.6) (4.8) (4.6)
fair value
Minor period-end accounting - 0.3 -
differences
Reported Interim or Final Accounts 779.8 711.2 586.2
NAV
1. Published NAV means the NAV as announced by the Company to the Stock
Exchange each week and to the AITC at the end of each month.
2. Reported NAV means the NAV disclosed in the interim or final report and
accounts, restated for changes in the UK accounting standards if
applicable.
11. It is the intention of the Directors to conduct the affairs of the Company
so that it satisfies the conditions for aproval as an investment trust company
set out in section 842 of the Income and Corporation Taxes Act 1988.
12. Except as detailed in notes 1 and 2, the foregoing information at 31
January 2005 is an abridged version of the Company's full Accounts which carry
an unqualified Auditor's report and did not contain statements under s.237 (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
Secretaries
28 September 2005
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