Half-yearly Report
Montanaro UK Smaller Companies Investment Trust PLC
Half-Yearly Report 2007
The Montanaro UK Smaller Companies Investment Trust PLC ("MUSCIT") was launched
in March 1995 and is listed on the London Stock Exchange.
Initial investments may be made in UK companies with a market capitalisation
lower than the largest constituent of the Hoare Govett Smaller Companies Index
("the HGSC") which represents the smallest 10% by value of the UK stock market.
Investments may be held if they rise above the HGSC.
The investment policy remains to focus on the "smaller" end of the quoted UK
small companies market. The benchmark is the FTSE SmallCap (excluding
investment companies) Index ("SmallCap"). The investment objective is capital
growth.
Highlights
for the 6 months to 30 September 2007
Results
◠Net Asset Value ("NAV"): -6.0% (£123 million)
◠Gross assets: -2.4% (£139 million)
◠Total borrowings drawn down: +£4.5 million (£15.0 million)
â— FTSE SmallCap (excluding investment companies) Index: -10.1%
â— Share price: -4.8%
As at As at
30 31 March
September
2007
2007
Ordinary share price 296.00 311.00
NAV per ordinary share 344.22 366.31
Manager's Review
Performance
Over the six months ended 30 September 2007, the Company's net asset value
(NAV) fell 6%, outperforming its benchmark the FTSE SmallCap (excluding
investment companies) Index (SmallCap) which fell 10%.
From the launch of the Company in March 1995 to the end of September 2007, the
NAV has increased 249% compared with 108% by the SmallCap.
Important events
Following approval by shareholders at the Annual General Meeting on 27 July
2007, a final dividend of 2.65p was paid on 10 August 2007 to shareholders on
the register on 15 June 2007.
The Directors are aware that HM Revenue & Customs ("HMRC") has stood down from
its appeal against the AIC/Claverhouse judgement and therefore VAT will not be
chargeable on investment management fees payable by investment trusts such as
MUSCIT. The immediate effect of this is that future invoices from the
Investment Manager will not bear VAT. However, the AIC understands that there
may be a consultation process by HMRC on changes to the relevant tax law and
the AIC has advised its members that the back claim of VAT paid to investment
managers might be subject to a number of practical issues. The MUSCIT Board is
awaiting further advice from the AIC and at the current time is not recognising
the potential back claim in its half-year results nor in its published NAV.
During the volatile month of August the Manager saw some interesting pricing
anomalies and in anticipation of a strong September results season, the
decision was made to draw down £4.5 million, taking total borrowings to £15
million. In September we extended our banking facility with ING from £15
million to £25 million. The Board believes that this facility gives appropriate
gearing potential for a Company of this size.
There were no other important events during the period.
Review
The summer months of 2007 were characterised by considerable turbulence in the
markets. Investor sentiment was unsettled by the credit crunch in the US and
concerns over its possible spread to the UK. These fears peaked during
September when the UK saw its first run on a major high street Bank since 1866.
At such times of uncertainty the SmallCap typically struggles for relative
performance against its larger peers. This summer was no different as we
witnessed a move to the perceived security and liquidity of larger stocks.
During the six months under review the SmallCap fell 10% while the FTSE
All-Share rose 1%, one of the most marked periods of underperformance in many
years.
One of the factors that contributed to this relative underperformance was the
malaise in the Real Estate sector. This sector, which comprises 12% of the
SmallCap, fell 24% in the period under review. Recent rises in UK interest
rates, coupled with the realisation that a period of yield compression was
coming to an end, hit sentiment hard. With risk being re-priced, fears
continued to mount that the investment market would stall. Having watched many
property stocks rush to healthy premiums to NAV over the past year, we were
cautious about the outlook and entered the new financial year with a
half-weight position. This has helped negate some of the poor performance from
the sector.
There was further evidence that our style aided returns during the first half.
Our process leads us to focus on the quality end of the SmallCap universe.
These businesses, which enjoy high barriers to entry, strong operating margins
and often have unique Intellectual Property, have delivered outperformance and
continue, in our opinion, to be the most attractive corner of our universe. Not
only have these businesses largely exhibited the most robust earnings, but they
also continue to remain attractive to predators. While we do not invest for
takeovers it is worth reporting that the portfolio saw three companies fall to
predators in the period: Datamonitor, Reliance Security and Sondex.
Outlook
A tremendous amount has been written about the tribulations of the global
credit markets and the potential ramifications for the global economy. We have
tried not to be too influenced by most of the largely negative press comment
and have instead focused on how events of the recent months will shape the
outlook for the UK Smaller Companies sector.
One of the seemingly inevitable consequences of the shake-out in the debt
markets is that credit will become scarcer and more expensive. This, in our
opinion, is likely to impact and influence the British consumer. We have
remained under-weight in the Consumer sector for some time and see little cause
to change this stance. Markets are also likely to remain volatile in the
near-term as suspicions remain that there are other major casualties to come.
In time we believe this "wall of worry" can be scaled.
Indeed we remain encouraged by the many growth opportunities among UK small
companies we meet and are optimistic that the market can retest its highs.
After a very busy September reporting season it is pleasing to report that we
saw an encouraging level of upgrades and positive outlook statements from
stocks in our portfolio. Particularly strong performances were recorded from
Fenner and Chloride, who provide industrial belts and power protection
solutions respectively. The fact we delivered outperformance of 2% in the month
goes some way to illustrate that the portfolio is in robust health. Indeed the
disconnect between what the companies have been reporting and forecasting
(positive) and the wider performance of their share prices (turgid) suggests
the market is sceptical that they can deliver. We are more confident and have
used the past few months to add to holdings and build some new positions.
Takeovers have proved a consistent theme in the MUSCIT portfolio. We continue
to believe that the second half will see further M & A with the focus remaining
on those well managed, quality businesses, which form the core of the
portfolio. With private equity businesses now finding it increasingly difficult
to make the maths work, we believe that trade buyers will capitalise on their
absence. With corporate balance sheets remaining healthy it continues to make
sense for companies to buy rather than to build.
In a historic context, the UK smaller company market remains attractively
priced with 12x 2008 forecast price/earnings buying 12% growth. As ever, good
stock selection will remain critical as the market is proving unforgiving to
any company seen to disappoint. However, with the support of an experienced
team of analysts we believe we have the resource to continue to identify those
companies that are best positioned to capitalise on economic growth at home and
abroad. With this in mind, we enter the second half with £15 million of debt
drawn down and gearing currently standing at 12%.
Dan Harlow
Montanaro Investment Managers Limited
26 November 2007
Thirty Largest Holdings
as at 30 September 2007
Holding Sector Value % of
£000 porfolio
Fisher (James) & Industrial 3,883 2.9
Sons Transportation
Chloride Group Electronic & Electrical 3,663 2.7
Equipment
Genus Pharmaceuticals & 3,610 2.7
Biotechnology
WSP Group Support Services 3,538 2.6
Scott Wilson Group Support Services 3,420 2.5
BPP Holdings Support Services 3,335 2.5
Dignity General Retailers 3,323 2.5
White Young Green Support Services 3,133 2.3
Wilmington Group Media 3,033 2.2
Fenner Industrial Engineering 2,926 2.2
Latchways Support Services 2,846 2.1
Phoenix IT Group Software & Computer 2,754 2.0
Services
RPS Group Support Services 2,659 2.0
Detica Group Software & Computer 2,644 2.0
Services
Dechra Pharmaceuticals & 2,614 1.9
Pharmaceuticals Biotechnology
Gooch & Housego Industrial Engineering 2,305 1.7
CODA Software & Computer 2,300 1.7
Services
VP Support Services 2,271 1.7
NCC Group Software & Computer 2,271 1.7
Services
Eaga Support Services 2,218 1.6
Rensburg Sheppards General Financial 2,197 1.6
Hargreaves Services Support Services 2,149 1.6
Sondex Oil Equipment Services & 2,139 1.6
Distribution
Stanley Gibbons General Retailers 2,135 1.6
Holidaybreak Travel & Leisure 2,126 1.6
Synergy Healthcare Health Care Equipment & 2,114 1.6
Services
MTL Instruments Electronic & Electrical 2,074 1.5
Equipment
Chemring Group Aerospace & Defence 2,054 1.5
Ricardo Support Services 2,049 1.5
Care UK Health Care Equipment & 2,039 1.5
Services
Thirty largest 79,822 59.1
holdings
The portfolio consists of 71 holdings with a value of £134,979,000.
Interim Management Report and Responsibility Statement
Interim Management Report
This Half-Yearly Report is the first published by the Company under the
Disclosure and Transparency Rules ("DTR") that are applicable to listed
companies with accounting periods commencing after 20 January 2007. The Company
is required to make a number of new disclosures, including those on this page.
The important events that have occurred during the period under review are set
out in the section so entitled in the Manager's Review. The key factors
influencing the financial statements are set out in the Manager's Review.
The principal risks and uncertainties for the remaining six months of the
financial year are reviewed in the Outlook section of the Manager's Review.
Montanaro Investment Managers Limited, as Investment Manager of the Company, is
considered to be a related party by virtue of its management contract with the
Company. During the period, services with a total value of £840,000 (30
September 2006: £678,000; 31 March 2007: £2,306,000) were purchased by the
Company from Montanaro Investment Managers Limited. At 30 September 2007, the
amount due to Montanaro Investment Managers Limited, disclosed under creditors
was £148,000. All amounts are inclusive of VAT.
Responsibility Statement
The Directors confirm that to the best of their knowledge:
â— the condensed set of financial statements has been prepared in accordance
with the Statement on Half-Yearly Financial Reports issued by the UK Accounting
Standards Board;
â— the interim management report includes a fair review of the information
required by:
(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of
important events that have occurred during the first six months of the
financial year and their impact on the condensed set of financial statements;
and a description of the principal risks and uncertainties for the remaining
six months of the year; and
(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party
transactions that have taken place in the first six months of the current
financial year and that have materially affected the financial position or
performance of the entity during that period; and any changes in the related
party transactions described in the last annual report that could do so.
This Half-Yearly Report was approved by the Board of Directors on 26 November
2007 and the above responsibility statement was signed on its behalf by David
Gamble, Chairman.
Income Statement (unaudited)
for the 6 months to 30 September 2007
6 months 6 months Year to 31 March 2007
to 30 September 2007 to 30 September 2006
Revenue Capital Total Revenue Capital Total Revenue Capital Total
£000 £000 £000 £000 £000 £000 £000 £000 £000
(Losses)/gains - (6,319) (6,319) - (155) (155) - 23,331 23,331
on investments
at fair value
Dividends and 1,433 - 1,433 1,254 - 1,254 2,423 - 2,423
interest
Management fee (420) (420) (840) (339) (339) (678) (736) (736) (1,472)
Management - - - - - - - (834) (834)
performance fee
Other income - - - - - - 3 - 3
Other expenses (146) - (146) (180) - (180) (342) - (342)
Net (deficit)/ 867 (6,739) (5,872) 735 (494) 241 1,348 21,761 23,109
return before
finance costs
and taxation
Interest payable (183) (183) (366) (142) (142) (284) (304) (304) (608)
and
similar charges
Net return 684 (6,922) (6,238) 593 (636) (43) 1,044 21,457 22,501
before taxation
Taxation - - - - - - (3) - (3)
Net return after 684 (6,922) (6,238) 593 (636) (43) 1,041 21,457 22,498
taxation
Return per 1.92p (19.44) (17.52) 1.67p (1.79)p (0.12) 2.92p 60.26p 63.18p
ordinary share p p p
The total column of this statement is the profit and loss account of the
Company. The supplementary revenue and capital columns are presented under
guidance issued by the Association of Investment Companies (AIC).
All revenue and capital items in the above statement derive from continuing
operations. No operations were acquired or discontinued in the period.
There have been no other recognised gains or losses in the period.
Summarised Reconciliation of Movements in Shareholders' Funds (unaudited)
for the 6 months to 30 September 2007
6 months to 30 Called-up Share Capital Special Capital Revenue Total equity
September 2007 share
premium redemption reserve reserve reserve shareholders'
capital
account reserve £000 £000 £000 funds
£000
£000 £000 £000
As at 1 April 3,561 19,307 1,149 9,835 94,755 1,833 130,440
2007
Net losses on - - - - (6,319) - (6,319)
investments
Costs allocated - - - - (603) - (603)
to capital
Net revenue for - - - - - 684 684
the period
Dividends paid in - - - - - (944) (944)
period
As at 30 3,561 19,307 1,149 9,835 87,833 1,573 123,258
September 2007
6 months to 30
September 2006
As at April 2006 3,561 19,307 1,149 9,835 73,298 1,611 108,761
Net losses on - - - - (155) - (155)
investments
Costs allocated - - - - (481) - (481)
to capital
Net revenue for - - - - - 593 593
the period
Dividends paid in - - - - - (819) (819)
period
As at 30 3,561 19,307 1,149 9,835 72,662 1,385 107,899
September 2006
Year to 31 March
2007
As at 31 March 3,561 19,307 1,149 9,835 73,298 1,611 108,761
2006
Net gains on - - - - 23,331 - 23,331
investments
Costs allocated - - - - (1,874) - (1,874)
to capital
Dividends paid in - - - - - (819) (819)
the year
Net revenue for - - - - - 1,041 1,041
the year
As at 31 March 3,561 19,307 1,149 9,835 94,755 1,833 130,440
2007
Summarised Balance Sheet (unaudited)
as at 30 September 2007
As at As at As at
30 September 30 September 31 March
2007 2006 2007
£000 £000 £000
Fixed assets
Investments at fair 134,979 117,378 137,442
value
Current assets 4,346 1,650 5,329
Creditors: amounts
falling due within one
year
Other creditors (1,067) (1,129) (1,831)
Revolving credit (15,000) (2,500) (10,500)
facility
(16,067) (3,629) (12,331)
Creditors: amounts
falling due after more
than one year
Revolving credit - (7,500) -
facility
Net assets 123,258 107,899 130,440
Share capital and
reserves
Called-up share capital 3,561 3,561 3,561
Share premium account 19,307 19,307 19,307
Capital redemption 1,149 1,149 1,149
reserve
Special reserve 9,835 9,835 9,835
Capital reserves 87,833 72,662 94,755
Revenue reserve 1,573 1,385 1,833
Total equity 123,258 107,899 130,440
shareholders' funds
Less: current period (684) (593) -
revenue
Total net assets for the 122,574 107,306 130,440
purpose of calculating
the net asset value per
ordinary share
Net asset value per 344.22p 301.34p 366.61p
ordinary share
Summarised Statement of Cash Flows (unaudited)
for the 6 months to 30 September 2007
6 months to 6 months to Year to
30 30 31 March
September September
2007
2007 2006
£000
£000 £000
Net cash outflow from (266) (298) (212)
operating activities
Servicing of finance
- Interest and similar (295) (245) (612)
charges paid
Net cash outflow from (295) (245) (612)
servicing of finance
Taxation
- Taxation paid - - (3)
Net cash outflow from - - (3)
taxation
Investing activities
- Purchases of investments (15,045) (13,412) (34,074)
- Sales of investments 11,713 11,868 35,675
Net cash (outflow)/inflow (3,332) (1,544) 1,601
from investing activities
Equity dividends paid (944) (819) (819)
Net cash outflow before (4,837) (2,906) (45)
financing
Financing
- Draw down of short-term 4,500 - 10,500
credit facility
- Repayment of short-term - - (10,000)
credit facility
Net cash inflow from 4,500 - 500
financing
(Decrease)/increase in cash (337) (2,906) 455
Notes to the Financial Statements
as at 30 September 2007
1 Financial Information
The financial information contained in this report does not constitute full
statutory accounts as defined in section 240 of the Companies Act 1985. The
financial information for the six months ended 30 September 2007 and 30
September 2006 has not been audited or reviewed by the Company's Auditor
pursuant to the Auditing Practices Board guidance on such reviews.
The information for the year ended 31 March 2007 has been extracted from the
latest published audited financial statements, which have been filed with the
Registrar of Companies. The report of the Auditors on those financial
statements contained no qualification or statement under sections 237 (2) or
(3) of the Companies Act 1985.
The financial statements are prepared on the basis of the accounting policies
set out in note 1 of the annual financial statements for the year ended 31
March 2007.
2 Tax credit/charge on ordinary activities
The tax charge for the half-year is nil (30 September 2006: nil; 31 March 2007:
£3,000) based on an estimated effective tax rate of 0% for the year ending 31
March 2008. The estimated effective tax rate is 0% as investment gains are
exempt from Capital Gains Tax owing to the Company's status as an Investment
Trust. There is expected to be an excess of management expenses over taxable
income and therefore there is no liability to Corporation Tax during the
half-year to 30 September 2007 (30 September 2006: nil; 31 March 2007: £3,000).
3 Reconciliation of Net Return Before Finance Costs and Taxation to Net Cash
Outflow From Operating Activities
6 months to 6 months Year to
30 September 30 September 31 March
2007 2006 2007
£000 £000 £000
Net return before finance 867 735 1,348
costs and taxation
Management fee charged to (420) (339) (1,570)
capital
Increase in creditors 98 28 163
(Increase) in prepayments (811) (722) (153)
and accrued income
Net cash outflow from (266) (298) (212)
operating activities
4 Reconciliation of Net Cash Flows to Movements in Net Debt
6 months to 6 months Year to
30 September 30 September 31 March
2007 2006 2007
£000 £000 £000
(Decrease)/Increase in cash (337) (2,906) 455
in the year
Draw down of credit facility (4,500) - (10,500)
Repayment of credit facility - - 10,000
Movement in net debt (4,837) (2,906) (45)
Net debt at beginning of (6,140) (6,095) (6,095)
period
Net debt at end of period (10,977) (9,001) (6,140)
Analysis of Net Debt
1 April Cash 30 September
2007 flows 2007
£000 £000 £000
Cash at bank 4,360 (337) 4,023
Debt due within one year (10,500) (4,500) (15,000)
Debt due after one year - - -
(6,140) (4,837) (10,977)
Montanaro UK Smaller Companies Investment Trust PLC
Registered in England and Wales
No. 3004101
www.montanarouksmaller.co.uk
An investment company as defined under Section 266 of the Companies Act 1985.
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