Half-yearly Report
Strategic Equity Capital plc
Half Yearly Report for the period ended 31 December 2007
Key highlights:
· Challenging conditions in smaller quoted company markets have negative impact
on Net Asset Value per share.
· Portfolio companies continue to operate well; strategic plans progressing in
line with the Investment Manager's expectations.
· Ad hoc share buyback initiated; enhances Net Asset Value per share and leads
to a reduction of the discount.
John Hodson, Chairman, commented:
I would remind shareholders that while the events of the second half are
clearly disappointing from both a net asset and share price perspective, the
Company remains focussed on its investment objective of achieving absolute
returns over a medium-term period. The very unusual market conditions we are
currently experiencing may present a significant investment opportunity for the
Company.
For further information, please contact:
Capita Sinclair Henderson Limited 01392 412 122
Tracey Brady/ Michael Buckley
SVG Investment Managers Limited 020 7010 8993
Xziena Charles
Copies of the press release and other corporate information can be found on the
company website at: http://www.strategicequitycapital.com
Investment Objective
The investment objective of the Company is to achieve absolute returns (i.e.
growth in the value of investments) rather than relative returns (i.e.
attempting to outperform selected indices) over a medium-term period,
principally through capital growth.
Investment Policy
The Company invests primarily in securities quoted on any securities market
operated by the London Stock Exchange that the Investment Manager believes are
undervalued and could benefit from strategic, operational or management
initiatives. The Company also has the flexibility to invest up to 20% of the
Company's gross assets at the time of investment in securities listed or traded
on other recognised stock exchanges and up to 20% of the Company's gross assets
at the time of investment in unlisted securities and in any class of debt or
equity related instrument.
Chairman's Report
The six months to December 2007 was a frustrating period for the Company. As
concerns about the global 'credit crunch' filtered through to equity markets
the UK stock market experienced a significant change in sentiment. Shares in
most companies performed poorly; the average All-Share stock fell by 20% and
the small cap ex-investment trust index fell by 21%. Strategic Equity Capital
invests in companies which typically have a market capitalisation of between £
50 and £300 million, and consequently, in the six months to December 2007, the
net asset value fell by 19.3%. Simultaneously the Company was impacted by a
general widening of discounts to net asset values in smaller company investment
trusts. Against this backdrop, the Company's share price fell more than the
underlying investments and at the year end was at a discount of 23.9% to the
net asset value of the Company.
This performance was in stark contrast to the achievements of the Company
earlier in the year. Having achieved its objective of becoming fully invested
in the fourth quarter of 2006, the Company's net asset value grew by 16.4% in
the nine months to 30 June 2007. By way of comparison, the small cap index
(excluding investment trusts) rose by 12.2% in the same period, whilst the FTSE
All-Share index increased by 11.6%. The performance in that period was driven
by operational, strategic and management change strategies being led or
supported by the Investment Manager. The resulting absolute returns were ahead
of our target and were achieved with a low level of correlation to underlying
markets.
The Directors believe that the Investment Manager's philosophy of applying
private equity techniques to public markets is fundamentally sound. It has
delivered strong results in the past, when allowed to run to completion, as
demonstrated by the Company's high returns from realisations. The operating
performance of the portfolio companies remains generally robust, with the vast
majority of holdings on track or ahead of the Investment Manager's strategic
value creation plans. The absolute value of a number of portfolio companies
has fallen to very low levels due to the sharp decline in the value of smaller
companies, however over the long term the smaller company bias of the fund
should be an aid rather than a hindrance. Smaller companies have delivered
over five times the return of the FTSE-All Share index since 1955, and they
rarely underperform for lengthy periods.
Investment Manager
The Company's portfolio is managed by SVG Investment Managers Limited, a
subsidiary of SVG Capital plc. Its investment processes and techniques are
modelled on that of successful private equity investors, focusing on strategic,
operational and management initiatives. SVG Investment Managers continues to
develop and enhance its resources and investment processes. Jonathan Morgan
left the Board of Strategic Equity Capital in November 2007 in anticipation of
his joining SVG Investment Managers' investment committee early in 2008. Mr
Morgan originally joined ICFC (now 3i plc) in 1980 and joined the private
equity division of the Prudential group in 1985. He became managing director
in 1995. We believe Mr Morgan will be a valuable addition to the Investment
Manager's team.
The Board
Michael Phillips joined the Board in August 2007. Mr Phillips is the chief
executive of iimia MitonOptiomal plc, which is an AIM listed company. We
believe his experience in the private client industry and in particular the
investment trust sector will be invaluable to the Company.
As mentioned above, Jonathan Morgan left the Board in November 2007 to become
directly involved in the business of the investment manager. We thank him for
his valued contribution since incorporation.
Share Buybacks
In November, the Company renewed its standing authority to buyback shares,
either for cancellation or to be held in treasury. Given the extraordinarily
wide discount that the Company reached in November and December 2007, the Board
decided to use its authority to enact an ad hoc buyback programme. The action
commenced shortly before Christmas and by the year end, the Company had bought
back for treasury 50,000 shares at a discount of approximately 21.7%. This led
to a small uplift in the NAV per share of 0.02p. The Board will continue to
review the situation, being conscious of the overall market conditions which
have resulted in investment trust discounts more generally widening, and also
of the cash and other investment opportunities available to the Company. Since
the half year end the Company has repurchased for treasury a further 330,000
ordinary shares and as at 15 February 2008 the discount had reduced to 19.7%.
The Board will take whatever action it believes is in the best interests of
shareholders.
Conclusion
I would remind shareholders that while the events of the second half are
clearly disappointing from both a net asset and share price perspective, the
Company's investment objective remains focussed on achieving absolute returns
over a medium term period. The very unusual market conditions we are currently
experiencing may present a significant investment opportunity for the Company.
John Hodson
22 February 2008
Interim Management Report
Portfolio review
At 31 December 2007, the Company had net assets of £66.7 million and was 99%
invested with a portfolio of 28 investments. The Company has a banking facility
of £17.5 million, of which £1 million was drawn at year-end. The Company had
net cash of £0.4 million.
2007 represented the first full year during which the Company was fully
invested, having become so during the fourth quarter of 2006. The portfolio
has matured during the last 12 months and it is pleasing to have had several
examples of strategic, operational and management initiatives evidenced in the
underlying portfolio. In the first half of the year particularly, these
initiatives helped drive performance. The weighted average 'age' of holding in
the Company as at 31 December 2007 was approximately 19 months and the
portfolio has a blend of companies in different stages of implementation of
their strategic plans. Whilst market conditions have reduced current
valuations and may delay the ultimate realisation of value in certain cases, we
do expect to see the benefits of changes coming through. Our investment
horizon on each project is typically three to five years and consequently we
expect to see the changes occurring in the underlying portfolio to drive
returns over the medium term.
Performance
The period's performance has been overshadowed by macro concerns and a general
sell-off in small cap stocks. Hence, negative contributors have outweighed the
positives. Key positive contributors to performance over the period were
Filtronic, Vintage I and Northgate Information Solutions.
Filtronic has benefited from the resolution of a number of uncertainties,
notably the settlement of certain outstanding product warranty claims relating
to a business sold during 2006, the sale of its US defence business and the
announcement of the sale of its loss making Newton Aycliffe facility for a
consideration of over £10 million. The remaining operating businesses have
performed strongly during the year. SVG Investment Managers (SVGIM) continues
to back management's plan to return a significant amount of cash to
shareholders. We expect this to occur before the end of 2008.
Vintage I is a structured private equity fund of funds. The fund invests in
private companies which exhibit similar characteristics of operational,
strategic or management initiatives to what the Company looks for in the public
markets. The Company is allowed to invest up to 20% of its net asset value in
unquoted equity, and the excellent returns from this investment to date
vindicate this strategy.
Northgate Information Solutions is a software and services business, focusing
on HR / payroll software and solutions, public sector software and solutions
and IT services. The Company invested in the business in order to promote a
strategy of a sale of the group's public sector business which we believed
would lead to a re-rating of the remaining operations by the public markets.
The share price fell significantly in the latter part of 2007, driven primarily
by stock market concerns over debt levels. Our analysis indicated substantial
upside, given the high visibility of earnings and strong cash flows. In
December, the company and private equity house KRR announced an agreed takeover
at 95p per share. This represented a premium of 17.5% to our average in
price.
The key negative contributors included Redstone, Entertainment Rights, Mecom,
Payzone and 4imprint.
Redstone has continued to perform well operationally, announcing a number of
substantial contract wins. It is also well placed in the government's 'BSF'
(Building Schools for the Future) programme; it has won the Lancashire contract
and is short listed in Birmingham. However, the share price has fallen from its
high in the early summer. We believe the share price at the time included a
level of bid speculation, as Redstone would, in our view, make a good buy-out
candidate. The removal of this bid speculation following the 'closure' of
credit markets later in the summer together with the sell off of small caps led
to a fall in the share price. We remain confident that the operational
improvements in the business will generate good returns in the medium term.
Trading remains in line with expectations.
Entertainment Rights has seen its share price fall heavily since the summer.
Operationally the company has performed well, having successfully integrated
the acquisition of Classic Media in the USA. However, concerns about the US
consumer and the potential effect on the children's DVD market, US dollar
exposure and relatively high debt levels have led to increased nervousness.
Analyst expectations have been reduced on the back of these issues and also as
a result of a supplier specific problem in its UK DVD business. We believe the
fall in share price is over-done and the value of the company is backed by a
large library of content, the replacement cost of which is a multiple of the
company's current market value. Private equity and trade activity in the
industry has also been significant, and the company announced in early January,
that it has received an approach from potential buyers.
Mecom's share price has fallen from its high in the summer on the back of
concerns about the advertising backdrop in Europe and the comparatively high
debt levels in the company. The company has reiterated that the operational
improvements in the underlying businesses are progressing well and that the
target margins remain achievable. However, analysts have reduced their
earnings forecasts for 2008, reflecting a perception of heightened integration
risk and macro concerns. The company is now trading on a discount rating which
we believe will correct as the integration benefits are proven. Over the next
three years earnings are expected to grow substantially and cash flow is
expected to reduce debt.
The merger of Cardpoint and Alphyra to create Payzone was completed in December
2007. Alphyra was formerly owned by private equity group Balderton Capital.
As a result of the regulatory issues surrounding the merger, the company's
brokers have been unable to publish research on the merged entity, and hence
there has been an information vacuum on the prospects for the merged entity.
There has also been management conflict following the merger, which is now
being dealt with. The combined group has a unique cash payment and cash
acceptance European network and is expected to be highly cash generative.
There has been trade and private equity interest in Cardpoint in the past and
high levels of corporate activity in the sector more generally. We remain
positive on the prospects pending the resolution of the management issues.
4imprint experienced a major sell-off in the fourth quarter as investors became
concerned with exposure to the US dollar and the economic outlook.
Furthermore, an integration problem in its Blackpool office led to the loss of
some business. We remain supportive of the long term opportunities for the
business and are working actively with the company's management to grow
shareholder value.
New investments
The Company made one new investment during the period.
Civica is a software and IT services business providing consulting, software
and managed services predominantly to local authorities. It has particular
strength in workflow and document management solutions, social housing,
education and enforcement. It has a high level of contracted turnover. The
management team has successfully grown the business organically and by
acquisition and we believe there is significant opportunity for further
industry consolidation. We anticipate further value-adding acquisitions, which
we would support, as well as a gradual business transformation towards a
greater proportion of value added services sold off the software platform.
There has been trade and private equity activity in the industry and Civica was
itself in talks over the summer of 2007. It is possible that this interest
could re-emerge.
Realisations
The Company had one realisation in the period, Nationwide Accident Repair
Services, which operates a network of accident repair centres in the UK,
providing services to motor insurers and fleet operators. We had taken a small
stake in the business, participating in the placing of one of the former
private equity owners' stakes. In instances where we believe a small holding
will facilitate our early engagement with management, we will make small
investments with a view to either increasing the investment, once we have
agreed a plan of action with management, or exiting. In this case, we chose to
exit the investment at a premium to our average in price.
Portfolio analysis
The investment portfolio is predominantly focused on small companies with
market capitalisations of between £50 million and £300 million. Sector
weightings are driven by stock specific investment opportunities. As at 31
December 2007, technology companies represented 24.7% of the portfolio
representing the largest sector exposure. The Company also has meaningful
exposure to telecoms, media and support services, where we see specific value
opportunities.
Outlook
Since the summer, earnings revisions for the UK market have begun to reflect
that 2007 may well have been the cyclical peak for corporate profit margins.
Growth expectations have been reduced and the number of profits downgrades has
been significant. More generally, concerns about global credit markets, the
strength of the US economy and inflation continue to plague the markets leading
to extreme volatility. In the private equity world, there is anecdotal
evidence of a number of deals being 'pulled' in the summer, as the credit
conditions began to tighten, and the level of private equity activity has
slowed markedly during the last quarter of the year. Whilst this has had a
knock-on effect to equity market valuations, it does present opportunities for
private equity style investing in the public markets. An advantage of our
style of approach as compared to pure private equity is that it does not rely
on obtaining high levels of debt financing and hence does not rely on banks'
participation. For small and mid-cap companies looking to expand, the private
equity and banking options available have been significantly reduced, so where
companies look for alternative sources of funding, the Company should be well
placed. More generally, the sell-off has been relatively indiscriminate. By
using private equity techniques, which highlight cash flows, the opportunity to
select and support good companies, thereby generating superior investment
returns, remains strong. Importantly, without a broadly rising market to
support valuations, companies with the ability to generate value from 'self
help' through strategic or operational initiatives should have an advantage.
Consequently, whilst we believe that the general stock market outlook is likely
to be uncertain, there will be excellent opportunities for our style of
investing.
Risks and uncertainties
The principal risks and uncertainties associated with the business as
identified in the Company's Annual Report for the year ended 30 June 2007
remain unchanged for the previous six months and the six months ahead.
SVG Investment Managers Limited
22 February 2008
All statements of opinion and/or belief contained in this Investment Manager's
report and all views expressed and all projections, forecasts or statements
relating to expectations regarding future events or the possible future
performance of the Company represent SVG Investment Managers Limited's own
assessment and interpretation of information available to it as the date of
this report. As a result of various risks and uncertainties, actual events or
results may differ materially from such statements, views, projections or
forecasts. No representation is made or assurance given that such statements,
views, projections or forecasts are correct or that the objectives of the
Company will be achieved.
Top 10 holdings
as at 31 December 2007
Cost Valuation % of % of net
Company Sector invested
Classification £'000 £'000 assets
portfolio
Redstone Telecoms 6,949 8,736 13.28 13.09
Pinewood Shepperton Media 3,986 5,080 7.72 7.61
Thorntons Retail 3,818 4,380 6.66 6.56
Filtronic Technology 4,206 4,112 6.25 6.16
Spirent Telecoms 3,606 3,972 6.04 5.95
Intec Telecom Systems Telecoms 2,962 3,204 4.87 4.80
Payzone Industrials 4,285 3,087 4.69 4.63
Entertainment Rights Media 5,653 3,003 4.56 4.50
Evolution Group Investment services 3,242 2,723 4.14 4.08
Renold Industrials 3,126 2,685 4.08 4.02
41,833 40,982 62.29 61.40
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 22 February
2008 and the above responsibility statement was signed on its behalf by John
Hodson, Chairman.
The Directors announce the unaudited statement of results for the half year 1
July 2007 to 31 December 2007 as follows:
Income statement
(unaudited) for the period ended 31 December 2007
Period ended Year ended Period ended
31 December 2007 30 June 2007 31 December 2006
Capital
Revenue return Capital return Total Revenue return return Total Revenue return Capital return Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Investments
(Losses)/gains on investments at fair value through profit or loss - (16,314) (16,314) - 10,558 10,558 - 3,084 3,084
Net investment result - (16,314) (16,314) - 10,558 10,558 - 3,084 3,084
Income
Dividends 362 - 362 866 - 866 503 - 503
Interest 92 - 92 426 - 426 301 - 301
Underwriting commission - - - 7 - 7 - - -
Total income 454 - 454 1,299 - 1,299 804 - 804
Expenses
Investment Manager's fee (156) - (156) (892) - (892) (429) - (429)
Investment Manager's performance fee - 386 386 - (2,596) (2,596) - (192) (192)
Other expenses (235) - (235) (297) (40) (337) (151) - (151)
Total expenses (391) 386 (5) (1,189) (2,636) (3,825) (580) (192) (772)
Net return before finance costs and taxation 63 (15,928) (15,865) 110 7,922 8,032 224 2,892 3,116
Finance costs
Interest payable (110) - (110) (4) - (4) - - -
Total finance costs (110) - (110) (4) - (4) - - -
Net return before taxation for the period (47) (15,928) (15,975) 106 7,922 8,028 224 2,892 3,116
Taxation - - - 17 - 17 - - -
Net return after taxation for the period (47) (15,928) (15,975) 123 7,922 8,045 224 2,892 3,116
Returns per ordinary share pence pence pence pence pence pence pence pence pence
Basic and diluted (0.06) (21.93) (21.99) 0.17 10.91 11.08 0.31 3.98 4.29
The total column of this statement is the income statement of the Company. All
items in the above statement derive from continuing operations. These accounts
are unaudited and are not the Company's statutory accounts.
These accounts have been prepared under International Financial Reporting
Standards.
Statement of changes in net equity
(unaudited) for the period ended 31 December 2007
Shares
Share held in
Share premium Special treasury Capital Revenue
capital account reserve reserve reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
For the period ended 31 December 2007
1 July 2007 7,262 2,070 62,282 - 10,761 377 82,752
Return for the period - - - - (15,928) (47) (15,975)
Ordinary shares purchased and held in treasury - - - (34) - - (34)
31 December 2007 7,262 2,070 62,282 (34) (5,167) 330 66,743
For the year to 30 June 2007
1 July 2006 7,262 2,042 62,282 - 2,839 1,198 75,623
Return for the period - - - - 7,922 123 8,045
Dividend paid - - - - - (944) (944)
Write back of share issue expenses - 28 - - - - 28
30 June 2007 7,262 2,070 62,282 - 10,761 377 82,752
For the period ended 31 December 2006
1 July 2006 7,262 2,042 62,282 - 2,839 1,198 75,623
Return for the period - - - - 2,892 224 3,116
Dividends - - - - - (943) (943)
Write back of share issue expenses - 28 - - - - 28
31 December 2006 7,262 2,070 62,282 - 5,731 479 77,824
These accounts have been prepared under International Financial Reporting
Standards.
Balance sheet
(unaudited) as at 31 December 2007
31
31 December 30 June December
2007 2007 2006
£'000 £'000 £'000
Non-current assets
Fair value through profit and loss investments 65,800 86,100 71,431
Current assets
Other receivables 814 640 108
Cash and cash equivalents 1,371 918 7,067
2,185 1,558 7,175
Total assets 67,985 87,658 78,606
Current liabilities
Bank loan 1,000 1,000 -
Other payables 242 3,906 782
1,242 4,906 782
Total assets less current liabilities 66,743 82,752 77,824
Net assets 66,743 82,752 77,824
Represented by:
Shareholders' equity
Share capital 7,262 7,262 7,262
Share premium account 2,070 2,070 2,070
Special reserve 62,282 62,282 62,282
Own shares held in treasury (34) - -
Capital reserve (5,167) 10,761 5,731
Revenue reserve 330 377 479
Total shareholders' equity 66,743 82,752 77,824
Net asset value per share pence pence pence
Basic and diluted 91.96 113.94 107.16
Shares in issue number number number
Ordinary shares (excluding shares held in treasury) 72,576,000 72,626,000 72,626,000
These accounts have been prepared under International Financial Reporting
Standards.
Statement of cash flows
(unaudited) for the period ended 31 December 2007
Period ended Year ended Period ended
31 December 30 June 31 December
2007 2007 2006
£'000 £'000 £'000
Operating activities
Net return before finance costs and taxation (15,865) 8,028 3,116
Adjustment for losses/ (gains) on investments 16,314 (10,518) (3,084)
Interest paid (99) - -
Operating cash flows before movements in working capital 350 (2,490) 32
(Increase)/ decrease in receivables (688) 218 143
(Decrease)/ increase in payables (2,685) 2,631 224
Income taxes recovered/ (paid) 24 (282) -
Purchases of portfolio investments (8,397) (41,236) (21,028)
Sales of portfolio investments 11,883 21,535 8,155
Net cash inflow/(outflow) from operating activities 487 (19,624) (12,474)
Financing activities
Equity dividends paid - (944) (944)
Drawdown of revolving credit facility - 1,000 -
Write back of share issue expenses - 28 27
Ordinary shares purchased and held in treasury (34) - -
Net cash outflow from financing activities (34) 84 (917)
Increase/ (decrease) in cash and cash equivalents for period 453 (19,540) (13,391)
Cash and cash equivalents at start of period 918 20,458 20,458
Cash and cash equivalents at 31 December 2007 1,371 918 7,067
These accounts have been prepared under International Financial Reporting
Standards ('IFRS').
1.1 Corporate information
Strategic Equity Capital plc is a limited company incorporated and domiciled in
the United Kingdom whose shares are publicly traded.
The Company carries on business as an investment trust.
The financial statements of Strategic Equity Capital plc for the year ended 30
June 2007 were authorised by a resolution of the Directors on 26 September
2007.
1.2 Basisof preparation/statement of compliance
The financial statements of the Company have been prepared in accordance with
International Financial Reporting Standards ('IFRS') issued by the
International Accounting Standards Board (as adopted by the EU),
interpretations issued by the International Financial Reporting Interpretations
Committee, and applicable requirements of United Kingdom company law, and
reflect the following policies which have been adopted and applied
consistently. Where presentational guidance set out in the Statement of
Recommended Practice ('SORP') for investment trusts issued by the Association
of Investment Companies ('AIC') in January 2003 (as revised December 2005) is
consistent with the requirements of IFRS the Directors have sought to prepare
financial statements on a basis compliant with the recommendations of the SORP.
Convention
The financial statements are presented in Sterling, being the currency of the
primary environment in which the Company operates, rounded to the nearest
thousand.
Segmental reporting
The Directors are of the opinion that the Company is engaged in a single
segment of business, being investment business.
1.3 Accountingpolicies
Investments
All investments in the scope of IAS 39 held in the Company are classified as
'fair value through profit or loss'. As the entity's business is investing in
financial assets with a view to profiting from their return in the form of
interest, dividends or increase in fair value, listed equities and fixed income
securities are designed as fair value through profit or loss on initial
recognition. The entity manages and evaluates the performance of these
investments on a fair value basis in accordance with its investment strategy.
Investments are initially recognised at cost, being the fair value of the
consideration given, excluding transaction costs associated with the investment
that are charged to the income statement and allocated to capital.
After initial recognition, investments are measured at fair value, with
unrealised gains and losses on investments and impairment of investments
recognised in the income statement and allocated to capital. Realised gains
and losses on investments sold are calculated as the difference as the
difference between sales proceeds and cost.
For investments actively traded in organised financial markets, fair value is
generally determined by reference to Stock Exchange quoted market bid prices at
the close of business on the balance sheet date, without adjustment for
transaction costs necessary to realise the asset.
In respect on unquoted instruments, or where the market for a financial
instrument is not active, fair value is established by using recognised
valuation methodologies, in accordance with International Private Equity and
Venture Capital ('IPEVC'), Valuation Guidelines. New investments are initially
carried at cost, for a limited period being the price of the most recent
investment in the investee. This is in accordance with IPEVC Guidelines as the
cost of recent investments will generally provide a good indication of fair
value. Fair value is the amount for which an asset could be exchanged between
knowledgeable, willing parties in an arm's length transaction.
Trade date accounting
All 'regular way' purchases and sales of financial assets are recognised on the
'trade date' i.e. the date that the entity commits to purchase or sell the
asset. Regular way purchases, or sales, are purchases or sales of financial
assets that require delivery of the asset within a time frame generally
established by regulation or convention in the market place.
Income
Dividends receivable on quoted equity shares are taken into account on the
ex-dividend date. Where no ex-dividend date is quoted, they are brought into
account when the Company's right to receive payment is established. Other
investment income and interest receivable are included in the financial
statements on an accruals basis. Dividends received from UK registered
companies are accounted for net of imputed tax credits.
Expenses
All expenses are accounted for on an accruals basis. Transaction costs and
other expenses incurred on the acquisition of an investment classified as fair
value through profit or loss are not included within the cost of that
investment but are charged separately through the income statement and
allocated to capital. The Company's investment management and administration
fees, finance costs (including interest on the bank facility) and all other
expenses are charged through the income statement. These expenses are
allocated 100% to the capital column of the income statement. In the opinion
of the Directors the fee is awarded entirely for the capital performance of the
portfolio.
Cash and cash equivalents
Cash in hand and in banks and short term deposits which are held to maturity
are carried at cost. Cash and cash equivalents are defined as cash in hand,
demand deposits and short-term, highly liquid investments readily convertible
to known amounts of cash subject to insignificant risk of changes in value.
Bank overdrafts that are repayable on demand which form an integral part of
the Company's cash management are included as a component of cash and cash
equivalents for the purpose of the statement of cash flows.
Bank loans and borrowings
All bank loans and borrowings are initially recognised at cost, being the fair
value of the consideration received, less issue costs where applicable. After
initial recognition, all interest-bearing loans and borrowings are subsequently
measured at amortised cost, with any difference between cost and redemption
value being recognised in the income statement over the period of the
borrowings on an effective interest basis.
Taxation
Income tax on the profit or loss for the period comprises current and deferred
tax. Income tax is recognised in the income statement except to the extent that
it relates to items recognised directly in equity, in which case it is
recognised in equity.
Current tax is the expected tax payable on the taxable income for the period,
using tax rates enacted or substantively enacted at the balance sheet data, and
any adjustment to tax payable in respect of previous years. The tax effect of
different items of expenditure is allocated between revenue and capital on the
same basis as the particular item to which it relates using the Company's
effective rate of tax, as applied to those items allocated to revenue, for the
accounting period.
Deferred income tax is provided, using the liability method, on all temporary
differences at the balance sheet date between the tax basis of assets and
liabilities and their carrying amount for financial reporting purposes.
Deferred income tax liabilities are measured at the tax rate that are expected
to apply to the period when the liability is settled, based on tax rates(and
tax laws) that have been enacted or substantively enacted at the balance sheet
date.
Dividends payable to shareholders
Interim dividends to shareholders are recognised as a liability in the period
in which they are paid. Final dividends to shareholders are recognised as a
liability in the year in which they have been declared and approved by the
shareholders. Dividends are charged to the statement of changes in net equity.
Foreign currency transactions
The currency of the Primary Economic Environment in which the Company operates
is pounds Sterling ('Sterling') which is also the presentational currency.
Transactions denominated in foreign currencies are translated into Sterling at
the rates of exchange ruling at the date of the transaction.
Investments are converted to Sterling at the rates of exchange ruling at the
Balance sheet date. Exchange gains and losses relating to investments are taken
to the capital column of the Income statement.
2. Income
31 December 30 June 31 December
2007 2007 2006
£'000 £'000 £'000
Income from investments:
UK dividend income 362 866 503
Income from fixed interest 63 - -
securities
Liquidity fund income 19 389 282
444 1,255 785
Other income:
Bank interest receivable 10 37 19
Underwriting commission - 7 -
454 1,299 804
Total income comprises:
Dividends 362 866 503
Interest 92 426 301
Underwriting commission - 7 -
454 1,299 804
3. Returns per ordinary share
Period ended 31 Year ended 30 June Period ended 31
December 2007 2007 December 2006
Revenue Capital Revenue Capital Revenue Capital
return return return return return return
Total Total Total
pence pence pence pence pence pence pence pence pence
Returns (0.06) (21.93) (21.99) 0.17 10.91 11.08 0.31 3.98 4.29
per
ordinary
share -
basic
and
diluted
Returns per ordinary share are calculated based on 72,623,283 (30 June 2007 and
31 December 2006: 72,626,000) being the weighted average number of ordinary
shares, excluding shares held in treasury, in issue throughout the period.
4. Share buybacks
The Company has taken advantage of a change in the Companies Act 1985 which
came into force on 1 December 2003 to allow companies, including investment
trusts, to buy shares and hold them in treasury for re-issue at a later date.
In accordance with IAS 32, the consideration paid for shares held in treasury
is presented as a deduction from shareholders' equity.
During the period ended 31 December 2007 the company repurchased 50,000
ordinary shares, for a total consideration of £34,000, to be held in treasury.
Following the period end, on 11 January 2008, the Company repurchased 200,000
ordinary shares for treasury on 15 January 2008 a further 100,000, on 20 and 21
February a further 15,000 ordinary shares were repurchased for treasury. At the
date of this report a total of 380,000 ordinary shares were held in treasury
for a total cost of £251,000.
5. Investment Manager's fee
A basic management fee is payable to the Investment Manager at the annual rate
of 1% of the Net Asset Value ("NAV") of the Company. The basic management fee
accrues daily and is payable quarterly in arrears. Following the decision by
HM Revenue & Customs to stand down from its appeal against the AIC/Claverhouse
Judgement, VAT is no longer chargeable on investment management fees payable by
investment trusts such as Strategic Equity Capital plc.
The Directors consider that it is virtually certain the VAT previously paid by
the Company on management fees will be recovered and have therefore recognised
an asset of £256,000 which has been allocated to revenue in the income
statement.
6. Performance fee
The Investment Manager will be entitled to a performance fee in certain
circumstances. This fee is payable by reference to the increase in Adjusted
NAV per share over the course of a 'performance period'. The first performance
ended on 30 June 2007; each subsequent performance period is a period of six
months. The Investment Manager will become entitled to a performance fee is
respect of a performance period only if two criteria are met.
First, a performance hurdle test must be met. The performance hurdle is the
amount by which the Adjusted NAV per share at the end of the relevant
performance period exceeds a target Adjusted NAV per share for that performance
period of an amount equal to the NAV per share on the date of Admission,
increased at a rate of 7% per annum on a compounding basis.
The second test to be met (a 'high watermark test') is that the Adjusted NAV
per share at the end of the relevant performance period is higher than the
highest previously recorded Adjusted NAV per share at the end of a performance
period in relation to which a performance fee was earned (or if no performance
fee has been earned since Admission, is higher than the NAV per share on the
date of Admission).
If the performance hurdle is met, and the high watermark exceeded, the
performance fee will be an amount equal to 15% of the increase in the Adjusted
NAV per share of the time weighted average of the total number of shares in
issue since the performance period in respect of which a performance fee was
last earned (or since Admission, if no performance fee has yet been earned).
Payment of a performance fee that has been earned will be deferred to the
extent that making payment would cause the performance hurdle or high watermark
not to be met - amounts deferred will be payable when, and to the extent that,
following any later performance period(s) with respect to which a performance
fee is payable, it is possible to pay the deferred amounts without causing the
performance hurdle or high watermark not to be met.
During the period ended 31 December 2007 no performance was payable. As
explained in note 5 the Directors considered that it is virtually certain the
VAT previously paid by the Company on performance fees will be recovered and
have therefore recognised as asset of £386,000 which has been allocated to
capital in the income statement.
7. Taxation
The tax charge for the half year is nil (2006: nil) based on an estimated
effective tax rate of 0% for the year ending 30 June 2008. The estimated
effective tax rate is 0% as investment gains are exempt from tax owing to the
Company's status as an Investment Company and there is expected to be an excess
of management expenses over taxable income.
Directors & advisers
Directors Registrar and transfer office Auditors
J Hodson* Computershare Investor Ernst & Young
Services plc LLP
Sir Clive M Thompson The Pavilions 1 More London
Place
J E Cornish* Bridgwater Road London
M C Phillips* Bristol BS13 8AE SE1 2AF
* Independent of the Investment Shareholder enquiries: 0870
Manager 707 1285
Investment Manager Sponsor and brokers Solicitors
SVG Investment Managers Limited Close Brothers Securities Slaughter and
May
111 Strand The Atrium Buildings One Bunhill Row
London WC2R 0AG Cannon Bridge London
25 Dowgate Hill EC1Y 8YY
Secretary and registered office London EC4R 2GA
Capita Sinclair Henderson
Limited
Beaufort House Custodian
51 New North Road HSBC Global Services
Exeter EX4 4EP Mariner House
Enquiries: 01392 412122 Pepys Street
London EC3N 4DA
Shareholder information
Financial calendar Share dealing NAV
Company's year end
Shares can be traded The Company's net asset value
30 June through your usual is announced weekly to the
stockbroker. London Stock Exchange.
Company's Annual results
announced September
Annual General Meeting
Share register enquires
November
The register for the
Ordinary shares is
Company's half year maintained by Computershare
Investor Services plc.
31 December
In the event of queries
regarding your holding,
Half yearly results please contact the
announced Registrar on 0870 702 0100.
Changes of name and/or
February address must be notified in
writing to the Registrar,
whose address is shown
above.
Share price Website
The Company's Ordinary Further information on the
shares are listed on the Company can be accessed via
London Stock Exchange. the Company's website
The mid-market price is www.strategicequitycapital.com
quoted daily in the
Financial Times under
'Investment Companies'.
An investment company as defined under Sections 265 and 266 of the Companies
Act 1985.
REGISTERED IN ENGLAND No. 5448627
A member of the Association of Investment Companies.