Interim Results

Strategic Equity Capital plc Unaudited interim results for the period ended 31 December 2005 Key highlights: · The Company listed on 19 July 2005 having raised £70.4 million (98.5p per share). In November 2005, a further 2,226,000 shares were issued at a small premium to net asset value, raising a further £2.3 million. · At 31 December 2005, the Company had net assets of £73.8 million (101.6p per share). · At 31 December 2005, the Company was approximately 40% invested in 10 companies. It is the intention for the Company to be substantially invested in suitable investment opportunities by June 2006. · Of the initial portfolio investments, several have already benefited from re-ratings of their share prices - a result of M&A activity or strategic, operational and management initiatives. John Hodson, Chairman of Strategic Equity Capital plc, commented: 'I am pleased to report on a solid start to the investing process for Strategic Equity Capital. The Company's investment objective is to achieve absolute returns for shareholders through a strategy of using private equity investment appraisal techniques and a practice of constructive corporate engagement. As the portfolio becomes more fully invested, I believe the Company should be well placed to deliver attractive absolute returns for shareholders in the medium term.' For further information, please contact: Sinclair Henderson Limited 01392 412 122 Tracey Hunt/ Michael Buckley SVG Investment Managers Limited 020 7010 8900 Tony Dalwood / Rebecca Hartley Penrose Financial 020 7786 4888 Emma Thorpe / Will Bowen Copies of the press release and other corporate information can be found on the company website at: http://www.strategicequitycapital.com Chairman's statement On behalf of the Board of Directors, I would like to welcome all the shareholders of Strategic Equity Capital and thank them for their support. The Company was launched in July 2005, having raised £70.4 million, at the time representing the largest primary fund-raising for a UK investment trust since the start of 2003. In October, the Company issued a further 2,226,000 shares at a small premium to net asset value, raising a further £2.3 million. I am pleased with the investment pace over the period, and at 31 December 2005 the Company was approximately 40% invested with 10 portfolio investments. It is the intention for the Company to be substantially invested in suitable investment opportunities by June 2006. At 31 December 2005, the Company had net assets of £73.8 million (101.6p per share) which compares to a net asset value per share of 98.5p. SVG Investment Managers Limited and the Strategic Advisory Board The Company's portfolio is managed by SVG Investment Managers Limited and has an investment objective of achieving absolute returns for shareholders through a strategy of using private equity investment appraisal techniques and a practice of constructive corporate engagement. I believe the public equities team at SVG Investment Managers Limited is one of the pioneers of this investment style within UK public markets. The team was established in 2002 and since then has gone on to generate substantial returns for investors using private equity investment appraisal techniques and investing in undervalued companies that could benefit from strategic, operational or management initiatives. Along with the Manager's experience, I would also like to draw attention to the role played by the Strategic Advisory Board, which is made up of individuals with extensive experience of improving the operations and value of companies. Their involvement is integral to the investment process, both in assisting SVG in the selection of potential investment opportunities and also in working closely with the Manager and frequently with investee companies, helping to identify strategic, operational or management initiatives. Members of the Strategic Advisory Board include: Ken Minton, William Nabarro and Sir Clive Thompson. International Financial Reporting Standards The valuation of the accounts have been prepared under International Financial Reporting Standards (IFRS), as a result all investments have been recorded at the bid price. Outlook As the Company becomes more fully invested and the strategic, operational and management changes being implemented in existing investee companies begin to bear fruit, I believe the Company should be well placed to deliver attractive absolute returns for shareholders over the medium term. John Hodson, Chairman 26 January 2006 Investment Manager's report Overview This is the Investment Manager's first report for Strategic Equity Capital, covering the period from listing on 19 July 2005 to 31 December 2005. The investment objective of the Company is to achieve absolute returns over a medium-term period, principally through capital growth, by primarily investing in UK public companies that we believe are undervalued and could benefit from strategic, operational and management initiatives. We use an investment appraisal process involving private equity investment techniques and a practice of constructive corporate engagement. These investment techniques include an in-depth due-diligence process, which includes meetings with the management teams and business counterparties; detailed valuation and financial analysis with a focus on free cash-flow generation and asset backing; a study of relevant comparable private equity and trade transactions; consultation with industry experts; and engaging key stakeholders in constructive dialogue directed towards the implementation of value-creation strategies. Portfolio overview At 31 December 2005, the Company had net assets of £73. 8 million (101.6p per share). At 31 December 2005, the Company was approximately 40% invested, with holdings in 10 companies. As indicated to shareholders at the time of listing, it is our intention for the Company to be substantially invested in suitable investment opportunities by its financial year-end in June 2006. Once fully invested, the majority of the portfolio will be invested in between 10 to 15 companies operating in a variety of sectors. It is our objective to create value without assuming operational control of the investee companies. Overall, we are encouraged with the performance of the portfolio given its relative immaturity. We believe it will take time for the share prices of the investee companies to be re-rated or for the catalysts we have identified for value creation to take effect. We expect the portfolio's holdings will typically be held for a period of two to five years. Investment activity During the period, the Company made 10 investments, with the largest investment, Hampson Industries, representing 7.3% of net assets and 18.4% of the invested portfolio as at 31 December 2005. Of these investments, several have already benefited from re-ratings of their share prices due to M&A activity or various strategic, operational or management initiatives. Summary of portfolio investments Company Sector classification Cost Valuation % of invested % of net portfolio assets £'m £'m Hampson Aerospace & Defence 4.62 5.41 18.4 7.3 Industries Elementis Speciality Chemicals 3.35 4.20 14.3 5.7 Evolution Investment Services 4.02 4.00 13.6 5.4 Group Watermark Support services 3.85 3.89 13.2 5.3 SMG Media 3.51 3.36 11.4 4.5 Pinewood Media 2.30 2.78 9.5 3.8 Shepperton Chorion Media 2.61 2.41 8.2 3.3 Communisis Support services 2.96 2.09 7.1 2.8 Mecom Group Equity investment 1.26 1.20 4.1 1.6 instruments Mowlem Construction & 0.04 0.06 0.2 0.1 Materials A summary of the activities of the 10 investments, which represent approximately 40% of net assets, is given below: Hampson Industries is an international precision engineering group serving the global aerospace, automotive and specialist engineering markets. Following the global downturn in the commercial aerospace market in September 2001, Hampson embarked on an extensive process of rationalisation to improve the competitiveness of the business in order to secure future growth. We believed the group was attractively valued compared to private equity transactions. Following discussions with the management team, the team worked with the group on an extensive due-diligence process, which culminated in the Company participating in a discounted equity placing as a cornerstone investor in November 2005 to facilitate the acquisition of two US aerospace companies. In addition, the Company acquired shares in the market. Going forward, we believe the strength in the board, which includes a former member of the Strategic Advisory Board (SAB), combined with the progress made to date with previous acquisitions will continue to ensure the group is well placed to develop the business and ultimately benefit from any upturn in the global aerospace cycle. Elementis is a specialty chemicals group that until recently focused on four divisions: specialty chemicals, chromium, pigments and rubber. In recent years the group has suffered from share price underperformance and a poor Return on Capital Employed. The Company began investing in Elementis in August 2005 following the restructuring of its executive management team. As part of this process, Ken Minton (member of the SAB) joined the board. Since August, Elementis has continued to benefit from an improvement in its operating environment and in October 2005 announced both the sale of its rubber division and the results of the first phase of its strategic review. We expect the group to continue to benefit from an improved operating environment, with the results of the second phase of its strategic review expected in March 2006. Over the period, the Company invested in Evolution Group. In the first six months of 2005, the company's share price was de-rated by the market. Evolution has a significant market share of the AIM and UK small cap market, in addition to a profitable private client fund management business, Christows. Since the de-rating of the company's shares, it has made a number of management changes. The company also has significant cash balances providing an underpin to its valuation. The continued growth of both the M&A and AIM markets, together with more efficient use of Evolution's balance sheet plus clarity over the valuation of Christows will, we believe, be catalysts for value creation. Watermark is a catering and 'in-cabin' product supplier to the airline industry. We believe there are a number of growth opportunities within this sector, largely driven by the increase in the number of passengers travelling and the need for the airlines to reduce costs and outsource the supply of their products and services. Recent events within the sector have raised additional interest and we believe that Watermark is well placed to capitalise on opportunities which are arising as a result. The Company began investing in SMG, a conglomerate of media assets providing information and entertainment services in the UK, in August 2005. Since then the share price has continued to under-perform and it is our opinion that the current valuation does not reflect the true value of the company's assets. These include Scottish Television, Pearl & Dean, Primesight and Virgin Radio. We believe SMG may well benefit from corporate activity in the sector as its valuation trades at a discount to comparable transaction multiples and, in our view there is considerable value in the group. In October 2005, the Company began investing in Pinewood Shepperton, the film and television production studios. The group floated on the London Stock Exchange in May 2004. In the first half of 2005, the group suffered from considerable uncertainty relating to the fiscal incentives available to film producers. This together with continued US$ weakness caused delays in the timing of some key productions resulting in a number of US films being produced in other countries at the expense of the UK. The recent announcement by the Chancellor in his pre-budget report in early December set out the proposed new tax incentives for films produced in Britain. These proposed incentives have been widely welcomed throughout the industry and have resulted in an increase in Pinewood's share price. This, in addition to the substantial freehold property owned by the group, on which planning permission has now been granted will, in our view provide the positive catalysts for the creation of value over the medium to long term. Chorion owns, develops and manages intellectual property brands such as Agatha Christie, Enid Blyton and Mr Men. The Company began investing in Chorion in August 2005. In recent years the company has embarked on a growth strategy based on acquisitions and on the exploitation of their existing intellectual property rights. The successful expansion of some of its key franchises, such as Noddy, has reinforced our view of the capabilities of the management team and the share price has been re-rated by the market. However, we believe the current share price does not reflect the true value of the company. Recent corporate activity in this sector has highlighted its low valuation and whilst in our view further work is required to capitalise on the company's full potential, there are a number of clear catalysts for value creation over the next three to four years. Communisisis a full service print solutions company and one of the UK's largest specialist printers. Communisis' valuation has continued to suffer due to a difficult operating environment, driven by overcapacity and pricing pressures in the UK printing industry. There has been recent private equity activity within this sector. The company announced that the management had entered into discussions with a small number of parties which may or may not lead to an offer being made for the company or one of its divisions. The European media investor Mecom, which includes a member of the SAB, William Nabarro, as non-executive director, became another addition to the portfolio in August 2005. Investing in under-performing but cash generative pan-European media related companies (both private and publicly listed), the company floated on the AIM market in April 2005. Despite the early stage in Mecom's development, a number of deals have already been announced, including co-investment agreements worth US$175 million, the disposal of its holding in Local Press for a profit of £850,000 and the acquisition of Berliner Verlag, a leading newspaper publisher in Berlin. As the management team continues to identify and develop further opportunities for investment, we believe the company is well placed to deliver robust returns from its portfolio. Since 31 December 2005, Mecom have announced that they are in discussions with Socpresse which may or may not lead to an agreement to acquire Delaroche. As a result, the company has requested the suspension of trading in its shares. Partial realisation There was one partial realisation in the period, Mowlem. The Company began investing in Mowlem, the construction and support services supplier in August 2005. In recent years, the company has announced several profit warnings. More recently the company has made a number of changes to its management team. We believe significant value exists within its Public Finance Initiatives portfolio and contract pipeline. Carillion announced their intention to acquire Mowlem in November 2005 leading to a significant increase in Mowlem's share price. The Company sold the majority of its holding, at a 38% uplift to its average investment cost. Sector analysis The private equity investment appraisal techniques used in our investment selection is a bottom-up approach and as such we have no specific intention to focus on any given sector. At 31 December 2005, the portfolio had a relatively high weighting in media related stocks. This sector is very diversified and with historical underperformance, has given rise to a number of investment opportunities. Outlook The UK market has now displayed gains well above the long-term average for three consecutive years, and most sectors have seen significant re-ratings from their 2003 lows. Alongside this rally, there has been a dramatic increase in the level of M&A in the UK market, and in particular the level of private equity led takeovers. Last year, saw record levels of corporate activity in the UK market. According to KPMG Corporate Finance, there were 336 private equity deals worth US$45 billion in the first 11 months of the year, a 21% increase in the value of private equity activity and a rise of 13% in the number of deals on the first 11 months of 2004. Provided the cash flow yield of the UK public market remains significantly higher than the cost of borrowing for financial and trade buyers, which currently remains low, we expect this trend to continue. As a result, by using private equity investment appraisal techniques in the public market we believe that we will continue to identify opportunities for value creation via strategic operational or management initiatives. SVG Investment Managers Limited 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 at 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. The Directors announce the unaudited statement of results for the period 20 July 2005 to 31 December 2005 as follows: Income statement (unaudited) for the period ended 31 December 2005 20 July to 31 December 2005 10 May to 19 July 2005 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Investments Gains on investments - 1,950 1,950 - - - Income Dividends and interest 1,172 - 1,172 - - - Expenses Investment management fee (inc. of VAT) 233 - 233 - - - Investment management performance fee (inc. of VAT) - 477 477 - - - Other expenses 141 - 141 12 - 12 Total expenses 374 477 851 12 - 12 Net return before taxation 798 1,473 2,271 (12) - (12) Taxation (191) 130 (61) - - - Net return after taxation for the period 607 1,603 2,210 (12) - (12) Earnings per Ordinary share pence pence pence pence pence pence Basic and diluted 0.85 2.25 3.10 (1.21) - (1.21) Weighted average number of shares in issue in the period 71,282,256 991,569 Earnings per Ordinary share are calculated based on the weighted average number of Ordinary shares in issue throughout the period. The total column of this statement is the income statement of the Company. All items in the above statement derive from continuing operations. No operations were acquired or discontinued during the period. 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 2005 Share Special Share premium reserve Capital Revenue capital account reserve reserve Total £'000 £'000 £'000 £'000 £'000 £'000 Period ended 31 December 2005 19 July 2005 7,040 62,282 - - (12) 69,310 Profit for the period - - - 1,603 607 2,210 Transfer to special reserve1 - (62,282) 62,282 - - - Issue of share capital 222 2,042 - - - 2,264 31 December 2005 7,262 2,042 62,282 1,603 595 73,784 Period ended 19 July 2005 10 May 2005 - - - - - - Loss for the period - - - - (12) (12) Issue of share capital (net of expenses) 7,040 62,282 - - - 69,322 19 July 2005 7,040 62,282 - - (12) 69,310 1 On 14 September 2005, the High Court approved the cancellation of the Company's share premium account arising on the issue of the share's pursuant to the original placing, with the balance being transferred to a special reserve. These accounts have been prepared under International Financial Reporting Standards. Balance sheet (unaudited) as at 31 December 2005 31 December 19 July 2005 2005 £'000 £'000 Non-current assets Fair value through profit and loss investments - Portfolio 29,394 - 29,394 - Current assets Trade and other receivables 303 70,400 Cash and cash equivalents 44,854 50 45,157 70,450 Total assets 74,551 70,450 Current liabilities Other payables 290 1,140 290 1,140 Total assets less current liabilities 74,261 69,310 Non-current liabilities Investment Manager's performance fee 477 - 477 - Net assets 73,784 69,310 Represented by: Share capital 7,262 7,040 Share premium account 2,042 62,282 Special reserve 62,282 - Capital reserve 1,603 - Revenue reserve 595 (12) Issued capital and reserves 73,784 69,310 Net asset value per share pence pence Ordinary share 101.59 98.45 Ordinary shares in issue 72,626,000 70,400,000 These accounts have been prepared under International Financial Reporting Standards. Net asset values per share have been calculated in accordance with entitlements as at the period end and in accordance with the Company's Articles of Association and include current period revenue for the unaudited values at 31 December 2005. Statement of cash flows (unaudited) for the period ended 31 December 2005 Period Period ended ended 31 December 19 July 2005 2005 £'000 £'000 Operating activities Net return before tax 2,271 (12) Adjustment for gains on investments (1,950) - Operating cashflows before movements in working capital 321 (12) Increase in receivables (302) - Increase in payables 666 12 Net cash inflow from operating activities 685 - Investing activities Purchases of investments (31,456) - Sales of investments 4,011 - Net cash outflow from investing activities (27,445) - Financing activities Proceeds of Redeemable share issue - 50 Proceeds of Ordinary share issue 71,564 - Net cash inflow from financing activities 71,564 50 Increase in cash and cash equivalents for period 44,804 50 Cash and cash equivalents at start of period 50 - Cash and cash equivalents at 31 December 2005 44,854 50 These accounts have been prepared under International Financial Reporting Standards ('IFRS'). 1 General information The financial information contained in this announcement does not constitute statutory financial statements as defined in Section 240 of the Companies Act 1985. The financial information is unaudited and has been prepared on the basis of the accounting policies set out in the statutory financial statements for the period ended 19 July 2005, which contained an unqualified auditors' report and have been lodged with the Registrar of Companies and did not contain a statement required under Section 237(2) or (3) of the Companies act 1985.

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