Interim Results

RNS Number : 1962B

Baronsmead VCT 3 PLC

13 August 2008

 



Baronsmead VCT 3 plc

Unaudited Results - Half-year ended 30 June 2008

Highlights

•     NAV per ordinary share over the six month period decreased by 6% from 120.44p to 113.19p.

•     3p interim dividend per share payable on 26 September 2008

•     NAV total return to ordinary shareholders since launch in 2001 of 60%, equates to an annualised total

      return of 6.6% which is equivalent to 9.8% for higher rate taxpayers.

•     £4.5m profits realised from the sale of three unquoted investments. 

•     £1.12m subscribed by 121 existing shareholders in Q1 2008 with top up offer closed oversubscribed.

CHAIRMAN'S STATEMENT 

In increasingly depressed economic conditions, the highlight has been the sale of three unquoted investments at premium prices during the six months to 30 June 2008. These realisations yielded more than four times their aggregate cost and have made a healthy addition to the reserves from which future dividends can be paid. In addition during the period under review, the Manager has also been able to take advantage of the lower pricing for new investments and achieved a good level of investment.

The rating of UK smaller companies has fallen significantly since summer 2007 and is particularly noticeable in AIM investees, which represent 24 per cent of the overall portfolio at the period end. The value of the unquoted portfolio has been less affected and their overall trading results have helped underpin valuations.

We have flatter expectations for the next year or so but plan to anticipate and benefit from the up swing when it comes.

Results

In the six months to 30 June 2008, the Net Asset Value (NAV) per ordinary share decreased by 6 per cent from 120.44p to 113.19p before payment (due on 26 September 2008) of a 3p per share interim dividend. This dividend comprises 1.6p per share of distributed capital profits and 1.4p per share of net revenue. The capital dividend is largely attributable to a series of profitable realisations from investments in SLR, Kidsunlimited and Hawksmere being sold in total at more than four times their cost. The first two companies were highlighted in the last annual report as examples of 'How ISIS realises value for the shareholders of Baronsmead VCT 3'.

Baronsmead VCT 3 continued to meet the six VCT operational tests during the period. At the period end, 83 per cent of the ordinary capital raised (net of launch costs) prior to 31 December 2005 was invested in VCT qualifying investments.

The decrease in Net Assets of 6 per cent is spread fairly evenly by amount across the unquoted and AiM portions of the portfolio. The comparable fall for the FTSE All-Share Index was 11.2 per cent.

Long Term Performance

The standard measurements for monitoring investment performance are based either on the net asset value (NAV) plus dividends paid (known as 'NAV total return') or the movement in share price plus dividends paid (known as 'share price total return'). The latter is particularly relevant to investors who buy in the secondary market.

Other measures include dividend yield and cash returned to shareholders. All of these measures are normally stated before the inclusion of VCT tax reliefs. These reliefs were designed to redress both the VCT constraints as well as the higher risks that relate to smaller unquoted and AiM-traded companies.

NAV total return to shareholders since launch in January 2001 amounts to 60 per cent which represents an annual compound growth rate of 7 per cent and is stated net of all running costs.

Share price total return in the last five years was 56 per cent, which represents an annualised tax-free return of 9 per cent. These results compare favourably with other VCTs and fuller comparisons have recently been facilitated by the Association of Investment Companies (AIC) who publish monthly data on their website, www.theaic.co.uk. The comparable performance of the FTSE All-Share total return over five years was an increase of 71 per cent.

Dividends and yield.  By 30 June 2008, (and including the declared interim dividend), dividends totalling 36.3p have been paid to founder shareholders since launch in January 2001. Based on the mid share price of 104.5p and last years dividend payment of 7.5p the yield is 7.2 per cent which equates to 10.6 per cent to the higher rate tax payer. The Board aims to sustain minimum annual dividends of around 4.5p per share if possible.

Cash returned to shareholders arises from dividends paid and the initial income tax relief that qualifying shareholders can retain beyond the initial holding period. To date, subscribers in 2001 will have received 36.3p of dividends plus up to 20p initial income tax relief. C share subscribers in 2005/6 will have received 9.6p of dividends and up to 40p income tax relief for every £1 subscribed (provided these shares are retained for more than three years).

Portfolio Review

The total portfolio grew to 78 companies after 13 new investments and 7 realisations. The new investments set out below totalled £6.5 million in unquoted investments and £1.1 million into AiM-traded investees. For the first time a significant amount, (£2.05 million in seven investees), has been allocated to non-qualifying investments with good prospects of growth. Three investee companies received additional funding.

Unquoted investments
Company	Location	Sector	Activity	Investment Cost (£'000)
Active Assistance	Sevenoaks	Healthcare	Specialist live in care		679
Carnell Contractors	Penkridge, Staffs	Business Services	Highway agency services		1,499
CSC (World)†	Pudsey, Leeds	IT	3D structural steel software		1,606
Kidsunlimited†	Wilmslow	Business Services	Children's day nurseries		113
Nexus	Leeds	Business Services	Car rental services		1,368
Occam *	Chilcompton, Radstock	Business Services	Data Services		3
Playforce	Holt, Wiltshire	Business Services	Playground equipment		1,033
Xention *	Cambridge	Healthcare	Drug Discovery		152
Total Unquoted Investments					6,453

AiM-traded investments
Character Group†	New Malden		Media	Toy design and  distribution			144
Debts.co.uk	Chesterfield		Consumer	Debt management			262
Electric Word†	London		Media	B2B publishing			17
Essentially Group*	Jersey		Media	Sports marketing			240
Independent Media Distribution†	London		IT	Digital media distribution			15
IS Pharma	Chester		Healthcare	Specialist  pharmaceuticals			246
Silverdell†	Barking		Business Services	Asbestos specialists			14
STM†	Gibraltar		Business Services	Off shore Trust  administration			140
Total AiM-traded Investments							1,078
Total Investments							7,531
* Further round of financing
† Non-qualifying investments totalled £2.05 million during the period

The Board reviews the relative health of portfolio companies quarterly, in terms of profitability as well as other non-financial benchmarks. At the period-end, 81 per cent of the portfolio companies were reporting better or steady progress.

The unquoted portfolio had some successful realisations as well as strong trading, especially at Scriptswitch who presented their growth story to our seventh AGM. This was balanced by downgrades arising from market reductions in price earnings ratios or because of missed business plans. Consumer related businesses were most affected and a full provision was made against the investment in The Art Group. This provision equates to a diminution per share of 2.4p. Following a sharp decline in sales during April and May 2008, this business was sold for a nominal sum after the period end.  

The AiM and Listed part of the portfolio was down 16 per cent predominantly as a result of lower market prices rather than lower trading profits. Share prices in smaller quoted companies fell as investors turned to larger and more liquid stocks. Begbies and IDOX made good progress which can be contrasted with the negative trading statements of Claimar and Proactis. Two AiM holdings were sold at a loss as were two full-listed, Oxford Biomedica and Ardana. The latter was placed in administration and written off.

The cash realisations set out below show some strong outcomes from selling unquoted investments resulting in total sale proceeds (including income and dividends) being 4.1 times the original cost.

• The investment in SLR was sold to 3i in a secondary buy-out valuing the company in the region of £100 million and six times cost. SLR is an international environmental consultancy with offices in the UK, US and Canada. It has particular strengths in the energy sector, the private sector waste management industry and working for many of the major commercial developers. Since investment in September 2004, the business has delivered substantial organic and acquisitive growth in the UK and North America, opening new offices and expanding its range of services. As a result, employee numbers in SLR increased from 168 in 2004 to 650 at May 2008.

• Kidsunlimited was sold to a financial buyer at an enterprise value of £45 million representing 4.7 times the cost and realised profits of £1.4 million. Since first investment in 2001, kidsunlimited has successfully rolled out new nurseries to 50 locations with over 4,500 registered places offering premium care in purpose built or designed settings, including gardening club, 'Soccer Tots' and baby yoga. The business which was transitioned from its founders to a professional management team operates a scalable nursery model in a changing marketplace and has become 'the stand out asset' in the sector.

• Hawksmere, an investment made in December 2003, had experienced difficult trading but had returned to profitability prior to its sale. A new Managing Director and Finance Director joined in summer of 2005 and led the trading recovery. The investment was fully provided for as late as June 2006 and valued at nil. The sale of the company in January 2008 resulted in sales proceeds of 2.5 times the original cost of £766,000.

6 months to 30 June 2008 Realisations		First investment date	Cost £’000	Proceeds £’000	Multiple return
SLR	Secondary buy-out	September 2002	290	2,485	6.0*
Kidsunlimited	Secondary buy-out	June 2001	481	1,921	4.7*
Hawksmere	Trade sale	December 2003	766	1,698	2.5*
Oxford Biomedica	Market sale	April 2003	250	65	0.3
Cantono	Market sale	April 2005	375	19	0.1
Capcon	Market sale	October 2001	137	6	0.1
Ardana	Write off	August 2003	619	0	0.0
			£2,918	£6,194

* Includes interest received and some earlier loan redemptions

In addition, deferred proceeds of £115,000 were received on the sale of the earlier unquoted investments; Boldon James, RLA Media and Oxxon Pharmaccines Ltd.

Issue of New Shares

The top up offer in February 2008 resulted in applications from 121 existing shareholders totalling £1.12 million. When combined with the top ups in September 2007, the maximum possible without issuing a full prospectus of £3.6 million was raised from ordinary and C shareholders.

Buy backs totalled 955,000 ordinary shares which were bought back into Treasury.

The current market conditions for new investment are more attractive in terms of pricing than for some years and as a consequence the Board is minded to ensure there is sufficient available capital within Baronsmead VCT 3 to exploit the opportunity. Currently, the intention is that there will be a new share offer available to shareholders later in the current financial year ending 5 April 2009 and this will be communicated more clearly to shareholders once the Board has agreed the detailed plan.

VAT Position

Shareholders may be aware of a recent European Court ruling that management fees on investment trusts should be exempt from VAT following a test case brought by the Association of Investment Companies (AIC) and others. Subsequently, HMRC agreed that this ruling should also apply to VCTs from 1 October 2008 and has recently announced it will accept applications to reclaim at least some of the VAT charged in the last few years. The company will work with the Manager to quantify and recover the applicable back VAT from HMRC. There should certainly be some benefit to the company but the amount and timing remain uncertain. Hence there is no recognition in these financial statements for any such receipt.

Outlook

In recent years we have benefited from a succession of profitable unquoted realisations. These will be harder to achieve currently but the Manager believes that the present state of the economic cycle will offer opportunities to exploit as funds available to invest in growth companies become scarcer. We plan to have sufficient cash resources to complete new investments at more attractive levels which should generate good investment returns in the medium term.

There are clearly difficult times ahead but we hope to benefit when the market upswing occurs. However, the Manager has experience in tackling difficult market conditions and this should be of help to the performance of the portfolio in the longer term.

Mark Cannon Brookes

Chairman

12 August 2008

  Unaudited Income Statement of the Company

For the six months ended 30 June 2008

	2008 Revenue £'000	2008 Capital £'000	2008 Total £'000
Unrealised losses on investments	-	(7,785)	(7,785)
Realised gains on investments	-	3,393	3,393
Income	1,400	-	1,400
Investment management fee	(227)	(679)	(906)
Other expenses	(153)	-	(153)
Profit/(loss) on ordinary activities before taxation	1,020	(5,071)	(4,051)
Tax on ordinary activities	(238)	238	-
Profit/(loss) on ordinary activities after taxation	782	(4,833)	(4,051)
Return per ordinary share (p)	1.44	(8.89)	(7.45)

Unaudited Reconciliation of Movement in Shareholders' Funds

For the six months ended 30 June 2008

	2008 Total £'000
Opening shareholders' funds	65,221
(Loss) for the period	(4,051)
Purchase of shares for Treasury	(1,011)
Expenses of share issue and conversion of share premium	(51)
Increase in share capital in issue	1,118
Dividends paid	-
Closing shareholders' funds	61,226

  Unaudited Income Statement of the Company

For the six months ended 30 June 2007*

	2007 Revenue £'000	2007 Capital £'000	2007 Total £'000
Unrealised gains on investments	-	2,998	2,998
Realised gains on investments	-	626	626
Income	1,157	-	1,157
Investment management fee	(230)	(881)	(1,111)
Other expenses	(203)	-	(203)
Profit on ordinary activities before taxation	724	2,743	3,467
Tax on ordinary activities	(157)	157	-
Profit on ordinary activities after taxation	567	2,900	3,467
Return per ordinary share (p)	1.01	5.16	6.17

Unaudited Reconciliation of Movement in Shareholders' Funds

For the six months ended 30 June 2007*

	2007 Total £'000
Opening shareholders' funds	66,548
Profit for the period	3,467
Purchase of shares for Treasury	(524)
Dividends paid	(1,775)
Closing shareholders' funds	67,716

*Figures include the results of the asset pool previously attributable to the C shares, which were converted to 

ordinary shares on 28 January 2008.  Audited Income Statement of the Company

For the year ended 31 December 2007*

	2007 Revenue £'000	2007 Capital £'000	2007 Total £'000
Unrealised gains on investments	-	1,093	1,093
Realised gains on investments	-	873	873
Income	2,569	-	2,569
Investment management fee	(457)	(1,371)	(1,828)
Other expenses	(481)	-	(481)
Profit on ordinary activities before taxation	1,631	595	2,226
Tax on ordinary activities	(371)	371	-
Profit on ordinary activities after taxation	1,260	966	2,226
Return per ordinary share (p)	2.38	1.82	4.20

Audited Reconciliation of Movement in Shareholders' Funds

For the year ended 31 December 2007*

	2007 Total £'000
Opening shareholders' funds	66,548
Profit for the year	2,226
Increase in share capital	2,376
Purchase of shares for Treasury or cancellation	(759)
Dividends paid	(5,170)
Closing shareholders' funds	65,221

*Figures include the results of the asset pool previously attributable to the C shares, which were converted to ordinary shares on 28 January 2008.

  Unaudited Balance Sheet

As at 30 June 2008

	As at 30 June 2008	As at 30 June 2007			As at  31 December 2007*‡
		Ordinary
	Total	Shares	C Shares	Total	Total
	£'000	£'000	£'000	£'000	£'000
Fixed Assets
Unquoted investments	26,145	18,819	9,124	27,943	27,626
Traded on AiM	13,758	14,437	4,333	18,770	14,996
Quoted on FTSE SmallCap	720	562	-	562	1,160
Interest bearing securities	19,128	6,920	11,463	18,383	16,337
Total Fixed Assets	59,751	40,738	24,920	65,658	60,119
Net current assets	1,475	1,118	940	2,058	5,102
Total assets plus net current assets	61,226	41,856	25,860	67,716	65,221
Creditors: amounts falling due after one year	-	-	-	-	-
Net assets	61,226	41,856	25,860	67,716	65,221
Financed by:
Shareholders' funds	61,226	41,856	25,860	67,716	65,221

Net asset value per share:

	As at 30 June 2008	As at 30 June 2007		As at  31 December 2007
	Ordinary	Ordinary	C Shares	Ordinary
Basic	113.19p	131.16p	107.75p	120.44p
Treasury	112.57p	129.83p		119.64p
Ordinary/ C Shares in issue	54,091,997	31,912,392	23,999,772	32,253,521
Ordinary/ C Shares listed	58,226,997	35,092,392		35,433,521

*Figures include the results of the asset pool previously attributable to the C shares, which were converted to ordinary shares on 28 January 2008.

‡These figures are audited.  Summarised Unaudited Statement of Cash Flows

	Six months to 30 June 2008	Six months to 30 June 2007*	Year to 31 December 2007*‡
	£'000	£'000	£'000
Net cash (outflow)/inflow from operating activities	452	(1,374)	(1,452)
Taxation	-	-	-
Capital expenditure and financial investment	(3,528)	3,730	7,244
Equity dividends paid	5	(1,775)	(5,170)
Net cash inflow/(outflow) before financing	(3,071)	581	622
Net cash inflow/(outflow) from financing	56	(320)	1,617
Increase/(decrease) in cash	(3,015)	261	2,239
Reconciliation of net cash flow to movement in net cash
Increase/(decrease) in cash	(3,015)	261	2,239
Opening net cash	4,571	2,332	2,332
Net cash at 30 June/31 December	1,556	2,593	4,571
Reconciliation of operating (loss)/profit before taxation to net cash outflow from operating activities
(Loss)/profit on ordinary activities before taxation	(4,051)	3,467	2,226
Unrealised losses/(gains) on investments	7,785	(2,998)	(1,093)
Profit on realisation of investments	(3,393)	(626)	(873)
Changes in working capital and other non-cash items	111	(1,217)	(1,712)
Net cash (outflow)/inflow from operating activities	452	(1,374)	(1,452)

*Figures include the results of the asset pool previously attributable to the C shares, which were converted to ordinary shares on 28 January 2008.

‡These figures are audited. 

Notes

1.The unaudited interim results which cover the six months to 30 June 2008 have been prepared in accordance with applicable accounting standards and adopting the accounting policies set out in the statutory accounts of the Company for the period ended 31 December 2007.

2.Return per share is based on a weighted average of 54,385,064 ordinary shares in issue (31  December 2007 - 53,048,861 ordinary shares).

3.Earnings for the first six months to 30 June 2008 should not be taken as a guide to the results of the full financial year.

4.During the six months ended 30  June 2008 the Company issued 894,398 ordinary shares pursuant to the offer for subscription at an offer price of 125p per share which raised £1.1 million, before costs. During this period the Company purchased 955,000 ordinary shares to be held in Treasury at a cost of £1,011,490. At 30 June 2008 the Company holds 4,135,000 ordinary shares in Treasury. Excluding treasury shares, there were 54,091,997 ordinary shares in issue at 30 June 2008 (31 December 2007 - 32,253,521 ordinary shares and 25,570,331 C shares. 30 June 2007 - 31,912,392 ordinary shares and 23,999,772 C shares).

5.The interim dividend of 3  pence per ordinary share (1.4 pence revenue and 1.6 pence capital) will be paid on 26 September 2008 to shareholders on the register on 20 August 2008.

6.These are not statutory accounts in terms of Section 240 of the Companies Act 1985 and are unaudited. Statutory accounts for the year to 31 December 2007, which were unqualified, have been lodged with the Registrar of Companies. No statutory accounts in respect of any period after 31 December 2007 have been reported on by the Company's auditors or delivered to the Registrar of Companies.

7. Copies of the Interim Report have been mailed to shareholders and are available from the Registered Office of the Company at 100 Wood Street, London EC2V 7AN.

 

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