Half Yearly Report

RNS Number : 3451S

Baronsmead VCT 2 PLC

15 May 2009

 



Baronsmead VCT 2 plc

To:        Company Announcements

From:    Baronsmead VCT 2 plc

Date:    15 May 2009

Unaudited Results - Half-year ended 31 March 2009

FINANCIAL HEADLINES

2.5p - Interim dividend of 2.5p per share payable on 26 June to shareholders on the register as at 29 May 2009.

-4.5% - NAV per ordinary share over the six month period to 31 March 2009 decreased by 4.5 per cent from 91.68p to 87.57p before payment of a 2.5p interim dividend.

+75.8% NAV total return to ordinary shareholders since launch in 1998, equivalent to an annualised total return of 5.3 per cent before 20 per cent income tax relief (on subscription, at launch) and 6.6 per cent afterwards.

6.4p - Average annual tax free dividend of 6.4p per ordinary share since inception, equivalent to 9.5p for higher rate taxpayers.

CHAIRMAN'S STATEMENT - for the half-year ended 31 March 2009

Despite the current economic climate of increased uncertainty and high risk, the NAV per share has remained steady since the unprecedented turmoil in the worldwide financial markets last October. The overall decrease of 4.5 per cent can be compared to the fall of 20 per cent in the FTSE All-Share Index over the six month period.

Our joint offer with Baronsmead VCT closed on 3 April 2009. We are delighted to welcome the 819 new shareholders. In total 1,140 subscribers invested a total of £8.75m (£8.26m net) for Baronsmead VCT 2 giving increased capacity for further investment. 

RESULTS

In the six months to 31 March 2009, the Net Asset Value (NAV) per ordinary share decreased by 4.5 per cent from 91.68p to 87.57p before an interim dividend of 2.5p per share which will be paid on 26 June 2009 to shareholders on the register on 29 May 2009.  This dividend comprises 2.0p per share of distributed capital profits and 0.5p per share of net revenue.  The capital dividend is paid from the reserves accumulated from net profits realised in previous years. 

Baronsmead VCT 2 continued to meet the six VCT operational tests during the period. Throughout the period comfortably over 70 per cent of the ordinary capital raised (net of launch costs) prior to 30 September 2006 was invested in VCT qualifying investments.  Cash resources are estimated to be £18m following the payment of the interim dividend and including the net proceeds from shares allotted up to 31 March from the fund raising. There is therefore significant liquidity in Baronsmead VCT 2 to provide capital for new investment and to withstand banking pressures on the existing portfolio.

The decrease in NAV per share of 4.5 per cent is nearly all represented by a fall of 25 per cent in the AIM portion of the portfolio, all of which occurred in autumn 2008. Since then prices have remained more stable. The valuation of the unquoted portfolio is also affected by market changes in price earnings multiples, but the overall good profitability of these unquoted companies has helped to balance valuation gains and falls. The comparable fall for the FTSE All-Share Index was 20 per cent.

As discussed in my Statement in the annual report and accounts to 30 September 2008, VAT is no longer to be charged on management fees and we have been able to reclaim VAT previously paid. I am pleased to say that £404,000 has been accrued in these accounts as a receivable in addition to the £740,000 that was included previously.  

To ensure that new shares in the joint offer have been issued as equitably as possible, the Board has reviewed unquoted valuations on a monthly basis over this interim period. The resulting NAVs per share are shown below.

Portfolio review date	NAV per share (p)	Allotment price per share
30/09/08	91.68
31/10/08	86.17	91.50p on 14/11/08
30/11/08	85.56	91.00p on 12/12/08
31/12/08	86.96
31/01/09	85.96	91.00p on 13/02/09
28/02/09	86.01	91.50p on 13/03/09
18/03/09	86.74	92.00p on 30/03/09
31/03/09	87.57

Unquoted investments are valued at fair value by the Directors in accordance with the International Private Equity and Venture Capital Association Guidelines. Valuations for unquoted investments are typically based on a combination of market sector ratings, price earnings multiples for a basket of comparable quoted companies and recent corporate transactions, all appropriately discounted.

At 31 March 2009, 81 per cent of the unquoted investments were valued on a discounted price earnings ratio, 4 per cent at cost, 14 per cent at values below cost and 1 per cent at third party valuation. The AIM investments were valued at their bid price as traded on the AIM market at the period end date.

LONG TERM PERFORMANCE 

The interim dividend takes the cumulative tax free dividends paid to founder shareholders to 70.40p per share in respect of their original £1 investment before tax relief.

To this cash returned to shareholders can also be added the VCT tax reliefs, which are designed to redress both the VCT constraints as well as the higher risks that relate to investing in smaller unquoted and AIM-traded companies.  At a time of lower and sometimes negative investment returns, the proportional benefits from these reliefs are greater. For instance, the tax free nature of dividends for qualifying shareholders is significant when deposit rates on cash are almost non-existent as now.

There have been four prospectus fund raisings by Baronsmead VCT 2 prior to the recent joint offer. All shareholders from these previous offers have to date achieved positive absolute total returns. These returns, shown on page 2 of the accounts, are ahead of the FTSE All-Share Index over 1, 3, 5 and 10 years.  The comparison over five years is favourable in that the share price total return was 120.7 (before any adjustment for VCT tax benefits) against the FTSE All-Share Index of 107.2 and the FTSE SmallCap index of 62.2.

These results also 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.

PORTFOLIO REVIEW

The total portfolio at the year end consisted of 77 companies. This takes account of the follow on investment in IDOX, the full realisation of Universe and writing off 8 AIM investments.  47 per cent of the portfolio by value was invested in unquoted companies, 18 per cent in AIM investees and the balance of 35 per cent remained in cash or government securities.

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, 66 per cent of the portfolio companies were reporting better or steady progress.

The chart included in the interim accounts shows that, on average, the portfolio of unquoted investments is valued some 29 per cent higher than original cost.

The continuing fall in AIM values since the Autumn of 2008 slowed in the first quarter of 2009, largely as most distressed sellers had completed their realisations and more importantly purchasers have begun to see opportunities for good value.

Investment choices and active management of the unquoted portfolio

As the economy has weakened over the last two years or so, the Manager has concentrated new investments in sub-sectors that are less cyclical and with growth strategies that are less reliant on general economic growth. For instance, the proportion of the portfolio by value (including AIM-traded companies) for consumer businesses has more than halved to 14 per cent while IT & Media 25 per cent and Healthcare & Education 21 per cent have more than doubled.  

In addition, financial structures have been designed to be prudent wherever possible with relatively low levels of external debt. There are several ways of measuring borrowings but the most common relates to the level of net borrowings divided by annual operating profits. At this level, the level of debt within the portfolio as a whole is low and considerably less than those typically used in larger private equity transactions.

As always, the Manager is involved actively in managing its private equity investments. Tight control of overheads, a focus on efficient working capital management and early communication with debt providing bankers for each investee have all helped to manage risk and minimise issues.  

An important part of the investment process is to originate new opportunities through direct approaches to suitable businesses within targeted sectors. For that reason the manager makes considerable effort to build the right quality relationships with successful target companies who have ambition to grow, using private equity funding.  

Presentations by investee companies are a regular feature at each AGM in order to help shareholders better understand the importance of maintaining a close relationship between the executive management of unquoted companies and the Manager. The Chairman of ILS, Scott Christie, based in Alloa presented to the AGM held in December 2008 attended by some 100 shareholders of Baronsmead VCT and Baronsmead VCT 2. Since first investment in autumn 2006, this domiciliary care business has grown both by acquisition and organically, now providing services to 18 Scottish Local Authorities. Over this time, trading profits have almost tripled and the management has become a highly developed professional team.

Revision of strategy for investing in AIM

The strategy for investing in AIM has been refined to incorporate more of the private equity investment process. In particular, we are focusing on taking more influential stakes in a smaller number of investments where a likely exit strategy to a trade buyer can be envisaged, while looking to sell the long tail of older investments as and when the constraints of the VCT legislation allow.  

The AIM team utilises the knowledge and skills of the wider private equity team to provide input to the selection of new investments and during their ongoing development.  The Manager expects that these refinements to the investment strategy for AIM investments together with opportunities offered by the current lower valuations will have a positive impact on returns over the coming years.

SHAREHOLDER MATTERS

The joint offer with Baronsmead VCT opened in September 2008 and closed on 3 April 2009 with 1,140 applications including further investment from 321 existing shareholders.  £17.5 million was raised and the net proceeds for Baronsmead VCT 2 amounted to £8.26 million. 

Buy backs into Treasury totalled 762,366 ordinary shares.  Unfortunately the main market maker for a number of years (Landsbanki) ceased to trade in October 2008. By the period end, however, there were four market makers, namely Matrix Securities, Panmure Gordon, Singer Capital Markets and Winterfloods.

The role that VCT shares can play for a private investor in retirement and inheritance planning was highlighted in a letter sent by the Manager to shareholders in March 2009. This explained how shareholders could benefit from VCT investment pre and post retirement and also the impact of such investment on estate planning including the way in which subsequent beneficiaries could take advantage of the ongoing VCT tax reliefs.  

Feedback from shareholders and advisers indicates that this aspect of the handing on of VCT shares and tax advantages to beneficiaries could be more widely articulated. The letter from ISIS stressed the role of professional advisers as so much depends on the circumstances of individual shareholders. However please email [e-mail] if you wish to contribute to this topic and state what is important from your perspective as an interested shareholder.

OUTLOOK

There has been extreme volatility in the UK economy during winter 2008/09 and this is likely to continue for a number of months or even years to come.  

These difficult conditions are being countered by sustaining good investment diversity and ensuring that there is cash availability both within Baronsmead VCT 2 and the portfolio companies to cope with most eventualities. The Board and Manager share the belief that we are entering one of the best investment environments for many years and once greater stability has returned to UK financial and industrial markets there will be significant opportunities available.

Clive Parritt 

Chairman

15 May 2009

  Investments in the six months to 31 March 2009

Number	Company	Location	Sector	Activity	Investment Cost (£'000)
Unquoted investments
follow on
1	Kafevend Holdings Ltd	Crawley	Consumer Markets	Vending services	6
2	Nexus Vehicle Holdings Ltd	Leeds	Business Services	Vehicle rental broker	499
3	Occam DM Ltd	Bath	IT & Media	Integrated data services	51
4	Xention Discovery	Cambridge	Healthcare & Education	Develop of ion channel modulating drugs	39
	Total Unquoted investments				595
AIM-traded investments
follow on
1	Brulines Holdings plc	Stockton-on-Tees	Business Services	Pub management systems	299
2	Ffastfill plc	London	IT & Media	Trading platform software provider	120
3	IDOX plc	London	IT & Media	Public sector software and services	118
	Total AIM-traded investments				537
	Total investment in the period				1,132

Realisations in the six months to 31 March 2009

Number	Company		First Investment Date	Value at 30 September 2008  £'000	Realised profit/(loss) this period £'000	Overall Multiple Return *
Unquoted realisations
1	Scriptswitch	Partial loan note redemption	May 07	422	-	1.2
	Total Unquoted realisations			422	-
AIM-traded realisations
1	Begbies Traynor Group plc	Part sale	Sep 04	129	1	4.0
2	Craneware plc	Part sale	Sep 07	192	(8)	1.7
3	Universe Group plc	Market sale	May 03	27	(6)	0.1
				348	(13)
Written off
1	Appian Technology plc		Dec 05	157	(157)	-
2	Conder Environmental plc		Nov 00	-	-	-
3	EBTM plc		May 07	77	(77)	-
4	Fishworks plc		Jun 05	35	(35)	-
5	IPT Holdings plc		Nov 04	18	(18)	1.6
6	Landround plc		Aug 97	16	(16)	0.4
7	Loanmakers (Holdings) plc		Jun 05	-	-	1.3
8	Micap plc		Jul 03	-	-	-
				303	(303)
	Total AIM-traded realisations			651	(316)
	Total realisations			1,073	(316)

*Includes interest / dividends received and loan note redemptions accounted for in prior periods

Deferred proceeds were received for Kidsunlimited (£1,000) and Language Line (£32,000)

  Unaudited Income Statement of the Company

For the six months to 31 March 2009

	2009 Revenue £'000	2009 Capital £'000	2009 Total £'000
Unrealised losses on investments	-	(2,581)	(2,581)
Realised losses on investments	-	(283)	(283)
Income	715	-	715
Recoverable VAT	101	303	404
Investment management fee	(138)	(414)	(552)
Other expenses	(155)	-	(155)
Profit/(loss) on ordinary activities before taxation	523	(2,975)	(2,452)
Tax on ordinary activities	(80)	80	-
Profit/(loss) on ordinary activities after taxation	443	(2,895)	(2,452)
Return per ordinary share (p)	0.71	(4.66)	(3.95)

Unaudited Reconciliation of Movement in Shareholders' Funds

For the six months to 31 March 2009

	2009 Total £'000
Opening shareholders' funds	54,822
Loss for the period	(2,452)
Purchase of shares for treasury	(582)
Increase in shares	7,188
Expenses of share issues and buybacks	(398)
Dividends paid	4
Closing shareholders' funds	58,582

  Unaudited Income Statement of the Company

For the six months to 31 March 2008

	2008 Revenue £'000	2008 Capital £'000	2008 Total £'000
Unrealised losses on investments	-	(6,456)	(6,456)
Realised gains on investments	-	302	302
Income	1,898	-	1,898
Investment management fee	(193)	(580)	(773)
Other expenses	(163)	-	(163)
Profit/(loss) on ordinary activities before taxation	1,542	(6,734)	(5,192)
Tax on ordinary activities	(405)	405	-
Profit/(loss) on ordinary activities after taxation	1,137	(6,329)	(5,192)
Return per ordinary share (p)	1.84	(10.25)	(8.41)

Unaudited Reconciliation of Movement in Shareholders' Funds

For the six months to 31 March 2008

	2008 Total £'000
Opening shareholders' funds	68,745
Loss for the period	(5,192)
Increase of shares	1,786
Expenses of share issues	(60)
Purchase of shares for treasury	(1,566)
Closing shareholders' funds	63,713

  Audited Income Statement of the Company

For the year ended 30 September 2008

	2008 Revenue £'000	2008 Capital £'000	2008 Total £'000
Unrealised losses on investments	-	(10,241)	(10,241)
Realised losses on investments	-	(105)	(105)
Income	2,834	-	2,834
Recoverable VAT	85	655	740
Investment management fee	(350)	(1,054)	(1,404)
Other expenses	(357)	-	(357)
Profit/loss on ordinary activities before taxation	2,212	(10,745)	(8,533)
Tax on ordinary activities	(544)	544	-
Profit/loss on ordinary activities after taxation	1,668	(10,201)	(8,533)
Return per ordinary share (p)	2.73	(16.68)	(13.95)

Audited Reconciliation of Movement in Shareholders' Funds

For the year ended 30 September 2008

	2008 Total £'000
Opening shareholders' funds	68,745
Loss for the year	(8,533)
Purchase of shares for treasury	(2,850)
Increase in shares	1,786
Expenses of share issues and buybacks	(81)
Dividends paid	(4,245)
Closing shareholders' funds	54,822

  Unaudited Balance Sheet

		As at 31 March 2009	As at 31 March 2008	As at  30 September 2008‡
		Total	Total	Total
		£'000	£'000	£'000
Fixed Assets
Unquoted investments		27,765	30,586	27,050
Traded on AIM		9,670	15,632	13,002
Quoted on PLUS		82	66	95
Listed investments		651	606	558
Listed interest bearing securities		15,567	12,431	9,486
		53,735	59,321	50,191
Current assets
Debtors		4,146	944	1,378
Cash at bank and on deposit		1,526	4,515	4,123
		5,672	5,459	5,501
Creditors: amounts falling due within one year		(825)	(1,041)	(846)
Net current assets		4,847	4,418	4,655
Total assets less current liabilities		58,582	63,739	54,846
Creditors: amounts falling due after more than one year		-	(26)	(24)
Net assets		58,582	63,713	54,822
Capital and reserves
Called-up share capital		7,289	6,504	6,504
Share premium account		11,143	5,136	5,135
Capital redemption reserve		9,254	9,254	9,254
Revaluation reserve		(3,108)	1,941	(2,684)
Profit and loss account		34,004	40,878	36,613
Equity shareholders' funds		58,582	63,713	54,822
Net asset value per share		87.57p	104.08p	91.68p
Number of shares in issue at balance date		66,896,301	61,216,015	59,794,245
Treasury net asset value per share		86.70p	103.52p	91.10p
Number of ordinary shares in issue		66,896,301	61,216,015	59,794,245
Number of ordinary shares held in treasury		5,993,906	3,820,000	5,241,770
Number of listed ordinary shares		72,890,207	65,036,015	65,036,015

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

	Six months to 31 March 2009	Six months to 31 March 2008	Year to 30 September 2008‡
	£'000	£'000	£'000
Net cash inflow / (outflow) from operating activities	227	758	1,212
Capital expenditure and financial investment	(6,301)	2,426	6,795
Equity dividends recovered/(paid)	4	3	(4,251)
Net cash (outflow) / inflow before financing	(6,070)	3,187	3,756
Issue of shares less buybacks	3,473	161	(800)
(Decrease) / increase in cash	(2,597)	3,348	2,956
Reconciliation of net cash flow to movement in net cash
Increase/(decrease) in cash	(2,597)	3,348	2,956
Opening net cash	4,123	1,167	1,167
Net cash at end of period	1,526	4,515	4,123
Reconciliation of operating loss before taxation to net cash outflow from operating activities
Loss on ordinary activities before taxation	(2,452)	(5,192)	(8,533)
Realised losses / (gains) on investments	283	(302)	105
Unrealised losses on investments	2,581	6,456	10,241
(Increase) / decrease in debtors	(152)	(175)	(465)
(Decrease) / increase in creditors	(33)	(29)	(136)
Net cash inflow from operating activities	227	758	1,212

‡These figures are audited.  

Notes

1. The unaudited interim results which cover the six months to 31 March 2009 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 year ended 30 September 2008.

2. Return per share is based on a weighted average of 62,168,370 ordinary shares in issue (30 September 2008 - 61,138,930 ordinary shares, 31 March 2008 - 61,719,450 ordinary shares).

3. Earnings for the first six months to 31 March 2009 should not be taken as a guide to the results of the full financial year to 30 September 2009.

4. During the six months ended 31 March 2009 the Company issued 7,854,192 new ordinary shares raising proceeds of £7.2 million before costs. During this period the Company purchased 762,366 ordinary shares to be held in Treasury at a cost of £581,930. At 31 March 2009 the Company holds 5,993,906 ordinary shares in Treasury. These shares may be re-issued below Net Asset Value as long as the discount at issue is narrower than the average discount at which the shares were bought back.

Excluding treasury shares, there were 66,896,301 ordinary shares in issue at 31 March 2009 (30 September 2008 59,794,245 ordinary shares, 31 March 2008 61,216,015 ordinary shares).

5.  The interim dividend of 2.5p will be paid on 26 June 2009 to shareholders recorded on the company's register on 29 May 2009. The ex-dividend date is 27 May 2009.

6.  The financial information contained in this half year report does not constitute statutory accounts as defined in section 434 Companies Act 2006. The information for the year ended 30 September 2008 has been extracted from the latest published audited financial statements. The audited financial statements for the year to 30 September 2008, which were unqualified, have been filed with the Registrar of Companies.  No statutory accounts in respect of any period after 30 September 2008 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.

 

END

 

 

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