Interim Results

3i SMALLER QUOTED COMPANIES TRUST PLC 14 October 1999 3i Smaller Quoted Companies Trust plc Benchmark Beaten Again Interim Results 1999 3i Smaller Quoted Companies Trust plc today announces interim results for the six months ended 31 August 1999. Highlights * NAV per share increased by 26.3% to 252.9p, outperforming the FTSE Small Cap Index excluding Investment Companies by 1.7% and the Hoare Govett Smaller Companies Index excluding Investment Trusts by 2.5% over the period * Earnings per share of 2.99p (before receipt of special dividends of 0.51p per share) up 13% on underlying earnings of 2.64p for the comparable period last year * Interim dividend increased to 1.68p. This reflects a rebalancing of dividends without which, the increase would be 5% * 43.1% of investment in companies backed by 3i Group plc, with overweight positions in the Information Technology, Electronic and Electrical Equipment, and Distributors sectors, reflecting 3i Group plc's particular knowledge and experience in these areas * FTSE Small Cap Index excluding Investment Companies now used as the Trust's benchmark Commenting on the results, Bill Govett, Chairman, said: 'Over the last six months, the Trust outperformed its benchmark. At 31 August 1999, the FTSE 100 Index traded at an average price earning ratio of 28.5 compared to 21.9 for the FTSE Small Cap Index excluding Investment Companies. Economies in the UK and Continental Europe are strengthening and increases in confidence are being expressed in recent business surveys, including 3i's own Enterprise Barometer. However, Wall Street valuations are at historically high levels, and the growing US trade deficit make further interest rate rises likely. UK smaller companies are unlikely to be immune from any set back on Wall Street. Despite this reservation and the appreciation in the share prices of UK smaller companies during 1999, ratings of UK smaller companies are still significantly lower than those of larger companies.' For further information, please contact: Mike Prentis, 3i Asset Management Limited 0171 928 3131 Emily Bruning, Shandwick 0171 329 0096 CHAIRMAN'S STATEMENT Performance My statement in last year's Annual Report pointed to tentative signs of a recovery in the valuations of smaller companies. The six months to 31 August 1999 have seen a significant improvement in these valuations with the Hoare Govett Smaller Companies Index excluding Investment Trusts increasing by 23.8% and the FTSE Small Cap Index excluding Investment Companies increasing by 24.6%. By way of comparison, the FTSE 100 Index and FTSE All Share Index increased by 1.1% and 4.0% respectively, highlighting the outperformance by smaller companies. The Trust performed slightly better than the smaller company indices with the net asset value per ordinary share increasing by 26.3%. Earnings and Dividends Earnings per share for the six months to 31 August 1999 were 2.99p before receipt of special dividends of 0.51p per share. These compare to a figure for the equivalent period last year of 2.64p when no such special dividends were received. Taking account of practice by some other Investment Trusts, the Board considers that a rebalancing of the interim and final dividends would be appropriate from the split of 25% at the interim stage and 75% at the final stage seen last year. Consequently the Board is declaring an increase in the interim dividend to 1.68p from 0.99p last year. In the absence of such a rebalancing, the directors would have declared an increase of 5% in the interim dividend to 1.04p per share. Benchmark Shareholders will be aware that the Trust's benchmark has been the Hoare Govett Smaller Companies Index excluding Investment Trusts. However, detailed performance information, increasingly important to allow effective fund management, is more readily available in respect of the FTSE Small Cap Index excluding Investment Companies. The FTSE Small Cap Index excluding Investment Companies is also the benchmark of the majority of Trusts in the AITC sector focussing on smaller companies in the UK. For these reasons the Board has concluded that it is preferable to use the FTSE Small Cap Index excluding Investment Companies as the benchmark and the Manager is now using this index as the Trust's benchmark. The change of benchmark will not alter the Trust's investment policy. For shareholders' information, performance against the Hoare Govett Smaller Companies Index excluding Investment Trusts will continue to be reported in the interim and annual reports for the time being. Discount The Board pays close attention to the discount to net assets at which the Trust's shares trade. In general the Trust's shares have traded at a discount better than the average for the AITC sector, which your Board believes is appropriate given the strong track record of the Trust. During the half year the discount widened from 14.7% at 1 March 1999 to 16.7% at 31 August 1999 - this compares to sector averages of 20% and 18% respectively. Shareholders will be aware that the Trust now has the power to buy back its shares. The primary purpose of share buybacks would be to enhance net asset value for all continuing shareholders. In addition, buybacks generate incremental demand for the Trust's shares which may have a beneficial effect on the level of the Trust's discount. Management Fee I mentioned above the track record of the Trust - in fact the Trust has consistently achieved a performance ahead of the benchmark in recent years. In order to provide an incentive to maintain and improve upon this record, the Board has agreed to introduce a performance related element to the remuneration of the Manager, 3i Asset Management Limited. This is in addition to the current fee of 0.65% per annum, which is in the bottom quartile for the AITC sector. The performance related fee will be based on the Trust's net asset value performance relative to the benchmark and will be capped at 0.25% per annum. Further details are given in Note 4. Market Conditions In the UK growth in both GDP and consumer spending has been above expectations and forecasts for calendar 1999 have been revised upwards. House price increases in the south east have also been high and this is one of the factors behind the Monetary Policy Committee's recent decision to increase interest rates - a further increase later in 1999 remains possible. This looks likely to lead to a continuation of the strength of Sterling against the Euro. Whilst not helpful to exporters, many of those with higher added value products and services have learned to cope well with the strength of Sterling and should benefit from the strengthening of Euro-zone economies. Signs of recovery in the Far East have come earlier than expected and also present opportunities for UK smaller company exporters. Wall Street valuations are at historically very high levels and the strength of consumer spending and growing trade deficit in the United States make further interest rate increases likely. Any resultant fall on Wall Street is likely to feed through into the valuation of companies in the UK, both big and small. Sharply higher oil and metal prices also present threats and are likely to have to be absorbed, at least in part, in the margins of many UK smaller companies. Lastly, Y2K issues may yet result in a few surprises. Despite the above reservations and the appreciation in the share prices of UK smaller companies during 1999, ratings of UK smaller companies are still significantly lower than those of larger companies. W J R Govett 13 October 1999 INVESTMENT MANAGER'S REVIEW Strategy The Manager's strategy is to select and manage a portfolio of shares which will outperform the FTSE Small Cap Index excluding Investment Companies benchmark in the medium term. In following this strategy the Manager makes use of the skills and information base which it has as part of the 3i group. The Trust will therefore tend to be overweight in those sectors in which the 3i group has particular knowledge and experience. The Manager follows a growth-orientated investment style although this does not preclude the Manager from investing in value or cyclical stocks as and when appropriate. Notwithstanding the change of benchmark referred to in the Chairman's statement, the Trust's investment strategy has not changed and it will continue to invest in growth companies in the UK. The change of benchmark provides the Manager with a wider range of statistical information on UK smaller companies on a more regular basis. The Manager finds this useful in determining sector weightings and stock selection. Overall Performance This strategy has continued to be effective with net asset value per ordinary share increasing by 26.3% over the six month period. This exceeds both the old and new benchmark by 2.5% and 1.7% respectively. During the early part of the period under review there was a marked shift in favour of value stocks, an area in which the Trust is not heavily invested. As a result, the Trust underperformed both indices in March and April. Since June, the value of growth stocks has started to recover, and this recovery now seems to be gathering pace. This has benefited the Trust and it has outperformed both the old and new benchmark in each month since April. Gearing Gearing has increased from 4.7% at 1 March 1999 to 7.3% at 31 August 1999. Given the strong growth in share prices of UK smaller companies the increased gearing helped the Trust's performance. Stocks and Sector Performance The main overweight sector positions were General Industrials and Information Technology. The overweight Information Technology position hindered performance. This reflected the shift away from growth stocks during the early part of the period under review. The likely impact of Y2K, in particular the likely demand for new hardware, software and services towards the end of this calendar year caused many to be cautious about prospects for the Information Technology sector. Recent announcements made by some of the systems integrators and hardware resellers have been mixed, but some suggest that any reduction in activity could be short- lived. Also, attention is moving to medium term prospects for 2000 and beyond, and the demand for efficient technology can only increase as companies strive to become ever more competitive. The Manager therefore remains confident that the prospects for the sector are attractive. The Trust's Information Technology holdings include DIAGONAL, Skillsgroup, RM, Guardian IT, ITNet, royalblue and NSB Retail. The Trust under-performed slightly in the General Industrials sector. It did not hold two of the strongest performers in the sector, and its holding in City Technology disappointed. Within General Industrials the best performing holding was Cammell Laird, the ship repair and refurbishment company with dry docks in Merseyside, the North East and Gibraltar. The holding appreciated by just over £1m to become the Trust's most valuable holding, despite some profit taking. The main underweight sector position continued to be Financials (which includes Real Estate). In Financials, superior returns were achieved through stock selection. The two insurance holdings, Independent Insurance and CLM Insurance both performed well, the latter announcing an agreed all paper merger with SVB Holdings. Birkby also achieved a good return following the announcement of its acquisition by Mentmore Abbey. In the Cyclical Services sector, the Trust moved from an underweight to a neutral weighting during the period. Within the sector the most overweight position was in distributors. The Trust's stocks performed very well in particular Trifast and PTS. Trifast, a distributor of fasteners, is growing rapidly by developing strategic partnerships with some very big companies especially in the telecoms and electronics sectors both in the UK and overseas. PTS was acquired by BSS. The investment performed very well not just because the bid was at a good premium but also because the Trust chose to take paper which itself appreciated strongly following the bid. Also within Cyclical Services, the Trust's Media and Photography holdings performed more strongly than the subsector. Bloomsbury Publishing achieved very good sales of its Harry Potter children's books several of which have featured regularly in the top 10 sales lists. It also published the Encarta World English Dictionary, the result of many years work - the CD Rom version is published in conjunction with Microsoft. The holding in IMS also performed well following good results and attention being drawn to its popular football internet site, teamtalk.com. Each of the Trust's holdings in Trifast, PTS, Bloomsbury Publishing and IMS appreciated by over £1m. New investments in the Cyclical Services sector include N Brown, the specialist mail order clothing company, Glotel, a telecoms staffing company, Forth Ports and AEA Technology (although this stock had been held before). The sector weighting in Non-Cyclical Consumer Goods was slightly underweight and returns were disappointing. To a significant extent this was because the Trust did not hold a number of stocks which recovered strongly after previously experiencing trading problems. Also the holding in Oxford Asymmetry fell sharply when its subsector did well. Takeovers PTS, Birkby and CLM Insurance have already been mentioned Other disposals by way of takeovers included Partco, Denby, Hozelock, Sidlaw and GAME. There has been an increase in the number of mergers (eg. CLM Insurance and Birkby) and this is a trend the Manager expects to continue. The sales of Denby and Hozelock are both examples of sales to financial buyers but the Manager has not seen other such approaches in recent months. This is partly because the Trust is heavily invested in growth rather than value stocks. New Issues The new issue market has been quiet during the last six months. New issues in which the Trust has taken part include Morse, Synstar, Glotel and IQE. Historically the Trust has benefited from an active new issue market, but the contribution to performance from new issues over the six months period was negligible. The Manager expects that the new issue market will become more active again but does not expect a marked upturn during the second half. Market Capitalisation Breakdown At 31 August 1999 the smallest constituent of the FTSE Small Cap Index excluding Investment Companies had a market capitalisation of £30 million, and the largest a capitalisation of £405 million. At that date, 84.7% of the Trust's portfolio by value was comprised of stocks within this market capitalisation range, 10.2% was above the range and 5.1% below it. The Manager will continue to make new investments above this range from time to time where a stock is regarded as attractive and stock liquidity is expected to be good. It would be rare for the Manager to make a new investment in a company with a market capitalisation of less than £30 million. Conclusion and Outlook The performance of the Trust and the UK Smaller Companies Sector over the last six months has been strong both in actual terms and relative to the FTSE 100 Index. At 31 August 1999 the FTSE 100 Index traded at an average price earnings ratio of 28.5 compared to 21.9 for the FTSE Small Cap Index excluding Investment Companies. It is encouraging that economies in the UK and Continental Europe are strengthening and increases in confidence are being expressed in recent business surveys, including 3i's own Enterprise Barometer. The Manager believes that the economic environment favours UK smaller companies, and that relative to larger stocks they continue to offer better value. 3i Asset Management Limited 13 October 1999 STATEMENT OF TOTAL RETURN for the six months ended 31 August 1999 (incorporating the revenue account) 6 months to 6 months to 12 months to 31 August 1999 31 August 1998 28 February 1999 (unaudited) (unaudited) (audited) Revenue Capital Total Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 Gains on invest -ments Net realised gains over previous valuation 1,596 1,596 3,890 3,890 4,962 4,962 Net unrealised appreci -ation/ (depreci -ation) 28,470 28,470 (16,545)(16,545) (6,504)(6,504) ------ ------ ------ ------ ------ ------ ------ ------ ------ 30,066 30,066 (12,655)(12,655) (1,542)(1,542) Income 2,927 2,927 2,333 2,333 4,335 4,335 Investment management fee (123) (368) (491) (108) (323) (431) (221) (661) (882) Other expenses (153) (153) (131) (131) (251) (251) ------ ------ ------ ------ ------ ------ ------ ------ ------ Net return before finance costs and taxation 2,651 29,698 32,349 2,094 (12,978)(10,884) 3,863 (2,203) 1,660 Interest payable and similar charges (355) (241) (596) (149) (447) (596) (595) (582)(1,177) ------ ------ ------ ------ ------ ------ ------ ------ ------ Return on ordinary activities before tax 2,296 29,457 31,753 1,945 (13,425)(11,480) 3,268 (2,785) 483 Tax on ordinary activi -ties (269) - (269) (414) - (414) (763) - (763) ------ ------ ------ ------ ------ ------ ------ ------ ------ Return on ordinary activities after tax for the period 2,027 29,457 31,484 1,531 (13,425)(11,894) 2,505 (2,785) (280) Dividends (973) (973) (573) (573)(2,316) (2,316) ------ ------ ------ ------ ------ ------ ------ ------ ------ Transfer to reserves 1,054 29,457 30,511 958 (13,425)(12,467) 189 (2,785)(2,596) ===== ====== ====== ====== ====== ====== ====== ====== ====== Return per ordinary share 3.50p 50.86p 54.36p 2.64p (23.18p)(20.54p) 4.33p (4.81p) (0.48p) All revenue and capital items in the above statement derive from continuing operations. BALANCE SHEET as at 31 August 1999 31 August 31 August 28 February 1999 1998 1999 (unaudited) (unaudited) (audited) £'000 £'000 £'000 Fixed assets Investments 158,179 118,734 124,020 ------- ------- ------- Current assets Debtors 1,029 606 382 Cash and short term deposits 3,906 3,297 9,263 ------- ------- ------- 4,935 3,903 9,645 Creditors: amounts falling due within one year (1,992) (1,911) (3,061) ------- ------- ------- Net current assets 2,943 1,992 6,584 ------- ------- ------- Total assets less current liabilities 161,122 120,726 130,604 Creditors: amounts falling due after more than one year (14,666) (14,652) (14,659) ------- ------- ------- Net assets 146,456 106,074 115,945 ======= ======= ======= Capital and reserves Called-up share capital 14,480 14,480 14,480 Share premium 38,952 38,952 38,952 Capital reserve - realised 37,450 31,308 34,883 - unrealised 52,700 18,745 25,810 Revenue reserve 2,874 2,589 1,820 ------- ------- ------- Total shareholders' funds 146,456 106,074 115,945 ======= ======= ======= Net asset value per share 252.9p 183.1p 200.2p Approved by the Board 13 October 1999 CASH FLOW STATEMENT for the six months ended 31 August 1999 31 August 31 August 28 February 1999 1998 1999 (unaudited) (unaudited) (audited) £'000 £'000 £'000 Operating activities Investment income received 2,186 1,616 3,166 Deposit interest received 223 113 305 Underwriting commission received 18 16 24 Investment management fees paid (451) (413) (844) Secretarial fees paid (29) (29) (59) Other cash receipts 8 - 8 Other cash payments (172) (137) (180) ------- ------- ------- Net cash inflow from operating activities 1,783 1,166 2,420 ------- ------- ------- Servicing of finance Interest paid (581) (597) (1,178) ------- ------- ------- Net cash outflow from servicing of finance (581) (597) (1,178) ------- ------- ------- Taxation Taxation recovered - 245 245 ------- ------- ------- Total taxation recovered - 245 245 ------- ------- ------- Financial investment Purchase of investments (15,957) (20,823) (28,834) Sale of investments 11,141 18,714 32,591 ------- ------- ------- Net cash (outflow)/inflow from financial investment (4,816) (2,109) 3,757 ------- ------- ------- Equity dividends paid (1,743) (1,691) (2,264) ------- ------- ------- (Decrease)/increase in cash (5,357) (2,986) 2,980 ======= ======= ======= Notes to the financial statements 1. RECONCILIATION OF NET REVENUE BEFORE FINANCE COSTS AND TAXATION TO NET CASH INFLOW FROM OPERATING ACTIVITIES 31 August 31 August 28 February 1999 1998 1999 £'000 £'000 £'000 Net revenue before finance costs and taxation 2,651 2,094 3,863 Scrip dividends (35) (116) (68) Investment management fee charged to capital (328) (305) (623) (Increase)/decrease in accrued income (184) (74) 12 (Decrease)/increase in creditors (23) (22) 23 Increase in debtors (18) (11) (3) Tax on investment income (280) (400) (784) ------ ------ ------ Net cash inflow from operating activities 1,783 1,166 2,420 ====== ====== ====== 2. RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT 31 August 31 August 28 February 1999 1998 1999 £'000 £'000 £'000 (Decrease)/increase in cash in the period (5,357) (2,986) 2,980 Amortised debenture stock issue expenses (7) (7) (14) ------ ------ ------ Movement in net debt in the period (5,364) (2,993) 2,966 Opening net debt (5,396) (8,362) (8,362) ------ ------ ------ Closing net debt (10,760) (11,355) (5,396) ------ ------ ------ 3. YEAR 2000 The business of the Trust is effected through the processes and systems operated by the Manager. During the period, the Manager has continued to work to ensure that operations should not suffer any disruption as the Trust enters the new millennium. Nonetheless the complexities of the issue are such that it is not possible to guarantee that there will be no adverse effects on the Trust or its portfolio. The Manager considers Year 2000 preparations to be a priority and has achieved Year 2000 compliance of primary business operations. All costs associated with Year 2000 compliance were borne by the Manager and there was no related cost to the Trust. 4. MANAGER'S PERFORMANCE FEE The calculation of the performance fee is based on the increase in net asset value per share in excess of the performance of the benchmark, and is calculated on a total return basis. The fee is paid at the rate of 10% of the average of the excess performance in the two previous financial years, applied to the average of the total assets less current liabilities of the Trust at the previous four half year ends. The fee will be paid annually in April. For the purposes of the first such fee, payable April 2000, the excess performance for the year to 28 February 1999 is assumed to be nil. The fee is capped at 0.25% of the average of total assets less current liabilities at the four previous half year ends. As the amount of this performance fee for the current year is contingent upon performance for the whole of the year to 29 February 2000, no amount has been provided in the balance sheet. NOTES TO THE ANNOUNCEMENT 1. The Interim Report for the six months to 31 August 1999 will be posted to shareholders on 18 October 1999 and thereafter copies will be available from 3i Asset Management Limited, 91 Waterloo Road, London SE1 8XP. 2. The Interim dividend will be paid on 12 November 1999 to holders of shares on the register of members on 29 October 1999. 3. The accounting policies used in the preparation of the Interim Report are the same as those used in the statutory accounts for the year ended 28 February 1999. The six month period is treated as a discrete period. The figures for the year to 28 February 1999 are extracted from the accounts filed with the Registrar of Companies on which the auditors issued an unqualified report. The Interim Report does not constitute statutory accounts.
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