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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