Interim Results
3i Smaller Quoted Co's Trust PLC
14 October 2004
14 October 2004
3i Smaller Quoted Companies Trust plc
Interim results for the six months to 31 August 2004
"3i SQC outperforms the benchmark"
The Board of 3i Smaller Quoted Companies Trust plc ("the Trust") today announces
its interim results for the six months to 31 August 2004.
Results overview
• The Trust outperformed the FTSE SmallCap Index excluding Investment
Companies ("the benchmark") by 2.1%. In absolute terms, the net asset value ("
NAV") per share fell by 7.4% to 217.4p.
• Stock selection was the main contributing factor to the Trust's
outperformance of the benchmark.
• The Directors have declared an interim dividend of 1.75p per share, a
2.3% increase on the 1.71p interim dividend paid last year.
• The discount to NAV narrowed over the period from 22.0% as at 29
February 2004 to 19.3% as at 31 August 2004, and has narrowed further since.
• The Trust has now reached agreement, subject to contract, to appoint
DWS Investment Trust Managers Limited ('DWS'), part of Deutsche Bank, as the new
Investment Manager.
Commenting on the results, Mike Prentis, Fund Manager, said:
"The Trust's relative outperformance in a mixed period for smaller companies
derives mainly from good stockpicking. The Trust has a strong bias towards
growth companies, which performed well, as did its investments in early stage
companies."
- ends -
For further information, please contact:
Mike Prentis
Fund Manager
3i Asset Management
(a division of 3i Investments plc,
the Investment Manager)
020 7975 3527
Notes to editors
The objective of 3i Smaller Quoted Companies Trust plc is to achieve long term
capital growth for shareholders in excess of the growth in the benchmark through
investment mainly in smaller UK quoted companies.
The Investment Manager of 3i Smaller Quoted Companies Trust plc is the Asset
Management division of 3i Investments plc. 3i Investments plc is authorised and
regulated by the Financial Services Authority.
Chairman's statement
Overview
After a strong performance during the Trust's last financial year, stock markets
have been dull. In large part this reflects both global economic uncertainties,
manifested most obviously in high oil prices, and moves to increase interest
rates in the UK and the US. The Trust outperformed the benchmark by 2.1%. In
absolute terms, the net asset value ("NAV") per share fell by 7.4% to 217.4p.
Earnings and dividends
Earnings per share were 3.09p for the period, compared to 2.67p for the six
months to 31 August 2003. The Directors have declared an interim dividend of
1.75p, a 2.3% increase on the 1.71p interim dividend paid last year.
Gearing
Net borrowing has remained in the range £10 million to £12 million throughout
the period, and is an indication of the generally positive view that your Board
and the Investment Manager share about the outlook for UK smaller companies.
Discount and share buybacks
The Trust's share price fell from 183.0p to 175.5p during the period, a fall of
4.1%, whilst the discount narrowed from 22.0% to 19.3%. The Trust bought in and
cancelled 2,475,000 shares at an average discount to NAV of 19.4%.
Transfer of investment management agreement
On 7 July 2004, 3i Group plc announced its intention to dispose of its quoted
fund management activities as these were no longer deemed core to the strategy
of 3i Group plc. The Trust's Board has had three objectives in responding to
this development: to ensure continuity of investment management; to achieve
better financial terms; and to move to a management firm that offers improved
marketing.
I am pleased to be able to confirm that terms have now been agreed, subject to
contract, to appoint DWS Investment Trust Managers Limited ("DWS"), part of
Deutsche Bank, as the Trust's new Investment Manager. Mike Prentis, the
existing fund manager, has agreed to transfer to DWS and will work closely with
its existing smallcap team. The benefits arising from the appointment of DWS
are expected to include the following:
• The management fee payable by the Trust will be reduced: currently the
Trust pays an annual fee equal to 0.65% of its total assets less current
liabilities, but upon transfer to DWS this will be reduced to 0.5% in respect of
total assets less current liabilities in excess of £50 million.
• The notice period of the management contract will be reduced from 12
months to six months. Notice may not be given by either party during the first
12 months of DWS's appointment as Investment Manager.
• DWS will provide the Trust with greater marketing capability and
provide the option of savings plans for private shareholders, something which 3i
has not been able to offer in recent years.
In addition, 3i has undertaken that, in the case of the proposed flotation of
any UK company in which 3i has, or may in the future have, an investment, it
will send a formal written request to the relevant company's sponsor that the
Trust be given the opportunity to acquire shares in the relevant IPO at the
flotation price; this arrangement will be subject to review after two years,
after which time it will continue until either party gives 12 months' notice.
Shareholders should note that whilst this arrangement will not guarantee the
Trust's participation in any particular IPO, it will constitute a tangible
benefit to the Trust in terms of future opportunities. Overall, the Board
believes these changes represent an improved position for shareholders and are
pleased with the outcome of negotiations.
Board structure
It is my intention to step down as Chairman at the Trust's AGM in June 2005.
Richard Brewster, the Deputy Chairman, who has wide experience in the financial
services sector, will succeed me. It is expected that up to two new
appointments to the Board will be made in the near future.
Outlook
The global economic and market outlook has become less clear in recent months.
In the US, following strong GDP growth earlier this year, the latest survey
evidence and jobs data is mixed. Growth looks to have returned to trend levels.
In Europe, there is a growing belief that profits will grow faster than wages
as some of the effects of globalisation become apparent in an area of high
unemployment.
The UK has also shown some signs of slowing activity but still remains
attractive relative to other economies. Interest rates have continued to rise
and the desired cooling of the housing market, with knock-on effects on consumer
spending, seems to be underway. These trends are occurring at a time of
increasing investment by the corporate sector, which has run a positive cash
balance for the last two years meaning companies are better able to endure
higher interest rates and fund growth. Government spending has also remained
strong. Overall, UK GDP growth is rebalancing rather than falling sharply.
Looking forward, the question seems to be whether generally good profit growth
can outweigh mixed economic and political news. I believe it will and that we
can anticipate positive returns in the period ahead. Importantly, stockpicking
by the Investment Manager in a disciplined manner is the way to gain the best
returns in such a period.
William Govett
13 October 2004
Investment Manager's review
Overall performance
As mentioned in the Chairman's statement, the Trust outperformed its benchmark
in the first six months of its financial year. Stock selection was again the
main contributor to relative outperformance and exceeded the costs of running
the Trust, including the negative effect of being geared.
Portfolio positioning
The Trust retains its bias towards growth companies, which usually represent
60-65% of the portfolio by value. We also look for good opportunities amongst
value and recovery stocks. Currently, we are tending to find more attractively
valued opportunities amongst sub £100 million market capitalisation companies,
and the weighted average market capitalisation of the Trust's portfolio has
continued to fall. We are taking a medium term, typically two-year, view on
more stocks especially some of the smallest companies, which tend to be
illiquid. The share prices of these stocks can move erratically and correlation
with overall market movements may be less marked.
Stock and sector performance
Our investment approach is to invest on a bottom-up basis, identifying
attractive companies through our fundamental research and frequent meetings with
companies. We usually have exposure to most sectors of the market in order to
hold a diversified portfolio but regard sector weightings as a control not a
driver for portfolio construction.
The best performing sectors for the Trust were oil and gas, real estate, mining
and general retailers, all showing absolute increases in values during the
period. The first three of these sectors generally comprise what we think of as
value stocks, namely companies trading below likely net asset value. Our
investments in First Calgary Petroleums, which has discovered sizeable gas and
oil reserves in Algeria, and Burren Energy, which produces increasing volumes of
oil in Turkmenistan and the Republic of Congo, performed very strongly. We have
sold the First Calgary stake, crystallising a gain of 132% over cost, and have
taken some profit in Burren Energy. The real estate sector has outperformed for
several years, and against the background of rising interest rates we expected
this to come to an end; consequently the Trust has had a large underweight
position in this sector for some time. In fact, the sector was one of the best
absolute performers during the period. Pleasingly, the Trust's investments
outperformed the sector as a result of the takeover of Estates & General, and
excellent asset purchases and sales by Ashtenne's management. The Trust's
strong performance in the mining sector is due to Monterrico Metals, which is
appraising a large copper deposit in Peru, and Consolidated Minerals which has
benefited from strong demand for its manganese and chromite which are used in
steel production in China, Russia and, shortly, India. Within the general
retailers sector the Trust's investments in Blacks Leisure and Topps Tiles both
increased significantly reflecting good business models which in each case have
enabled their impressive management teams to achieve market leadership for their
companies.
The sectors which experienced greatest absolute falls in investment values were
support services, leisure and hotels, IT hardware and software and computer
services. In support services, the Trust's investments generally performed in
line with the sector. Within leisure and hotels, the investments in Regent Inns
and Holidaybreak disappointed. The management of the former has now been
removed, and we feel that Holidaybreak's management are tackling their issues so
as to ensure better profits next year. The technology sectors have been weak
for some months now. We had hoped that second quarter results from the US would
show much improved business investment in software. This proved not to be the
case and many technology stock prices have fallen. Whilst the Trust was
overweight in these sectors, and thus experienced absolute falls in values, our
stockpicking relative to the sectors was good, with a particularly strong
performance by CSR, which has gained a leading market position with its
Bluetooth chips, and iSoft, which supplies software to hospitals, mainly in the
UK.
Activity
The period was marked by strong IPO activity, especially at the start of the
period. The Trust invested £1 million to £1.25 million in each of three IPOs:
Centaur, a publisher of business magazines; The Local Radio Company, the
management of which had successfully built up and sold JazzFM, a former
investment of the Trust; and Nelson Resources. Nelson Resources has strongly
growing oil production in Kazakhstan, and an option over potentially very
productive acreage in the Caspian Sea close to where one of the largest ever oil
discoveries was made. Significant investments were also made in Kier, Findel,
and Johnson Services (in each case backing well proven management in businesses
performing well); AG Barr, the owner of the IRN-BRU soft drinks brand; and
Huveaux which is building a strong portfolio of political and educational
publications. Smaller investments were made in companies such as Chorion, which
bought the rights to the "Mr Men" characters, and various small, speculative
metal exploration companies, one of which we hope will be as successful for the
Trust as Monterrico has been.
Complete disposals were made, on valuation grounds, of the holdings in
Bloomsbury, SMG, Amlin, Forth Ports, Gyrus, ITNET (before its profit warning)
and Wincanton. Holdings in niche lending companies Paragon and Kensington, and
car retailer Pendragon, were sold to reduce exposure to the consumer at a time
of rising interest rates. The Trust did not benefit from M&A activity on the
usual scale during the period, with only Estates & General being acquired.
Looking forward
We closely monitor newsflow (results, trading statements, takeover activity and
other key news) in the smallcap universe. Our indications suggest that, whilst
newsflow in July was rather mixed, the picture in August and September has been
more positive.
UK interest rates now look to be close to their peak, and the UK economy is in
reasonable shape, albeit growth is probably slowing back to trend levels from
the elevated levels of the recent "recovery" period. The outlook is clouded by
high oil prices, an uncertain political position internationally, especially in
the Middle East, and slowly increasing short-term US interest rates. Despite
these concerns, we remain positive about the prospects for many UK smaller
companies and for the Trust's portfolio as a whole.
Mike Prentis
Fund Manager
3i Investments plc
13 October 2004
Statement of total return
for the six months ended 31 August 2004 (incorporating the revenue account)
6 months to 31 August 2004 6 months to 31 August 2003 12 months to 29 February 2004
(unaudited) (unaudited) (audited)
Revenue Capital Total Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Gains/(losses) on
investments
Net realised
(losses)/gains
over (2,356) (2,356) 1,969 1,969 10,777 10,777
previous
valuation
Net unrealised
value (7,710) (7,710) 34,397 34,397 41,048 41,048
movement
(10,066) (10,066) 36,366 36,366 51,825 51,825
Income 2,069 2,069 2,022 2,022 3,392 3,392
Investment
management fee (110) (333) (443) (107) (319) (426) (214) (642) (856)
Other expenses (164) (164) (159) (159) (322) (322)
Net return before
finance costs 1,795 (10,399) (8,604) 1,756 36,047 37,803 2,856 51,183 54,039
Interest payable
and (192) (401) (593) (263) (333) (596) (459) (718) (1,177)
similar charges
Return on
ordinary
activities for 1,603 (10,800) (9,197) 1,493 35,714 37,207 2,397 50,465 52,862
the
period
Dividends (895) (895) (956) (956) (2,376) (2,376)
Transfer to/
(from) 708 (10,800) (10,092) 537 35,714 36,251 21 50,465 50,486
reserves
Return per
ordinary
share (pence) 3.09p (20.80)p (17.71)p 2.67p 63.77p 66.44p 4.32p 91.01p 95.33p
All revenue and capital items in the above statement derive from continuing
operations.
No operations were acquired or discontinued during the period.
Reconciliation of total shareholders' funds
6 months to 6 months to 12 months to
31 August 2004 31 August 2003 29 February 2004
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Return on ordinary activities for the period (9,197) 37,207 52,862
Dividends (895) (956) (2,376)
(10,092) 36,251 50,486
Purchase and cancellation of own ordinary shares
Premium to nominal value on shares purchased (3,948) (660) (3,891)
Nominal value of ordinary 25p shares purchased (619) (199) (774)
Movement in total shareholders' funds (14,659) 35,392 45,821
Opening total shareholders' funds 125,891 80,070 80,070
Closing total shareholders' funds 111,232 115,462 125,891
Balance sheet
as at 31 August 2004
31 August 31 August 29 February
2004 2003 2004
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Fixed assets
Investments 124,058 126,618 140,419
Current assets
Debtors 225 903 49
Cash, short term deposits and money market funds 3,551 4,580 3,745
3,776 5,483 3,794
Creditors: amounts falling due within one year (1,863) (1,914) (3,590)
Net current assets 1,913 3,569 204
Total assets less current liabilities 125,971 130,187 140,623
Creditors: amounts falling due after more than one year (14,739) (14,725) (14,732)
Net assets 111,232 115,462 125,891
Capital and reserves
Called-up share capital 12,791 13,985 13,410
Share premium 38,952 38,952 38,952
Capital redemption reserve 1,689 495 1,070
Capital reserve - realised 45,455 50,007 45,720
- unrealised 8,904 8,774 24,006
Revenue reserve 3,441 3,249 2,733
Total shareholders' funds 111,232 115,462 125,891
Net asset value per share (pence) 217.4p 206.4p 234.7p
Approved by the Board on 13 October 2004
Cash flow statement
for the six months ended 31 August 2004
31 August 31 August 29 February
2004 2003 2004
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Operating activities
Investment income received 1,859 1,694 3,181
Income from money market funds 57 161 226
Deposit interest received 1 9 10
Underwriting commission received - 8 9
Investment management fees paid (431) (444) (869)
Secretarial fees paid (29) (29) (59)
Other cash payments (147) (179) (275)
Net cash inflow from operating activities 1,310 1,220 2,223
Servicing of finance
Interest paid (581) (581) (1,163)
Net cash outflow from servicing of finance (581) (581) (1,163)
Financial investment
Purchase of investments (30,637) (29,545) (65,877)
Sale of investments 35,701 25,184 65,021
Net cash inflow/(outflow) from financial
investment 5,064 (4,361) (856)
Equity dividends paid (1,420) (1,466) (2,422)
Financing
Purchase of ordinary shares for cancellation (4,567) (860) (4,665)
Net cash outflow from financing (4,567) (860) (4,665)
(Decrease) in cash (194) (6,048) (6,883)
Notes to the financial statements
1 Reconciliation of net revenue before finance costs to net cash inflow from operating
activities
31 August 31 August 29 February
2004 2003 2004
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Net revenue before finance costs 1,795 1,756 2,856
Investment management fee allocated to
capital reserve - realised (332) (319) (642)
Increase in accrued income (152) (150) 35
Decrease in creditors 23 (37) (27)
Increase in debtors (24) (30) 1
Net cash inflow from operating activities 1,310 1,220 2,223
2 Reconciliation of net cash flow to movement in net debt
31 August 31 August 29 February
2004 2003 2004
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
(Decrease) in cash in the period (194) (6,048) (6,883)
Amortised debenture stock issue expenses (7) (7) (14)
Movement in net debt in the period (201) (6,055) (6,897)
Opening net debt (10,987) (4,090) (4,090)
Closing net debt (11,188) (10,145) (10,987)
Independent review report of the auditors
Introduction
We have been instructed by the Trust to review the financial information for the
six months ended 31 August 2004 and we have read the other information contained
in the Interim report and considered whether it contains any apparent
misstatements or material inconsistencies with the financial information.
This report is made solely to the Trust. Our review work has been undertaken so
that we might report to the Trust in accordance with Bulletin 1999/4 issued by
the Auditing Practices Board and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone other than
the Trust for our work, for this report, or for the opinions we have formed.
Directors' responsibilities
The Interim report, including the financial information contained therein, is
the responsibility of, and has been approved by, the Directors. The Listing
Rules of the Financial Services Authority require that the accounting policies
and presentation applied to the interim figures should be consistent with those
applied in preparing the preceding annual accounts except where any changes, and
the reasons for them, are disclosed.
Review work performed
We conducted our review in accordance with guidance contained in Bulletin 1999/4
issued by the Auditing Practices Board. A review consists principally of making
enquiries of management and applying analytical procedures to the financial
information and underlying financial data and, based thereon, assessing whether
the accounting policies and presentation have been consistently applied unless
otherwise disclosed. A review excludes audit procedures such as tests of
controls and verification of assets, liabilities and transactions. It is
substantially less in scope than an audit performed in accordance with Auditing
Standards and therefore provides a lower level of assurance than an audit.
Accordingly we do not express an audit opinion on the financial information.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 31 August 2004.
Scott-Moncrieff
Chartered Accountants
Edinburgh
13 October 2004
Notes to the announcement
1 The interim dividend of 1.75p per ordinary share will be paid on 8
November 2004 to shareholders on the register of members at 22 October 2004.
2 The Interim report for the six months to 31 August 2004 will be posted
to shareholders on 22 October 2004. Alternatively, the Interim report and
accompanying slide presentation will be posted on our website at www.3isqc.com
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 29
February 2004 and those expected to be used for the year to 28 February 2005.
The six month period is treated as a discrete period except insofar as tax in
the revenue account is charged on the basis of an estimated annual effective
rate. The figures for the year to 29 February 2004 are extracted from the
accounts filed with the Registrar of Companies on which the auditors issued an
unqualified report. The Interim report and this announcement do not constitute
statutory accounts.
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