Final Results

RNS Number : 5347N

Herald Investment Trust PLC

18 February 2009

 



PRELIMINARY STOCK EXCHANGE ANNOUNCEMENT

HERALD INVESTMENT TRUST plc

Results for the year to 31 December 2008

18 February 2009

CHAIRMAN'S STATEMENT

2008 has been a tumultuous year for stock markets, and the decline in net asset value per share of 36.1% compares to a decline in the hybrid benchmark of 40.6%. Disappointing trading reports from investee companies were few and far between and insignificant overall, but the world was chasing liquidity, and the legitimate fear was that the seriousness of the credit squeeze would now affect the wider economy, and hence profits in due course. A year ago the forecast for the profitable stocks in the portfolio was 14.7x 2007 earnings: the portfolio at the end of 2008 is valued at 9.7x the earnings reported in 2007. This implies a derating of 34% on historic numbers, which nearly matches the decline in NAV, albeit on a somewhat different portfolio. A year ago the forecast p/e for 2008 was 11.6x, and is now estimated to be 9.5x; so prospective forecasts have fallen a little in aggregate, but this still represents a derating of 18%. There has at the margin been some destruction of value when companies have failed to raise new money but this has been more than offset by the opportunity to take stakes at exceptionally good valuations. Unlike bank shareholders where there has been a permanent destruction of value, the portfolio essentially remains sound, and profits continue to grow, albeit at a slower rate.

The net asset value of the Trust was weak in the second half of 2007, but January 2008 was worse than any month in 2007, and the decline in January of 10.2% exceeded the decline for 2007 as a whole. For the Trust's shareholders there was then a period of relative stability with the year to date loss reduced a little by the end of August both in absolute and relative terms. Then the crunch harshly took its bite in September, October and November with the NAV per share declining 10.2%, 18.9% and 9.5% in those months respectively. This reflected a further liquidity squeeze in the smaller companies markets around the world. Overall the NAV decline for the year was 36.1%.

The outperformance in the year against the hybrid benchmark would have been markedly greater but for the material adverse impact of a £15m marked to market provision on a 30 year interest rate swap on £50m bank borrowings. A facility of £75m was agreed in April, and £50m of this was drawn down, at a fixed margin for 3 to 5 years (c5.6%). In the spring it seemed obvious that the credit crunch was in its early stage, and that having cash in a world of distress selling would offer the potential for superior longer term returns. In light of the deteriorating macro-economic background at the year end this was invested in cash and Government bonds, in the expectation that valuations would be even more attractive in 2009. While it is exciting to have this war chest, it is a challenge to time the market bottom. Having purposefully deleveraged and repositioned the portfolio more defensively in the second half of 2007 liquid assets peaked at £40m in the first quarter, and in hindsight the Manager reinvested this cash too early, but the severity of the autumn's instability, though recognised as a possibility, seemed unlikely.

The UK still accounts for the majority of the portfolio. The weighted return of the targeted sectors was similar to the decline of the Hoare Govett Small Companies Index including AIM of 47.7% (total return). In contrast the total return of the UK portfolio was -35.8% which was usefully ahead of the index. The capital decline was £75m. The US portfolio declined 32.3% in £ terms, or £25m. The Russell 2000 Technology index was down 42.3%, or 20.1% in £ terms. Local currency returns in Europe and the Far East were -48.4% (-£3.4m) and -51.7% (-£11m) respectively. Both portfolios were reduced in the autumn of 2007 but in retrospect should have been cut even more aggressively. The volume sensitive manufacturing orientation of the Far East meant that it would always be the most vulnerable to a global recession, and it is the one area where there have been widespread reductions in profit forecasts. Had the severity of the global slowdown been anticipated clearly the weightings would have been further reduced, and the outlook for 2009 appears particularly difficult. In contrast the UK and US portfolios are reasonably defensive. As stated above the interest rate swap reflected a year end write down of £15m, albeit the 30 year gilt and swap rates have been exceptionally volatile and at the time of writing this loss has been reduced to £9m. This was partially offset by £4m unrealised bond gains at the year end. 

The income statement includes the recovery of £2.9m of VAT paid in previous years, including interest, following the judgment by the European Court of Justice, which will obviously not recur. The Board, therefore, declares a special dividend of 3.45p per share to represent the recovery of VAT and recommends a final dividend of 1.55p per share. The underlying improvement is from a loss of £1.4m to a profit of £1.8m. This significantly reflects three factors: a 29% increase in investment income, which ought to be sustainable, albeit bond income will be replaced by dividend income; a £1.2m increase in deposit interest, which is expected to decline materially; and a significant decline in the management fee reflecting the absence of VAT as well as the decline in assets. 

In November, the Board received a requisition from a shareholder for a motion permitting shareholders the right to have their stock bought back should they wish on a quarterly basis at a 2% discount to realisable value. It is disappointing that the discount to the net asset value widened during the year to 27.2% at the year end. The Manager and the Board firmly believe that it is important to consider share buy-backs and marketing to facilitate liquidity in the shares, but that a formulaic buy-back mechanism is entirely inappropriate. The current stock market valuations on a wider basis reflect the havoc caused by there being so many distressed sellers in the market. The policy of this Company is to take material stakes in smaller companies, which are never easily acquired or realised, and in the current market conditions which remain extremely difficult it is unlikely that full liquidity could be achieved at even a 27% discount. Furthermore, the Trust has over the years participated in many primary issues and placings for emerging companies that need outside capital. It is rewarding to see how many of these have developed into successful companies from meagre beginnings, and this is a vital ingredient in the wider prosperity of the economy. It is to be hoped that a positive by-product of these troubled times will be greater recognition of the value of fundamental investing for the development of sound businesses creating long term value both for the investors in the Company, the employees in the investee companies and the wider economy. It is your Board's belief that patient investors will benefit in the long run from the ability not only to avoid being a distressed seller, but also to buy stocks at distressed valuations.  The robustness of the closed end structure is especially desirable in current market conditions, and it is not in the interests of the majority to indulge the short term aims of a minority.

The unanimous view of the Board is that shareholders should vote against the requisitioned resolution.

The fragility of the banking system, and the associated contraction of credit is a worry to everyone. There are bound to be adverse repercussions in the profitability of companies within the portfolio. Nevertheless, whilst the Manager is fearful of the knock-on effects of the bleak macro environment, this is offset by excitement that the Trust is in a strong position to exploit the break down in liquidity and funding in the smaller company world, in a sector which has a number of resilient characteristics including strong balance sheets.        

Martin Boase

Chairman

17 February 2009

HERALD INVESTMENT TRUST plc

Statistics and Performance Report

	At inception  16 February 1994	At  31 December 2007	At 31 December 2008	Performance since 31 December  2007	Performance since inception
NAV per share	98.7p	395.0p	252.6p	(36.1)%	155.9%
Share price ‡	90.9p	312.0p	184.0p	(41.0)%	102.4%
FTSE 100 Index	3,417.7	6,456.9	4,434.2	(31.3)%	29.7%
HGSC Index plus AIM (capital gains ex. investment companies)	1,750.0	3,562.9	1,804.3	(49.4)%	3.1%
Russell 2000 (small cap) Technology Index (in sterling terms)	83.2*	72.1	57.6	(20.1)%	(30.8)%
‡ Mid market price. * At 9 April 1996 being the date funds were first available for international investment. Benchmark: The portfolio benchmark against which performance is measured is 2/3 Hoare Govett Smaller Companies Index plus AIM (capital gains ex. Investment companies) and 1/3 Russell 2000 (small cap) Technology Index (in sterling terms). Past performance is not a guide to future performance.

Portfolio Performance for the 12 months to 31 December 2008

Equity markets	Performance (total return) %
UK	(35.8)
Europe ex. UK	(30.4)
Americas	(32.3)
Asia Pacific ex. Japan	(41.0)
Emerging Markets	(58.1)
Fixed Interest	21.1

- ends -

For further information please contact:

Ms Katie Potts, Manager

Herald Investment Trust plc                                           020 7553 6300

Baillie Gifford & Co

Secretaries                                                                    0131 275 2000

The following is the unaudited preliminary statement for the year to 31 December 2008 which was approved by the Board on 17 February 2009. The Directors of Herald Investment Trust plc are recommending to the Annual General Meeting of the Company to be held on 22 April 2009 the payment of a final dividend of 1.55p net (0.50p net last year) per Ordinary share for the year ended 31 December 2008. The Directors are also proposing an additional special dividend of 3.45p per Ordinary share. 

HERALD INVESTMENT TRUST plc 

INCOME STATEMENT

	For the year ended 31 December 2008 (unaudited)				For the year ended 31 December 2007 (audited)
	Revenue £'000	Capital £'000	Total £'000		Revenue £'000	Capital £'000	Total £'000
Losses on investments	-	(126,592)	(126,592)		-	(32,898)	(32,898)
Currency gains/(losses)	-	54	54		-	(49)	(49)
Income (note 3)	7,629	-	7,629		5,167	-	5,167
Investment management fee	(2,808)	-	(2,808)		(4,252)	-	(4,252)
Recovered VAT (note 4)	2,506	-	2,506		-	-	-
Other administrative expenses	(321)	-	(321)		(268)	-	(268)
Net return before finance costs and taxation	7,006	(126,538)	(119,532)		647	(32,947)	(32,300)
Finance costs of borrowings	(2,128)	-	(2,128)		(1,883)	-	(1,883)
Net return on ordinary activities before taxation	4,878	(126,538)	(121,660)		(1,236)	(32,947)	(34,183)
Tax on ordinary activities	(136)	-	(136)		(134)	-	(134)
Net return on ordinary activities after taxation	4,742	(126,538)	(121,796)		(1,370)	(32,947)	(34,317)
Net return per Ordinary share (note 5)	5.59p	(149.07p)	(143.48p)		(1.57p)	(37.82p)	(39.39p)
Dividend per Ordinary share (note 6)	1.55p				0.50p
Special dividend per Ordinary share (note 6)	3.45p

   The total column of this statement is the profit and loss account of the Company.

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year.

A Statement of Total Recognised Gains and Losses is not required as all gains and losses of the Company have been reflected in the above statement.

HERALD INVESTMENT TRUST plc

BALANCE SHEET

		At 31 December 2008 (unaudited)		At 31 December 2007 (audited)
		£'000		£'000
FIXED ASSETS Investments held at fair value through profit or loss		243,276		330,833
CURRENT ASSETS
Debtors		1,803		839
Cash and short term deposits		31,547		12,155
		33,350		12,994
CREDITORS: Amounts falling due within one year (note 7)		(50,837)		(330)
Derivative financial instrument (note 7)		(15,079)		-
		(65,916)		(330)
Net current (liabilities)/assets		(32,566)		12,664
TOTAL NET ASSETS		210,710		343,497
CAPITAL AND RESERVES
Called-up share capital		20,852		21,743
Share premium		73,738		73,738
Capital redemption reserve		1,100		209
Capital reserve		109,072		246,171
Revenue reserve		5,948		1,636
EQUITY SHAREHOLDERS' FUNDS		210,710		343,497
Net asset value per Ordinary share		252.63p		394.96p
Ordinary shares in issue (note 8)		83,408,123		86,971,010

HERALD INVESTMENT TRUST plc

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

For the year ended 31 December 2008 (unaudited)

	Called-up share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital Reserve Realised              Unrealised      £'000                           £'000		Revenue reserve £'000	Total shareholders' funds £'000
Shareholders' funds at  1 January 2008	21,743	73,738	209	247,789	(1,618)	1,636	343,497
Net return on ordinary activities after taxation	-	-	-	10,634	(122,093)	4,742	(106,717)
Shares bought back	(891)	-	891	(10,561)	-	-	(10,561)
Revaluation of interest rate swap	-	-	-	-	(15,079)	-	(15,079)
Dividends paid during the year	-	-	-	-	-	(430)	(430)
Shareholders' funds at  31 December 2008	20,852	73,738	1,100	247,862	(138,790)	5,948	210,710

For the year ended 31 December 2007 (audited)

	Called-up share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital Reserve  Realised         Unrealised      £'000                        £'000		Revenue reserve £'000	Total shareholders' funds £'000
Shareholders' funds at  1 January 2007	21,889	73,738	63	233,361	48,125	4,052	381,228
Net return on ordinary activities after taxation	-	-	-	16,796	(49,743)	(1,370)	(34,317)
Shares bought back	(146)	-	146	(2,368)	-	-	(2,368)
Dividends paid during the year	-	-	-	-	-	(1,046)	(1,046)
Shareholders' funds at  31 December 2007	21,743	73,738	209	247,789	(1,618)	1,636	343,497

The Institute of Chartered Accountants in England and Wales, in its technical guidance TECH 01/08, states that profits arising out of a change in fair value of assets, recognised in accordance with Accounting Standards, can be treated as realised, provided the change recognised can be readily converted into cash. Securities listed on a recognised stock exchange are generally regarded as being readily convertible into cash and hence unrealised profits in respect of such securities, currently included within the Unrealised Capital Reserve, can be regarded as distributable under Company Law. 

HERALD INVESTMENT TRUST plc

SUMMARISED CASH FLOW STATEMENT
	For the year ended 31 December 2008 (unaudited)			For the year ended 31 December 2007 (audited)
	£'000	£'000			£'000	£'000
NET CASH INFLOW FROM OPERATING ACTIVITIES		6,092				187
NET CASH OUTFLOW FROM SERVICING OF FINANCE		(1,614)				(2,156)
FINANCIAL INVESTMENT
Purchase of investments	(100,426)				(82,697)
Sale of investments	76,331				108,457
NET CASH (OUTFLOW)/INFLOW FROM FINANCIAL INVESTMENT		(24,095)				25,760
EQUITY DIVIDEND PAID		(430)				(1,046)
NET CASH (OUTFLOW)/INFLOW BEFORE FINANCING		(20,047)				22,745
FINANCING
Shares repurchased	(10,561)				(2,368)
Loans drawn down (note 7)	50,000				60,000
Loans repaid	-				(80,000)
NET CASH INFLOW/(OUTFLOW) FROM FINANCING		39,439				(22,368)
INCREASE IN CASH		19,392				377
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET (DEBT)/FUNDS
Increase in cash in period		19,392				377
(Increase)/decrease in bank loans (note 7)		(50,000)				20,000
MOVEMENT IN NET (DEBT)/FUNDS IN PERIOD		(30,608)				20,377
NET FUNDS/(DEBT) AT 1 JANUARY		12,155				(8,222)
NET (DEBT)/FUNDS AT 31 DECEMBER		(18,453)				12,155
RECONCILIATION OF NET RETURN BEFORE FINANCE COSTS AND TAXATION TO NET CASH INFLOW FROM OPERATING ACTIVITIES
Net return on ordinary activities before finance costs and taxation		(119,532)				(32,300)
Losses on investments		126,592				32,898
Currency (gains)/losses		(54)				49
Amortisation of fixed interest book cost		148				-
Changes in debtors and creditors		(976)				(283)
Income tax (suffered)/repaid		(4)				6
Overseas tax suffered		(136)				(134)
Realised currency profit/(loss)		54				(49)
NET CASH INFLOW FROM OPERATING ACTIVITIES		6,092				187

HERALD INVESTMENT TRUST plc 

DISTRIBUTION OF ASSETS

 (unaudited)

		At 31 December 2008 %		At 31 December 2007 %
Equities:  United Kingdom		45.9		62.3
Continental Europe		2.5		5.0
Americas		22.4		17.5
Asia Pacific		5.4		7.8
Emerging Markets		0.3		-
Total equities		76.5		92.6
Sterling denominated bonds		5.4		-
Norwegian krone denominated bonds		3.6		-
EUR denominated bonds		-		2.2
US$ denominated bonds		2.7		1.5
Net current assets		11.8		3.7
Total assets (before deduction of bank loans and derivative financial instruments)		100.0		100.0

HERALD INVESTMENT TRUST plc

NOTES

1.		The financial statements for the year to 31 December 2008 have been prepared on the basis of accounting policies which are consistent with those set out in the Company's Annual Financial Statements at 31 December 2007. The Directors consider the Company's functional currency to be sterling as the Company's shareholders are predominantly based in the UK and the Company is subject to the UK's regulatory environment.
2.		Related party transactions  The Directors' fees for the year are detailed in the Directors' Remuneration Report contained within the Annual Report. No Director has a contract of service with the Company. During the year no Director was interested in any contract or other matter requiring disclosure under section 232 of the Companies Act 1985. Herald Investment Management Limited are appointed as investment managers under a management agreement which is terminable on twelve months' notice. Their fee is calculated on a monthly rate of 0.08333% of the Company's net asset value based on middle market prices. The management fee is levied on all assets except the holding in Herald Ventures II Limited Partnership managed by Herald Investment Management Limited.
			31 December 2008 £'000						31 December 2007 £'000
3.	Income
	Income from investments and interest receivable		7,597						5,167
	Other income		32						-
			7,629						5,167
4.	Recovered VAT In 2007 the European Court of Justice ruled that investment management fees should be exempt from VAT. Since then, HMRC has accepted the Managers' repayment claims for the periods from 2001 to 2007. £2,506,000 of VAT together with £370,000 of interest was received by the Manager on behalf of the Company in respect of this period. These amounts have been paid to the Company and recognised in the current year.
			31 December 2008 £'000					31 December 2007 £'000
5.	Net return per ordinary share
	Revenue return		4,742					(1,370)
	Capital return		(126,538)					(32,947)
	Total return		(121,796)					(34,317)
	Net return per Ordinary share is based on the above totals of revenue and capital and on 84,885,186 Ordinary shares (2007 - 87,114,983) being the weighted average number of Ordinary shares in issue during the year. There are no dilutive or potentially dilutive shares in issue.
			31 December						31 December
			2008		2007				2008 £'000		2007 £'000
6.	Dividends
	Amounts recognised as distributions in the period:
	Previous year's final (paid 1 May 2008)		0.50p		1.20p				430		1,046
	We also set out below the total dividends payable in respect of the financial year, which is the basis on which the requirements of Section 842 of the Income and Corporation Taxes Act 1988 are considered. The revenue available for distribution by way of dividend for the year is £4,742,000 (2007 - £Nil).

HERALD INVESTMENT TRUST plc

NOTES (Ctd)

		31 December				31 December
		2008		2007		2008 £'000		2007 £'000
6.	Dividends (continued)
	Dividends paid and proposed in the period:
	Proposed final dividend per Ordinary share	1.55p		0.50p		1,293		435
	Proposed special dividend per Ordinary share#	3.45p		-		2,877		-
		5.00p		0.50p		4,170		435
	Adjustment to provision for 2007 final dividend re shares bought back					-		(5)
						4,170		430
	The current year's proposed dividends will be paid on 30 April 2009 to all shareholders on the register at the close of business on 14 April 2009. The ex-dividend date is 8 April 2009.
	# The proposed special dividend of 3.45p represents the recovery of VAT from HMRC (see Note 4).
7.	During the year, the Company replaced its existing 364 day £50 million multi-currency loan facility with a £75 million multi-currency variable rate loan facility with The Royal Bank of Scotland plc. The new facility comprises three £25 million tranches expiring on 31 May 2010, 2011 and 2013. Arrangement fees on this facility totalling £112,500 have been written off through finance costs of borrowings. At 31 December 2008, there were outstanding drawings of £50 million (2007 - Nil). Interest on the loans is payable in quarterly instalments in January, April, July and October. A non-utilisation fee of 0.30% is payable on the £25 million undrawn. The estimated repayment value of the loan at 31 December 2008 was £50 million. The indicative costs of repaying the loan as at 31 December 2008 were not material in the context of the above figures. The interest on £50 million of this facility has been fixed for the long term through a 30 year interest rate swap but may vary on periodic renewals of the debt facility to the extent that the mark up over LIBOR charged by a lending bank varies. The fair value of the interest rate swap contract at 31 December 2008 was an estimated liability of £15 million (2007 - Nil) based on the marked to market value.
8.	At the Annual General Meeting in April 2008 Shareholders granted the Company authority to purchase shares in the market up to 12,896,875 Ordinary shares (equivalent to 14.99% of its issued share capital at that date). In the year to 31 December 2008, a total of 3,562,887 (2007 - 585,000) Ordinary shares with a nominal value of £890,722 (2007 - £146,250) were bought back at a total cost of £10,561,000 (2007 - £2,368,000). At 31 December 2008 the Company had authority to buy back a further 10,268,474 Ordinary shares. Under the provisions of the Company's Articles share buy-backs are funded from the realised capital reserve. The Company does not have any externally imposed capital requirements.
9.	During the period transaction costs on purchases amounted to £546,000 (2007 - £387,000) and transaction costs on sales amounted to £189,000 (2007 - £354,000).
10	The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 December 2008. The financial information for 2007 is derived from the statutory accounts for 2007 which have been delivered to the Registrar of Companies. The Auditors have reported on the 2007 accounts, their report was unqualified and did not contain a statement under section 237(2) or (3) of the Companies Act 1985. The statutory accounts for 2008 will be finalised on the basis of the financial information presented in this preliminary announcement and will be delivered to the Registrar of Companies following the Company's Annual General Meeting.
11	The Report and Accounts for the year ended 31 December 2008 will be available on the Managers' website www.heralduk.com on or around 12 March 2009.
12	None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

 

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