Final Results

RNS Number : 2965H

Herald Investment Trust PLC

17 February 2010

 

PRELIMINARY STOCK EXCHANGE ANNOUNCEMENT

 

HERALD INVESTMENT TRUST plc

Results for the year to 31 December 2009

17 February 2010

CHAIRMAN'S STATEMENT

The total return was 70.1% in 2009. However, this reflects some recovery from the oversold position at the end of 2008, when market valuations reflected distressed sellers rather than any normal valuation of the underlying investee companies. A more relevant statistic is to report that the Herald Investment Trust net asset value per share declined 3.2% since the end of 2006, which was the end of the financial period prior to the onset of the credit squeeze.  Encouragingly, over this three year period the portfolio's share of profits per share in underlying investee companies has grown by 20% and the p/e of the portfolio remains modest by historic standards, particularly versus the low yields on cash and bonds.

The total return on the UK portfolio has been 63.5%, which compares with the return of the most relevant index the HGSCI (Hoare Govett Smaller Companies Index including AIM), of 61.4%. The North American portfolio returned 67.8% in US dollar ('$') terms versus a rebased Russell 2000 Technology Index rise of 60.7%. However, sterling ('£') appreciated relative to the $ dragging the US portfolio £ return to 49.6%. The Far East return was 136.8% in £ having declined the most 41.0%, in 2008, while the European portfolio returned 42.3% in local currencies or 32.0% in £. The overall return further benefited from a recovery in the year-end mark to market position of the swap, which reflected a non-cash loss of £15.1m at 31 December 2008, but of only £6.3m at the end of 2009. In addition, the portfolio has been fully invested or modestly geared throughout the year leading to a greater performance for the net asset value per share.  The total return of the benchmark was 55.8% giving 14.3% outperformance, and this follows outperformance of 2.6% relative to the benchmark in 2008. In practice the swap masked the degree of portfolio outperformance in 2008 by 4-5% and flattered the outperformance in 2009 by a similar amount. Whilst the negative effect of the swap has been disappointing the borrowing facility has enabled the Company to exploit the rally to the full.

The year has distinctly split into three parts. The first quarter saw continued distressed selling particularly from hedge funds deleveraging or facing redemptions combined with uncertainty about the instability of the banking system. The second and third quarters then saw steady asset appreciation in the smaller company market albeit on low volumes as selling pressures abated. During this period market activity in terms of primary and secondary issues was very low. However, a wall of activity occurred in November when there was a torrent of secondary offerings as brokers identified a window of opportunity that overwhelmed the market and stopped the rally in its tracks. While the new issue market remained closed in the UK, and was only just ajar in the US, the real activity related to the evident squeeze on bank credit lines to small quoted businesses. The majority of Herald's portfolio companies do not have debt, so the impact was largely only the secondary effect of a further small company market liquidity squeeze, and indeed led to a period of outperformance. This did provide opportunities to acquire or increase positions at good valuations, which had been expected to occur, but not in such a concentrated way in one month. It is particularly fulfilling that the borrowing facility has enabled the Trust to support worthwhile fund raisings in a small company market so evidently lacking capital, at valuations that seem extremely promising for Herald investors. The flow of takeovers in the portfolio has continued, but at a more normal rate than in 2007-8, when vultures swooped on a market so willing to realise cash. There was modest year end net gearing of 110.

Earnings per share for the year, including a further small VAT repayment, were 0.39p and the Board is proposing a dividend of 0.30p.  Capital appreciation remains the goal of the investment strategy.

HERALD INVESTMENT TRUST plc

CHAIRMAN'S STATEMENT (CTD)

Trading in general for portfolio companies has been solid. There have clearly been headwinds from the economy, so that while profits have fallen for some companies, others have continued to grow, albeit at a slower rate than had been anticipated two years ago. In aggregate the profits from consistently profitable companies seem to be more or less flat for 2009, while for the whole portfolio there is some growth. Furthermore analysts' forecasts for growth for financial years ending in calendar year 2010 are quite robust with Herald Investment Trust's share of net profits in always profitable companies expected to be c£23m in 2010. On this basis profits per share are forecast to be 38% higher in 2010 than in 2006, the year end before the credit crunch. This is significantly better than the wider market and the Company's share price, and bodes well for the future performance of the portfolio.

Further asset appreciation seems probable while the low level of interest rates encourages cash into, what are perceived as, riskier asset classes such as small company shares. However 2009 benefited from profit upgrades throughout the year reflecting excessive pessimism when forecasts were set at the start of the year.  Consensus analysts' forecast for 2010 average 15.2% for the portfolio. The challenging macroeconomic environment suggests this upgrade pattern will not be repeated in 2010. Nevertheless we remain optimistic that the technology sector which this portfolio targets offers greater potential for resilient profits than the wider market, which is more vulnerable to a constrained outlook for credit and for consumer and Government spending.

The Company's Articles of Association first gave shareholders the right to vote at the Annual General Meeting (AGM) on 14 April 2004 (and at AGMs to be held in every third year thereafter) as to whether the Company should continue to operate as an investment trust. Accordingly, an ordinary resolution, Resolution 7 in the Notice of Annual General Meeting, is being proposed at the AGM of the Company to be held on 21 April 2010 to the effect that the Company should continue as an investment trust. Herald Investment Trust is one of the largest investment trusts specialising in technology, communications and multi-media and is one of the best performing investment trusts since its launch in February 1994. Furthermore it is the only specialist technology orientated investment trust with a material exposure to the United Kingdom. The Herald Board believes that the focus of the Trust on smaller capitalisation companies provides exposure to some of the most rapidly growing companies within the Trust's target sectors and should continue to provide attractive long term investment opportunities. The Directors believe that the prospects for investment in the technology and media sectors remain positive and the Company is managed by one of the most experienced and successful managers in the sector. Your Board strongly recommends that shareholders vote in favour of the resolution, and intend to vote their own shareholdings in favour of the resolution for the Company to continue as an investment trust.

Martin Boase retired in September 2009 after 16 years as Chairman of the Trust. During this period the assets per share grew by a factor of four. Both the Board and the Manager are very grateful for his expert guidance and wise counsel during his tenure as Chairman and we wish him well for the future.

Julian Cazalet

Chairman

16 February 2010

HERALD INVESTMENT TRUST plc

Statistics and Performance Report

	At inception 16 February 1994	At 31 December 2008	At 31 December 2009	Performance since 31 December 2008	Performance since inception
NAV per share	98.7p	252.6p	420.6p	66.5%	326.1%
Share price ‡	90.9p	184.0p	337.8p	83.6%	271.6%
FTSE 100 Index	3,417.7	4,434.2	5,412.9	22.1%	58.4%
HGSC Index plus AIM (capital gains ex. investment companies)	1,750.0	1,804.3	2,838.2	57.3%	62.2%
Russell 2000 (small cap) Technology Index (in sterling terms)	688.7*†	474.2	678.5	43.1%	1.5%
‡ Mid market price. * At 9 April 1996 being the date funds were first available for international investment. † The Russell 2000 (small cap) Technology Index was rebased during 2009 following some minor adjustments to its constituents. The rebased index is used from 31 December 2008 onwards. 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 2009

Equity markets	Performance (total return) %
UK	63.5
Europe ex. UK	32.0
USA	49.6
Asia Pacific ex. Japan	136.8
Emerging Markets	75.0
Fixed Interest	2.2

- 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 2009 which was approved by the Board on 16 February 2010. The Directors of Herald Investment Trust plc are recommending to the Annual General Meeting of the Company to be held on 21 April 2010 the payment of a final dividend of 0.30p net (1.55p net last year) per Ordinary share for the year ended 31 December 2009. 

HERALD INVESTMENT TRUST plc 

 

INCOME STATEMENT

	For the year ended 31 December 2009 (unaudited)				For the year ended 31 December 2008 (audited)
	Revenue £'000	Capital £'000	Total £'000		Revenue £'000	Capital £'000	Total £'000
Gains/(losses) on investments	-	139,718	139,718		-	(126,592)	(126,592)
Currency gains	-	311	311		-	54	54
Income (note 3)	6,077	-	6,077		7,629	-	7,629
Investment management fee	(2,773)	-	(2,773)		(2,808)	-	(2,808)
Recovered VAT (note 4)	292	-	292		2,506	-	2,506
Other administrative expenses	(313)	-	(313)		(321)	-	(321)
Net return before finance costs and taxation	3,283	140,029	143,312		7,006	(126,538)	(119,532)
Finance costs of borrowings	(2,875)	-	(2,875)		(2,128)	-	(2,128)
Net return on ordinary activities before taxation	408	140,029	140,437		4,878	(126,538)	(121,660)
Tax on ordinary activities	(84)	-	(84)		(136)	-	(136)
Net return on ordinary activities after taxation	324	140,029	140,353		4,742	(126,538)	(121,796)
Net return per Ordinary share (note 5)	0.39p	169.95p	170.34p		5.59p	(149.07p)	(143.48p)
Dividend per Ordinary share (note 6)	0.30p				1.55p
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 2009 (unaudited)		At 31 December 2008 (audited)
		£'000		£'000
FIXED ASSETS Investments held at fair value through profit or loss		380,457		243,276
CURRENT ASSETS
Debtors		1,593		1,803
Cash and short term deposits		18,551		31,547
		20,144		33,350
CREDITORS: Amounts falling due within one year (note 7)		(53,407)		(50,837)
Derivative financial instruments (note 7)		(6,298)		(15,079)
		(59,705)		(65,916)
Net current liabilities		(39,561)		(32,566)
TOTAL NET ASSETS		340,896		210,710
CAPITAL AND RESERVES
Called-up share capital		20,263		20,852
Share premium		73,738		73,738
Capital redemption reserve		1,689		1,100
Capital reserve		243,064		109,072
Revenue reserve		2,142		5,948
SHAREHOLDERS' FUNDS		340,896		210,710
Net asset value per Ordinary share (including income)		420.58p		252.63p
Net asset value per Ordinary share (excluding income)		420.19p		247.04p
Ordinary shares in issue (note 8)		81,053,283		83,408,123

HERALD INVESTMENT TRUST plc

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

For the year ended 31 December 2009 (unaudited)

	Called-up share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve*    £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 January 2009	20,852	73,738	1,100	109,072	5,948	210,710
Net return on ordinary activities after taxation	-	-	-	140,029	324	140,353
Shares bought back	(589)	-	589	(6,037)	-	(6,037)
Dividends paid during the year	-	-	-	-	(4,130)	(4,130)
Shareholders' funds at 31 December 2009	20,263	73,738	1,689	243,064	2,142	340,896

*Capital reserve as at 31 December 2009 included investment holding gains of £14,807,000.

For the year ended 31 December 2008 (audited)

	Called-up share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve*      £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 January 2008	21,743	73,738	209	246,171	1,636	343,497
Net return on ordinary activities after taxation	-	-	-	(126,538)	4,742	(121,796)
Shares bought back	(891)	-	891	(10,561)	-	(10,561)
Dividends paid during the year	-	-	‑	-	(430)	(430)
Shareholders' funds at 31 December 2008	20,852	73,738	1,100	109,072	5,948	210,710

* Capital reserve as at 31 December 2008 included investment holding losses of £123,711,000.

HERALD INVESTMENT TRUST plc

SUMMARISED CASH FLOW STATEMENT
	For the year ended 31 December 2009 (unaudited)			For the year ended 31 December 2008 (audited)
	£'000	£'000			£'000	£'000
NET CASH INFLOW FROM OPERATING ACTIVITIES		3,729				6,092
NET CASH OUTFLOW FROM SERVICING OF FINANCE		(2,871)				(1,614)
FINANCIAL INVESTMENT
Purchase of investments	(59,037)				(100,426)
Sale of investments	55,350				76,331
NET CASH OUTFLOW FROM FINANCIAL INVESTMENT		(3,687)				(24,095)
EQUITY DIVIDEND PAID		(4,130)				(430)
NET CASH OUTFLOW BEFORE FINANCING		(6,959)				(20,047)
FINANCING
Shares repurchased	(6,037)				(10,561)
Loans drawn down (note 7)	-				50,000
NET CASH (OUTFLOW)/INFLOW FROM FINANCING		(6,037)				39,439
(DECREASE)/INCREASE IN CASH		(12,996)				19,392
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
(Decrease)/increase in cash for period		(12,996)				19,392
Net cash inflow from bank loans (note 7)		-				(50,000)
MOVEMENT IN NET DEBT IN PERIOD		(12,996)				(30,608)
NET (DEBT)/FUNDS AT 1 JANUARY		(18,453)				12,155
NET DEBT AT 31 DECEMBER		(31,449)				(18,453)
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		143,312				(119,532)
(Gains)/losses on investments		(139,718)				126,592
Currency gains		(311)				(54)
Amortisation of fixed interest book cost		(5)				148
Changes in debtors and creditors		225				(976)
Income tax suffered		(1)				(4)
Overseas tax suffered		(84)				(136)
Realised currency profit		311				54
NET CASH INFLOW FROM OPERATING ACTIVITIES		3,729				6,092

HERALD INVESTMENT TRUST plc 

 

DISTRIBUTION OF ASSETS

 (unaudited)

 

		At 31 December 2009 %		At 31 December 2008 %
Equities:         United Kingdom		56.7		45.9
Continental Europe		2.9		2.5
USA		22.0		22.4
Asia Pacific		7.3		5.4
Emerging Markets		0.3		0.3
Total equities		89.2		76.5
Sterling denominated bonds		5.0		5.4
Norwegian krone denominated bonds		-		3.6
US$ denominated bonds		1.6		2.7
Net current assets		4.2		11.8
Total assets (before deduction of bank loans and derivative financial instruments)		100.0		100.0

 

HERALD INVESTMENT TRUST plc

NOTES (unaudited)

1.		The financial statements for the year to 31 December 2009 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 2008. 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 the Companies Act 2006. Herald Investment Management Limited is appointed as investment manager 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 2009 £'000						31 December 2008 £'000
3.	Income
	Income from investments and interest receivable		6,051						7,597
	Other income		26						32
			6,077						7,629
4.	VAT recovered In 2007 the European Court of Justice ruled that investment management fees should be exempt from VAT. During the year, HMRC has accepted the Manager's repayment claims for the period from 1994 to 1996.  £292,000 of VAT together with £171,000 of interest was reimbursed to the Company in respect of this period and recognised in the current year. In the year to 31 December 2008, £2,506,000 of VAT together with £370,000 of interest was received by the Company in respect of the repayment claims for the period from 2001 to 2007.
			31 December 2009 £'000					31 December 2008 £'000
5.	Net return per Ordinary share
	Revenue return		324					4,742
	Capital return		140,029					(126,538)
	Total return		140,353					(121,796)
	Net return per Ordinary share is based on the above totals of revenue and capital and on 82,397,262 Ordinary shares (2008 - 84,885,186) 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
			2009		2008				2009 £'000		2008 £'000
6.	Dividends
	Amounts recognised as distributions in the period:
	Previous year's final (paid 30 April 2009)		5.00p		0.50p				4,130		430

HERALD INVESTMENT TRUST plc

NOTES (unaudited) (Ctd)

		31 December				31 December
		2009		2008		2009 £'000		2008 £'000
6.	Dividends (continued)
	Set out below are 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 ended 31 December 2009 is £324,000 (2008 - £4,742,000).
	Dividends paid and proposed in the period:
	Proposed final dividend per Ordinary share	0.30p		1.55p		243		1,293
	Proposed special dividend per Ordinary share#	-		3.45p		-		2,877
		0.30p		5.00p		243		4,170
	Adjustment to provision for 2008 final dividend re shares bought back					-		(40)
						243		4,130
	The current year's proposed dividends will be paid on 29 April 2010 to all shareholders on the register at the close of business on 9 April 2010.  The ex-dividend date is 7 April 2010.
	# In 2008 the special dividend of 3.45p represented the recovery of VAT from HMRC (see note 4).
7.	The Company has a £75 million multi-currency variable rate loan facility with The Royal Bank of Scotland plc, which comprises three £25 million tranches expiring on 31 May 2010, 2011 and 2013. At 31 December 2009, there were outstanding drawings of £50 million (2008 - £50 million). 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 2009 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 2009 was an estimated liability of £6 million (2008 - £15 million) which was based on the marked to market value.
8.	At the Annual General Meeting in April 2009, Shareholders granted the Company authority to purchase shares in the market up to 12,382,957 Ordinary shares (equivalent to 14.99% of its issued share capital at that date). In the year to 31 December 2009, a total of 2,354,840 (2008 - 3,562,887) Ordinary shares with a nominal value of £588,710 (2008 - £890,722) were bought back at a total cost of £6,037,000 (2008 - £10,561,000). At 31 December 2009 the Company had authority to buy back a further 10,828,117 Ordinary shares. Under the provisions of the Company's Articles share buy-backs are funded from the capital reserve. The Company does not have any externally imposed capital requirements.
9.	During the period transaction costs on purchases amounted to £339,000 (2008 - £546,000) and transaction costs on sales amounted to £141,000 (2008 - £189,000).
10	The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 December 2009.  The financial information for 2008 is derived from the statutory accounts for 2008 which have been delivered to the Registrar of Companies. The Auditors have reported on the 2008 accounts, their report was unqualified and did not contain a statement under section 237(2) or (3) of the Companies Act 1985. The audit report for the financial statements for the year ended 31 December 2009 has yet to be signed but it is expected that the statutory accounts for 2009 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 2009 will be available on the Managers' website www.heralduk.com on or around 11 March 2010.
	None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

 

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