Half-year Report

RNS Number : 4161L

Herald Investment Trust PLC

18 July 2017

 

HERALD INVESTMENT TRUST plc

HALF-YEARLY FINANCIAL REPORT

For the six months ended 30 June 2017

SUMMARY OF PERFORMANCE

	At inception 16 February 1994	At 30 June 2017	At 31 December 2016	Performance since 31 December 2016	Performance since inception
NAV per share (including current year income)	98.7p	1230.5p	1083.2p	13.6%	1,146.7%
NAV per share (excluding current year income)	98.7p	1229.5p	1082.6p	13.6%	1,145.7%
Share price	90.9p	996.0p	882.5p	12.9%	995.7%
Numis Smaller Companies plus AIM (ex.investment companies) Capital Only	1,750.0	5,555.8	5,049.8	10.0%	217.5%
Russell 2000 (small cap) Technology Index Capital Only (in sterling terms)†	688.7*	2,429.9	2,307.0	5.3%	252.8%

*        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 has been used from 31 December 2008 onwards.

CHAIRMAN'S REVIEW

The Trust's NAV per share has appreciated during the first half by 13.6% to 1230.5p. I am delighted to report that this reflected solid progress in all regions. The UK portfolio returned 15.6% versus the total return of the Numis Index (Inc AIM) of 11.6%. It is particularly pleasing to have achieved an internal rate of return (IRR) of 19.2% on the AIM portfolio, which now accounts for £354m of the £517m in the UK market. A number of investments held for many years have borne fruit, growing to become worthwhile holdings from small beginnings. The North American portfolio's total return was 13.9% versus the sterling total return on the Russell 2000 Technology Index of 5.4%. The smaller Asian portfolio appreciated 13.4%, and the European portfolio returned 27.7%.

In the first half of last year the UK market was moribund and desperately illiquid. It is reassuring that having sprung back to life in the second half of last year this healthier state has continued thus far in 2017. The dramatic change in 2017 has been the steady stream of follow-on fund raisings in the UK, of which we have participated in 21 (and a further 9 in North America and 1 in Australia) with an aggregate investment of £23m. Looking forward, the pace of follow-on fund raisings is expected to slow down.

The stock market has its own cycle, but so does the technology sector, and opportunities abound. The background for technology companies seems more favourable than at any previous period this century. After all, the TMT bubble burst in 2000 leaving a hang-over of overcapacity, and before this had worked through the financial crisis hit demand. The smartphone was the bright spot of the first decade of the century, but there is now much more breadth to the vibrancy in technology and new media. Discussions about component shortages and capacity constraint are reminiscent of periods in the 1980s and 1990s. Arguably the biggest driver is the reversion to centralised computing with hosted applications in both the private and public clouds. The PC/client server drove demand and disruption in the 1980s and 1990s, which followed mainframes. The big three infrastructure suppliers - Amazon Web Services, Microsoft and Google - are accelerating technological change and disrupting the market. Other important markets include the use of electronics in cars, and the trend towards driverless cars, the internet of things, robotics, artificial intelligence and the cheapness of alternative energy through wind and solar. The race is now on to store energy in scale, cost effectively.

In the UK portfolio 29 holdings returned more than £1m, but IQE, Bango, GB Group and Next Fifteen Communications contributed the most by value. Wandisco, Spectra Systems and Taptica more than doubled as well as Bango and IQE. IQE was first acquired in 1999 and has delivered cumulative profits of £21.5m to the end of June. However, £13.9m of that return has been achieved in 2017. IQE manufactures compound semiconductor wafers which are being used in optics as well as power amplifiers. Adesto, Everspin and Hydrogenics have all appreciated from distressed levels by more than 100% in the North American portfolio, but the star performer by value has been Pegasystems, a Massachusetts based software company for productivity in customer relationship management. This holding was first acquired in 2003 at an average price of $3.95 per share (split adjusted), and ended the period at $58. It is impressive that the founder and CEO, Alan Trefler, still retains a controlling 51% stake. His lack of inclination to issue paper has meant the company has long been overlooked, with minimal research coverage, but his success has at last been noticed. It is in stark contrast to a number of US software and internet companies that issue shares prolifically to directors and employees, and dilute returns to outside shareholders. It seems to us that valuations often do not sufficiently discount this cost to shareholders, particularly when the focus is on adjusted earnings which exclude the cost of share based payments.

In Europe, the star performers have been BE Semiconductor Industries in the Netherlands, Isra Vision in Germany and Data Respons in Norway. BE Semiconductor Industries was first acquired in the portfolio in 2011 at an average price of €5.8 and stood at €46.7 at the period end. Cumulatively the total return has been £16.5m. Isra Vision was acquired in 2003 at a book cost of £483k and the value at the period end was £7.1m, which is nearly 15x the initial investment. Isra's exposure to robotics has stimulated the rerating.  In Asia, the South Korean portfolio had an IRR of 24.2% and delivered over half the region's return with useful contributions from PSK and Innox.

During the period, 1.495m shares were repurchased for £13.9m. This represents 2% of the outstanding capital. Buybacks are made on an opportunistic basis.

The period has had fewer takeovers than we have seen in previous years. Netdimensions was the only significant one in the first half. However in North America, Sandvine, Bankrate and MRV Communications are all in play. In aggregate all the takeovers announced this year will yield £15.6m if completed, and £37.7m cash has been received during the period from takeovers announced last year.

The IPO market in the US was particularly poor in 2016. There has been a marginal improvement this year, but pricing is generally unappealingly high. Companies are being held for longer in private hands, but will presumably need an exit at some stage. Not all exits will be trade takeovers.

The background for the sector is positive, but valuations are higher than they have been. Equities seem likely to experience the headwind from central banks' tightening and raising interest rates. Against this background companies with genuine growth may become more expensive. On this basis the sector still has attractions.

Julian Cazalet

Chairman
18 July 2017

TOP TWENTY EQUITY HOLDINGS AT 30 JUNE 2017

Company	Business	Value £'000	% of total assets*
Diploma	Distributor of components and systems	24,753	2.7
IQE	Design and manufacture of compound semiconductor wafers	23,191	2.6
GB Group	Intelligent identity data, software and services	21,160	2.3
IDOX	Supplier of software solutions primarily to the UK public sector	18,980	2.1
Next Fifteen Communications	Supplier of marketing communications services	17,361	1.9
Pegasystems	Develops applications for sales, marketing and operations	14,651	1.6
Silicon Motion Technology ADR **	Develops controllers used in flash memory	14,183	1.6
Bango	Provider of carrier billing and other alternative payment methods	13,516	1.5
BE Semiconductor Industries	Developer of semiconductor packaging and assembly equipment	13,115	1.4
M&C Saatchi	Global marketing services business	12,718	1.4
Telit Communications	Supplier of wireless machine to machine modems and services	11,528	1.3
Ceva	Licensor of semiconductor signal processing intellectual property	11,086	1.2
Radware	Developer of application delivery and cyber security solutions	9,685	1.1
SQS Software Quality Systems	Specialist in software quality and software testing	9,524	1.0
Telecom Plus	Supplier of telecommunications services and other utilities	9,403	1.0
Euromoney Institutional Investor	Business to business media group	9,058	1.0
Descartes Systems	Supplier of logistics management software	8,918	1.0
Statpro	Provider of portfolio analytics and risk management software	8,843	1.0
YouGov	International opinion data and analytics	8,408	0.9
SDL	Digital content management and language translation tools and services	8,364	0.9
		268,445	29.5

* Total assets before deduction of bank loans

** American Depositary Receipt

INCOME STATEMENT

(UNAUDITED)

	For the six months ended 30 June 2017			For the six months ended 30 June 2016
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Gains on investments	-	22,830	22,830	-	6,183	6,183
Movements in unrealised gains on investments	-	81,809	81,809	-	(1,989)	(1,989)
Currency losses	-	(2,255)	(2,255)	-	(5,230)	(5,230)
Gains on derivative instruments	-	-	-	-	3,844	3,844
Income	5,649	-	5,649	4,945	-	4,945
Investment management fee	(4,242)	-	(4,242)	(3,294)	-	(3,294)
Other administrative expenses	(240)	(1)	(241)	(273)	(1)	(274)
Profit before finance costs and taxation	1,167	102,383	103,550	1,378	2,807	4,185
Finance costs of borrowings	(259)	-	(259)	(822)	-	(822)
Profit before taxation	908	102,383	103,291	556	2,807	3,363
Taxation	(193)	-	(193)	(159)	-	(159)
Profit after taxation	715	102,383	103,098	397	2,807	3,204
Profit/(loss) per ordinary share (note 4)	0.99p	142.14p	143.13p	0.53p	3.72p	4.25p
Weighted average number of ordinary  shares in issue during each period	72,031,127			75,456,694

The total column of this statement is the profit and loss account of the Company, prepared in accordance with UK Accounting Standards.

The profit after taxation is the total comprehensive income and therefore no additional statement of comprehensive income is presented. The supplementary revenue and capital columns are presented for information purposes in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies. All items in the above statement derive from continuing operations and the Company. No operations were acquired or discontinued in the year.                                                                                                                                                                      

BALANCE SHEET

(UNAUDITED)

	As at 30 June 2017 £'000	As at 31 December 2016 £'000
Fixed assets
Investments held at fair value through profit or loss	818,522	712,969
Current assets
Cash and cash equivalents	88,262	82,448
Other receivables	2,021	23,529
	90,283	105,977
Current liabilities
Other payables	(28,175)	(27,532)
Net current assets	62,108	78,445
Total net assets	880,630	791,414
Capital and reserves
Called up share capital	17,892	18,266
Share premium	73,738	73,738
Capital redemption reserve	4,060	3,686
Capital reserve	783,550	695,049
Revenue reserve	1,390	675
Shareholders' funds	880,630	791,414
Net asset value per ordinary share (including current year income)	1230.50p	1083.21p
Net asset value per ordinary share (excluding current year income)	1229.51p	1082.63p
Ordinary shares in issue	71,566,882	73,061,801

STATEMENT OF CHANGES IN EQUITY

(UNAUDITED)

For the six months ended 30 June 2017

	Called up share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve £'000	Revenue reserve £'000	Share- holders' funds £'000
Shareholders' funds at 1 January 2017	18,266	73,738	3,686	695,049	675	791,414
Profit after taxation	-	-	-	102,383	715	103,098
Shares bought back (note 8)	(374)	-	374	(13,882)	-	(13,882)
Shareholders' funds at 30 June 2017	17,892	73,738	4,060	783,550	1,390	880,630

For the six months ended 30 June 2016

	Called up share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve £'000	Revenue reserve £'000	Share- holders' funds £'000
Shareholders' funds at 1 January 2016	19,028	73,738	2,924	575,202	245	671,137
Profit after taxation	-	-	-	2,807	397	3,204
Shares bought back (note 8)	(340)	-	340	(9,345)	-	(9,345)
Shareholders' funds at 30 June 2016	18,688	73,738	3,264	568,664	642	664,996

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

1        Financial Statements

          The condensed financial statements for the six months to 30 June 2017 within the Half Yearly Report comprise the statements set out above together with the related notes that follow below. The condensed financial statements do not constitute statutory accounts as defined in sections 434 to 436 of the Companies Act 2006 and have been neither audited or reviewed by the Company's auditors. Financial information in relation to the year ended 31 December 2016 has been extracted from the statutory accounts which have been filed with the Registrar of Companies. The Auditors' report on those accounts was unqualified and did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006.                                                                                

          The Company's assets, the majority of which are investments in quoted securities, exceed its liabilities significantly. All borrowings require the prior approval of the Board. Gearing levels and compliance with loan covenants are reviewed by the Board on a regular basis. In accordance with the Company's Articles of Association, shareholders have the right to vote on the continuation of the Company every three years with the next vote being in April 2019. Accordingly, the financial statements have been prepared on the going concern basis as it is the Directors' opinion that the Company will continue in operational existence for the foreseeable future.                                                                                         

2        Accounting policies

          The condensed financial statements have been prepared in accordance with applicable United Kingdom Accounting Standards and applicable law (UK Generally Accepted Accounting Practice), including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, FRS 104 Interim Financial Reporting and the Statement of Recommended Practice Financial Statements of Investment Trust Companies and Venture Capital Trusts, issued by the Association of Investment Companies in November 2014, as amended in January 2017.

          The accounting policies applied for the condensed financial statements are as set out in the Company's annual report for the year ended 31 December 2016.                                                                                               

3        Investment management fee

          Herald Investment Management Limited is appointed investment manager under a management agreement which is terminable on twelve months' notice. Its annual remuneration is 1.0% of the Company's net asset value based on middle market prices, calculated on a monthly basis payable in arrears. The management fee is levied on all assets except the holding in Herald Ventures II Limited Partnership managed by Herald Investment Management Limited.                                                                                     

4        Net return per ordinary share

	Six months ended 30 June 2017 £'000	Six months ended 30 June 2016 £'000
Revenue profit after taxation	715	397
Capital profit after taxation	102,383	2,807
Total net return	103,098	3,204
Weighted average number of ordinary shares	72,031,127	75,456,694

          Net return per ordinary share is based on the above totals of revenue and capital and the weighted average number of ordinary shares in issue during each period.

          There are no dilutive or potentially dilutive shares in issue.

5        Dividends

          In accordance with FRS 102 Section 32 'Events After the End of the Reporting Period', the final dividend payable on ordinary shares is recognised as a liability when approved by shareholders. Interim dividends are recognised only when paid.

          Dividends paid on ordinary shares in respect of earnings for each period are as follows:

	Six months ended 30 June 2017 £'000	Six months ended 30 June 2016 £'000
Amounts recognised as distributions in the period:
Final dividend for the year ended 31 December 2016 - nil (2015 - nil)	-	-

No interim dividend will be declared.

6        The Company has a sterling loan facility of £25 million and a £25 million multi-currency revolving advance loan maturing 31 December 2017.                                                                                      

          At 30 June 2017, the sterling loan facility was fully drawndown. Interest on the loan is payable in quarterly instalments in January, April, July and October. The estimated repayment value of the loan at 30 June 2017 was £25 million. The indicative costs of repaying the loan as at 30 June 2017 were not materially different in the context of the above figures.                                                                                      

7        Financial Instruments

          The Company's investments as disclosed in the Company's balance sheet are valued at fair value.

          Nearly all of the Company's portfolio of investments are in the Level 1 category as defined in FRS 102 as amended for fair value hierarchy disclosures (March 16).                                                                                         

          The three levels set out in FRS 102 are as follows:                                                                                     

          Level 1: The unadjusted quoted price in an active market for identical assets or liabilities that the entity can access at the measurement date.

          Level 2: Inputs other than quoted prices included within Level 1 that are observable (ie developed using market data) for the asset or liability, either directly or indirectly.                                                                                               

          Level 3: Inputs are unobservable (ie for which market data is unavailable) for the asset or liability.                                                                                  

          The analysis of the valuation basis for the financial instruments based on the hierarchy is as follows:

	30 June 2017		31 December 2016
	Assets £'000	Liabilities £'000	Assets £'000	Liabilities £'000
Level 1	895,330	(28,175)	807,216	(27,532)
Level 3	13,475	-	11,730	-
Total net assets	908,805	(28,175)	818,946	(27,532)

          The fair value of listed security investments is bid value. Investments on the Alternative Investment Market are included at their bid value. The fair value of unlisted investments uses valuation techniques determined by the directors on the basis of latest information in line with the relevant principles of the International Private Equity and Venture Capital Valuation Guidelines.         

8        At the Annual General Meeting held on 18 April 2017 the Company's authority to buy back up to 14.99% of its issued share capital at that date was renewed. In the six months to 30 June 2017 a total of 1,494,919 (30 June 2016 - 1,358,941) ordinary shares of 25p each were bought back at a total cost of £13,881,514 (30 June 2016 - £9,344,635). At 30 June, the Company had authority to buy back a further 9,275,678 ordinary shares.                                                                                                                      .

9        During the period, cost of purchases amounted to £61,924,000 (30 June 2016 - £33,258,000) and proceeds of sales amounted to £60,752,000 (30 June 2016 - £43,247,000). Transaction costs of £229,000 (30 June 2016 - £100,000) were incurred on the purchase of investments and £204,000 (30 June 2016 - £168,000) on sales of investments.                                                                                

INVESTMENT POLICY

Herald's objective is to achieve capital appreciation through investments in smaller quoted companies, in the areas of telecommunications, multimedia and technology (TMT). Investments may be made across the world. The business activities of investee companies will include information technology, broadcasting, printing and publishing and the supply of equipment and services to these companies.

PRINCIPAL RISKS AND UNCERTAINTIES

The principal risks facing the Company relate to the Company's investment activities. These risks are market risk (comprising other price risk, interest rate risk and foreign currency risk), credit risk and liquidity risk. An explanation of these risks and how they are managed is contained in note 18 of the Company's Annual Report and Financial Statements for the year to 31 December 2016. The principal risks and uncertainties have not changed since the publication of the Annual Report which can be obtained free of charge from Herald Investment Management Limited and is available on the Manager's website: www.heralduk.com. Other risks facing the Company include the following: regulatory risk (that the loss of investment trust status or a breach of applicable legal and regulatory requirements could have adverse financial consequences and cause reputational damage), operational/financial/custody risk (failure of service providers' accounting and/or settlements systems could lead to inaccurate reporting or financial loss), the risk that the discount can widen and gearing risk (the use of borrowings can magnify the impact of falling markets). Further information can be found on page 23 of the latest Annual Report and Financial Statements.

RESPONSIBILITY STATEMENT

We confirm that to the best of our knowledge:

a)   the condensed set of financial statements has been prepared in accordance with FRS104 "Interim Financial Reporting" published by the FRC and gives a true and fair view of the assets, liabilities, financial position and profit of the Company;

b)   the Half Yearly Report and interim management report (Chairman's Review) includes a fair review of the information required by Disclosure and Transparency Rules 4.2.7R (indication of important events during the first six months, and their impact on the financial statements and a description of principal risks and uncertainties for the remaining six months of the year); and

c)   the Half-Yearly Financial Report includes a fair review of the information required by Disclosure and Transparency Rules 4.2.8R (disclosure of related party transactions and changes therein - see note 3 above).

By order of the Board

Julian Cazalet
Chairman

18 July 2017

The Half Yearly Financial report will be posted to shareholders on or around 3 August 2017 and published on the Manager's website: www.heralduk.com 

Contacts:

Katie Potts, Manager                                                     020 7553 6300

Law Debenture Corporate Services Limited                       020 7696 5285

Company Secretary

 

END

 

 

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