Interim Results

RNS Number : 4865W

Herald Investment Trust PLC

29 July 2009

 

PRELIMINARY STOCK EXCHANGE ANNOUNCEMENT

HERALD INVESTMENT TRUST plc

Results for the six months ended 30 June 2009

29 July 2009

The following is the unaudited Half-Yearly Financial Report for the six months 

to 30 June 2009

HERALD INVESTMENT TRUST plc

Half-Yearly Financial Report 30 June 2009

Responsibility Statement

We confirm that to the best of our knowledge:

• the condensed set of financial statements has been prepared in accordance with the Accounting Standards Board's statement 'Half-Yearly Financial Reports';

• the 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

• 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).

By order of the Board

Martin Boase

Chairman

28 July 2009

  HERALD INVESTMENT TRUST plc

CHAIRMAN'S REVIEW

In the six months to 30 June 2009 the Net Asset Value (NAV) per share rose by 28.9%, a significant rebound from a previously very depressed level. With the benefit of hindsight it is now easy to explain. In 2001 UK bank lending equalled deposits, but by the middle of 2008 banks had borrowed an additional £700bn from the wholesale market, which was largely foreign capital (source Bank of England). This led to excess credit, and similar trends occurred in other Western economies. The credit bubble favoured sectors other than technology. As asset prices grew, and markets funded by credit, such as housebuilding and automotive, sectors with limited structural growth appeared more attractive, and technology underperformed. Now that this credit bubble has burst, the technology sector has started outperforming again. 

The trading performance in the portfolio companies has been much steadier than share prices. But the weakening economy did noticeably adversely affect trading for a number of companies in the fourth quarter of 2008, and on average profits in the Far East did decline, but overall the results season led to aggregate profits in the portfolio coming in a little ahead of forecast at the year end. This reflects the currency benefit of £ weakness more than offsetting the adverse influences of the economy. This means that over the 5 years to the end of 2008 profits in the portfolio had in aggregate broadly doubled while the NAV had declined a little. Trading has continued to be adversely affected by the economy this year, and forecasts have drifted down for 2009, but at this stage brokers estimates imply flat profits in the portfolio in aggregate, with a number of companies still expected to show reasonable growth. In spite of the first half bounce in share prices the p/e of profitable stocks in the portfolio remains low on consensus forecast earnings: 11.6x overall and 9.7x in the UK. This might not sound so low, but the Company's policy has always been to include early stage high growth companies which can command high p/es.  For example, the largest stock, Imagination, sits on a prospective p/e of 38x, implying many stocks are on low single figure multiples. Imagination was the worst performing stock in 2008, losing £6.8m, when it appeared to be subjected to bear raids by short sellers. In contrast it has been the single biggest contributor to the rise in assets in the first half with an appreciation of £11.6m. This reflected both Intel and Apple increasing their investment in the company in the market, and possibly a short squeeze. 'Bear raids' have been an irritation, but in retrospect have provided an opportunity to increase positions on several occasions very cheaply. We sympathise with management teams who have been subjected to this.

The total return of the UK portfolio was 32.0%, compared with the benchmark Hoare Govett Index return of 27.4%, and 31.0% weighted return of the target sectors. The US portfolio grew 34.6% in $ terms versus growth of 28.4% growth in the Russell 2000 Index, albeit the £ return was reduced by the $ weakness in the period. The Far East, which was hit so hard in 2008, with a noticeable deterioration in underlying profits, actually rebounded by 57.2% in local currency, while Europe grew a disappointing 9.0%, but only accounts for 3% of the portfolio. In addition, last year the Company took out a 30 year swap to fix the interest rate on the borrowing facility at c5.6%. The mark to market impact of this at 31 December 2008 was £15m, but this loss had declined to £6m at the end of June and is 4.5m at the date of this report. Takeovers have not been at the heady pace seen in the second half of 2006 and 2007, but there have been three cash bids - Wind River and Emulex in the US, and Business Solutions Group in the UK. They had all been relatively recent purchases. The venture capitalists appear to be continuing to run the slide rule over the portfolio, and the sector is so well capitalised in the US that further bids seem inevitable. It is a source of frustration to the Manager when UK companies are acquired by US companies or private equity relatively cheaply, because, left to 

HERALD INVESTMENT TRUST plc

CHAIRMAN'S REVIEW

grow, these companies could provide a greater interest in the technology sector for UK based investors. On acquisition the short term gains are clearly beneficial to investors, but not to investors and UK taxpayers in the longer term! Having purposely deleveraged the fund in the autumn of 2007, cash equivalents peaked at c£40m in January 2008. Since then cash of £60m has been reinvested in the UK and £33m in the US, offset by cash received from takeover bids, and modest use of the available borrowing facility. Now that the assets have rallied somewhat, banking covenants are less of an inhibitor on using the borrowing facility. It has been an exciting time to have this liquidity, and attractive funding opportunities continue to appear, in a capital constrained world, particularly in the unfashionable underfunded UK technology sector. 

The income account benefitted in 2008 from a substantial recovery of VAT, in the absence of which income for the current year is likely to be substantially lower.

The principal risks facing the Company are set out in note 9. 

Our policy is to continue with a defensive strategy on the assumption that the economy will remain difficult for some time. However the recession has so far proved less severe in the areas in which Herald invests than in the wider economy, and the outlook appears promising.

Having been Chairman of Herald since its launch in 1994, I have now decided to stand down. Julian Cazalet will become Chairman on 1 September 2009, and I shall leave the Board at that point. 

I commend my successor to you, and am confident of the future success of the Company under the continued management of Herald Investment Management Limited.

Martin Boase

Chairman

28 July 2009

HERALD INVESTMENT TRUST plc

CHAIRMAN'S REVIEW (continued)

Summary of Performance 

	At inception   16 February 1994	At  31 December 2008	At 30 June  2009	Performance since 31 December  2008	Performance since inception
NAV per share	98.7p	252.6p†	325.6p	28.9%	229.9%
Share price ‡	90.9p	184.0p	272.8p	48.3%	200.1%
FTSE 100 Index	3,417.7	4,434.2	4,249.2	(4.2%)	24.3%
HGSC Index plus AIM (capital gains ex. investment companies)	1,750.0	1,804.3	2,268.0	25.7%	29.6%
Russell 2000 (small cap) Technology Index (in sterling terms)	83.2*	57.6	64.5	12.0%	(22.5%)
† Includes income of 3.45p from recovered VAT and associated interest thereon. ‡ Mid market price.  * At 9 April 1996 being the date funds were first available for international investment. From 1 January 2006 the benchmark was changed to 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.

- ends -

For further information please contact:

 

Ms Katie Potts, Manager

Herald Investment Trust plc                                                                   020 7553 6300

 

Baillie Gifford & Co

Secretaries                                                                                            0131 275 2000

HERALD INVESTMENT TRUST plc

INCOME STATEMENT

(unaudited)

	For the six months ended 30 June 2009				For the six months ended 30 June 2008				For the year ended 31 December 2008
	Revenue £'000	Capital £'000	Total £'000		Revenue £'000	Capital £'000	Total £'000		Revenue £'000	Capital £'000	Total £'000
Realised (losses)/gains on investments	-	(8)	(8)		-	8,060	8,060		-	10,580	10,580
Fair value movements on investments - securities	-	54,363	54,363		-	(45,428)	(45,428)		-	(122,093)	(122,093)
Fair value movement on interest rate swap	-	9,218	9,218		-	(755)	(755)		-	(15,079)	(15,079)
Currency gains	-	160	160		-	16	16		-	54	54
Income from investments and interest receivable	2,630	-	2,630		3,102	-	3,102		7,597	-	7,597
Other income	-	-	-		26	-	26		32	-	32
Investment management fee	(1,175)	-	(1,175)		(1,556)	-	(1,556)		(2,808)	-	(2,808)
Recovered VAT	-	-	-		1,989	-	1,989		2,506	-	2,506
Other administrative expenses	(172)	-	(172)		(173)	-	(173)		(321)	-	(321)
Net return before finance costs and taxation	1,283	63,733	65,016		3,388	(38,107)	(34,719)		7,006	(126,538)	(119,532)
Finance costs of borrowings	(1,424)	-	(1,424)		(678)	-	(678)		(2,128)	-	(2,128)
Net return on ordinary activities before taxation	(141)	63,733	63,592		2,710	(38,107)	(35,397)		4,878	(126,538)	(121,660)
Tax on ordinary activities	(44)	-	(44)		(80)	-	(80)		(136)	-	(136)
Net return on ordinary activities after taxation	(185)	63,733	63,548		2,630	(38,107)	(35,477)		4,742	(126,538)	(121,796)
Net return per ordinary share (note 4)	(0.22p)	76.96p	76.74p		3.06p	(44.30p)	(41.24p)		5.59p	(149.07p)	(143.48p)
Weighted average number of ordinary shares in issue during each period	82,809,374				86,015,624				84,885,186

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

 All revenue and capital items in this 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 (unaudited)
	At 30 June  2009		At 30 June  2008		At 31 December  2008
	£'000		£'000		£'000
Fixed assets
Investments held at fair value through profit or loss	293,421		293,434		243,276
Current assets
Debtors	1,441		10,672		1,803
Cash and short term deposits	32,028		49,378		31,547
	33,469		60,050		33,350
Creditors
Amounts falling due within 1 year (note 6)	(53,662)		(51,507)		(50,837)
Derivative financial instruments	(5,861)		(755)		(15,079)
	(59,523)		(52,262)		(65,916)
Net current (liabilities)/assets	(26,054)		7,788		(32,566)
Total net assets	267,367		301,222		210,710
Capital and Reserves
Called-up share capital	20,526		21,211		20,852
Share premium	73,738		73,738		73,738
Capital redemption reserve	1,426		741		1,100
Capital reserve	170,044		201,696		109,072
Revenue reserve	1,633		3,836		5,948
Shareholders' funds	267,367		301,222		210,710
Net asset value per ordinary share	325.65p		355.03p		252.63p
Ordinary shares in issue (note 7)	82,103,283		84,843,123		83,408,123

  HERALD INVESTMENT TRUST plc

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

(unaudited)

For the six months ended 30 June 2009

	Called-up share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Total shareholders' funds £'000
Shareholders' funds at 1 January 2009	20,852	73,738	1,100	109,072	5,948	210,710
Revaluation of interest rate swap	-	-	-	9,218	-	9,218
Net return on ordinary activities after taxation	-	-	-	54,515	(185)	54,330
Shares bought back†	(326)	-	326	(2,761)	-	(2,761)
Dividends paid during the period#	-	-	-	-	(4,130)	(4,130)
Shareholders' funds at 30 June 2009	20,526	73,738	1,426	170,044	1,633	267,367

For the six months ended 30 June 2008

	Called-up share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Total shareholders' funds £'000
Shareholders' funds at 1 January 2008	21,743	73,738	209	246,171	1,636	343,497
Revaluation of interest rate swap	-	-	-	(755)	-	(755)
Net return on ordinary activities after taxation	-	-	-	(37,352)	2,630	(34,722)
Shares bought back†	(532)	-	532	(6,368)	-	(6,368)
Dividends paid during the  period#	-	-	-	-	(430)	(430)
Shareholders' funds at 30 June 2008	21,211	73,738	741	201,696	3,836	301,222

For the year ended 31 December 2008

	Called-up share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Total shareholders' funds £'000
Shareholders' funds at 1 January 2008	21,743	73,738	209	246,171	1,636	343,497
Revaluation of interest rate swap	-	-	-	(15,079)	-	(15,079)
Net return on ordinary activities after taxation	-	-	-	(111,459)	4,742	(106,717)
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

* The capital reserve includes a loss of £69,348,000 relating to the revaluation of investments (30 June 2008 - loss of 

  £47,046,000; 31 December 2008 - loss of £123,711,000).

† See note 7.  # See note 5.  

HERALD INVESTMENT TRUST plc
CONDENSED CASH FLOW STATEMENT (unaudited)
		For six  months ended  30 June 2009			For six  months ended  30 June 2008			For year ended  31 December 2008
		£'000			£'000			£'000
NET CASH INFLOW FROM OPERATING ACTIVITIES		2,385			1,338			6,092
NET CASH OUTFLOW FROM SERVICING OF FINANCE		(1,436)			(160)			(1,614)
FINANCIAL INVESTMENT
Purchase of investments		(22,766)			(47,532)			(100,426)
Sale of investments		29,189			40,082			76,331
NET CASH INFLOW/(OUTFLOW) FROM FINANCIAL INVESTMENT		6,423			(7,450)			(24,095)
EQUITY DIVIDEND PAID (note 5)		(4,130)			(430)			(430)
NET CASH INFLOW/(OUTFLOW) BEFORE FINANCING		3,242			(6,702)			(20,047)
FINANCING
Shares repurchased		(2,761)			(6,075)			(10,561)
Loans drawn down		-			50,000			50,000
NET CASH (OUTFLOW)/INFLOW FROM FINANCING		(2,761)			43,925			39,439
INCREASE IN CASH		481			37,223			19,392
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
Increase in cash in period		481			37,223			19,392
Increase in bank loans		-			(50,000)			(50,000)
MOVEMENT IN NET DEBT IN PERIOD		481			(12,777)			(30,608)
NET (DEBT)/FUNDS AT 1 JANUARY		(18,453)			12,155			12,155
NET DEBT AT 30 JUNE/31 DECEMBER		(17,972)			(622)			(18,453)
RECONCILIATION OF NET REVENUE BEFORE FINANCE COSTS AND TAXATION TO NET CASH INFLOW FROM OPERATING ACTIVITIES
Net return on ordinary activities before finance costs and taxation		65,016			(34,719)			(119,532)
(Gains)/losses on investments		(63,573)			38,123			126,592
Currency gains		(160)			(16)			(54)
Changes in debtors and creditors		892			(2,088)			(976)
Amortisation of fixed income book cost		(1)			97			148
Income tax repaid/(suffered)		4			(2)			(4)
Realised currency profit		251			16			54
Overseas tax suffered		(44)			(73)			(136)
NET CASH INFLOW FROM OPERATING ACTIVITIES		2,385			1,338			6,092
HERALD INVESTMENT TRUST plc
DISTRIBUTION OF ASSETS (unaudited)
	At 30 June    2009 %			At 30 June    2008 %					At 31 December    2008   %
Equities:  United Kingdom	53.4			52.4					45.9
Continental Europe	2.5			2.9					2.5
Americas	21.3			20.1					22.4
Asia Pacific	5.5			6.3					5.4
Emerging Markets	0.3			0.3					0.3
	83.0			82.0					76.5
Fixed interest: Sterling bonds	5.8			-					5.4
Norwegian bonds	-			-					3.6
US$ bonds	2.0			1.5					2.7
Net liquid assets	9.2			16.5					11.8
Total assets (before deduction of bank loans and derivative financial instruments)	100.0			100.0					100.0

HERALD INVESTMENT TRUST plc
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (unaudited)
1.		The condensed set of financial statements for the six months to 30 June 2009 have been prepared on the basis of the same accounting policies as set out in the Company’s Annual Financial Statements at 31 December 2008 and in accordance with the ASB’s Statement ‘Half-Yearly Financial Reports’ and have not been audited or reviewed by the Auditors pursuant to the Auditing Practices Board Guidance on ‘Review of Interim Financial Information.’
2.		The financial information contained within this Half-Yearly Financial Report comprises non-statutory accounts as defined in sections 434 to 436 of the Companies Act 2006. The financial information for the year ended 31 December 2008 has been extracted from the statutory accounts which have been filed with the Registrar of Companies and contain an unqualified Auditors’ Report and do not contain a statement under sections 237(2) or (3) of the Companies Act 1985.
3.		Related party transactions Herald Investment Management Limited are appointed investment managers under a management agreement which is terminable on twelve months’ notice. Their 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 2009 £’000			Six months ended 30 June 2008 £’000					Year ended 31 December 2008 £’000
		Revenue return	(185)			2,630					4,742
		Capital return	63,733			(38,107)					(126,538)
		Total net return	63,548			(35,477)					(121,796)
		Weighted average number of ordinary shares	82,809,374			86,015,624					84,885,186
		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:		Six months ended 30 June 2009 £’000				Six months ended 30 June 2008 £’000			Year ended 31 December 2008 £’000
		Amounts recognised as distributions in the period:
		Final dividend for the year ended 31 December 2008 of 1.55p (2007- 0.50p) paid 30 April 2009		1,280				430			430
		Special dividend for the year ended 31 December 2008 of 3.45p (2007-nil) paid 30 April 2009		2,850				-			-
				4,130				430			430
		No interim dividend will be declared.

 

HERALD INVESTMENT TRUST plc
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (unaudited)  (continued)
6.	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. 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 to the extent that the mark up over LIBOR charged by a lending bank varies. At 30 June 2009 there were outstanding drawings of £50 million (30 June 2008 - £50 million; 31 December 2008 - £50 million). The fair value of the liabilities in respect of the interest rate swap contract at 30 June 2009 was a liability of £5,861,000 (30 June 2008 - £755,000; 31 December 2008 - £15,079,000) which was based on the marked to market value.
7.	At the Annual General Meeting held on 22 April 2009 the Company's authority to buy back shares was renewed in respect of 12,382,957 ordinary shares (equivalent to 14.99% of its issued share capital at that date). In the six months to 30 June 2009 a total of 1,304,840 ordinary shares with a nominal value of £326,210 were bought back at a total cost of £2,761,000. At 30 June the Company had authority to buy back a further 11,878,117 ordinary shares.
8.	During the period transaction costs on purchases amounted to £158,000 (30 June 2008 - £329,000; 31 December 2008 - £546,000) and transaction costs on sales amounted to £69,000 (30 June 2008 - £140,000; 31 December 2008 - £189,000).
9.	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), liquidity risk and credit risk. An explanation of these risks and how they are managed is contained in note 20 of the Company's Annual Report and Accounts for the year to 31 December 2008. 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 Managers' website: www.heralduk.com. Other risks facing the Company include the following: gearing risk (the use of borrowings can magnify the impact of falling markets), the risk that the discount can widen and regulatory risk (that the loss of investment trust status or a breach of the UKLA Listing Rules could have adverse financial consequences and cause reputational damage).
10.	None of the views expressed in this document should be construed as advice to buy or sell a particular investment.
11.	The Half-Yearly Financial Report is available on the Managers' website www.heralduk.com and will be posted to shareholders on or around 12 August 2009.

 

END

 

 

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