Final Results

Perpetual UK Smaller Co's IT PLC 22 March 2001 PERPETUAL UK SMALLER COMPANIES INVESTMENT TRUST plc CHAIRMAN'S STATEMENT It has been an exceptionally volatile and generally difficult year for equity investors. However, against this testing backdrop I am pleased to report that your Company has made progress in the year, increasing net assets by 4.0% to £ 86.47 million. This compares favourably with our benchmark, the Hoare Govett Extended Smaller Companies Index (capital gains excluding investment trusts) which rose by 2.3% over the same period, as well as the FTSE All Share Index which increased by just 1.8%. The Company's share price has risen by 5.9% in the period, whilst the discount to net assets has narrowed from 18% at 31 January 2000 to 16.2% at 31 January 2001. This compares with an average for the sector of 15.2% at 31 January 2001. Since the end of the Company's financial year net assets have declined slightly, by 1.9%, but this compares well with a decline over the same period for the benchmark of 4.4%. The proposed final dividend of 7.7 pence per share is a smaller dividend than that paid last year, but represents a return to normal dividend levels. Shareholders will recall that the Company enjoyed a significant one-off increase in income last year due to the receipt of a number of special dividends. During the course of the year your Company entered into a new short term borrowing facility, permitting it to borrow up to the lower of £25 million, or 30% of its assets. During the year the manager has geared the Company's portfolio; at the year end gearing stood at 14% but has since been reduced to 10%. The board is of the opinion that the neutral level of gearing for the Company is between 10% and 15%, although the actual level will of course vary depending on market conditions. There are a number of other matters I would like to draw to shareholders' attention: First, shareholders will be aware that AMVESCAP PLC acquired Perpetual plc towards the end of last year. AMVESCAP itself is an important and active manager of a wide variety of investment trusts. Second, we are again seeking shareholders' authority for your Company to be permitted to repurchase its own shares when deemed appropriate. We have used this authority once during the course of the last year and we continue to believe that it is a potentially valuable tool to enhance shareholder value. Third, we are making some changes to the Company's Board. David FitzWilliam-Lay has indicated to me that, on approaching 70, he would like to retire as a director of the Company during 2001. I have agreed with him that he will stand down as a director with effect from 30th September 2001. David has been a Director of the Company since 1991 and I would like to thank him, personally and on behalf of the Company, for his invaluable advice over the years. I am delighted to announce two new appointments to the Board. With effect from today, Garth Milne and John Spooner have been appointed non-executive directors of your Company. They each bring to the Company a wealth of knowledge that I have no doubt will be of benefit in the coming years. Finally, a full report from the investment manager follows this statement. Your Board agrees with the manager's view that whilst both large and small companies in the UK face a challenging few months ahead, the investment environment is likely to improve later in the year. An improving outlook, combined with careful stock selection, leads us to believe that your Company is well placed to benefit from the recovery when it comes. Jamie Berry 21 March 2001. Chairman MANAGER'S REVIEW Investment Review The year under review was a remarkable one for all equity markets. It can be characterised by two key parts: the ending of the global boom in the Technology, Media and Telecommunications ('TMT') sector during the first quarter followed by an ongoing re-balancing across the market. From late 1999, the TMT bubble pushed the market to an all-time high, whilst the so called 'old economy' sectors slumped, in some cases to levels last seen in the recession of the early 1990s. This process was justified by many as the displacement of the old economy by the new, a view which we did not share. After the first quarter, when world equity markets seemed to be focussed on TMT stocks, the depressed valuations of old economy companies started to improve and the excessive valuations of new economy stocks began to fall. The modest slowdown in the UK economy and subsequently the more severe setback in the USA emphasised the vulnerability of many sectors, especially TMT. The final quarter of the year saw some significant falls among TMT stocks. In the UK, the economy had slowed in response to previous tighter monetary policy, and the market was hit by a series of corrections to the US Nasdaq Index, combined with a series of profit warnings from highly-rated companies. Uncertainty regarding the outcome of the US presidential election also weighed heavily on market sentiment. Investment strategy The TMT sector performed strongly early in the year and we responded by reducing our exposure as valuations rose sharply. As a result, by the end of the period, we were underweight in hardware and software companies, compared to the peer group. As the TMT sector declined sharply, our underweight position proved well founded. The portfolio was also boosted by increased merger and acquisition activity. We maintained our core holdings in sectors such as aerospace and defence, media, construction, housebuilding and leisure throughout the year, seeking out stocks trading at significant discounts to their net asset values as well as those with proven business plans and high barriers to entry. We also capitalised upon the weakness of the biotechnology sector towards the end of the year as an opportunity to purchase and add to stocks such as Oxford Glycoscience and Oxford Biomedica. Construction and housebuilding companies performed well during the period and we increased our exposure with stocks such as Crest Nicholson Bryant Group, and Laing (John). In addition other old economy stocks in sectors in which we were positioned, such as consumer cyclicals, performed strongly and we also had a significant exposure to the leisure-related areas with companies such as Po Na Na, Esporta and Regent Inns. We gradually moved to reasonably significant weightings within the media sector, with holdings in, amongst others Sanctuary Group and Incisive Media. Company Risk Profile The Company's objective is to achieve long term capital growth by investing predominately in the shares of quoted UK smaller companies. Smaller companies shares tend to be moderately traded and, as such, the market in these shares can at times prove illiquid. Shifts in investor sentiment, or the announcement of new information, can result in significant movements in share prices, and make dealing difficult. By investing in a broad range of companies, the Company seeks to minimise so-called stock-specific risk. Current Prospects The current outlook for the UK appears relatively benign; however, we expect interest rates to be cut further in the coming months, and believe that despite signs of robust consumer spending around Christmas 2000, such reductions should have occurred sooner. Sentiment towards the US markets has deteriorated, despite the two 0.5% interest rate cuts in January and the further 0.5% cut yesterday. There are certainly some strong fiscal balances in the UK and US, where government money is adequate to spend on public projects and services, but the benefits from this will take some time to feed through into the real economy. With UK economic growth forecast to be moderate, the smaller company sector should feel the positive effects of interest rate cuts. However, in an illiquid market movements and sentiments are often exaggerated, so further volatility could be experienced over the next few months. We expect further merger and acquisition activity, particularly in the form of management buyouts among companies disillusioned with their stock market valuations. This continues a trend which started in early 2000 when directors in poorly performing sectors considered that their companies were unreasonably marked down, and decided to take their firms private. With lower interest rates, this should be easier to finance, as the companies gear higher. We believe it will be a challenging few months for smaller companies. This will present the Company with useful opportunities to acquire new investments in line with our existing strategy. Additionally we will monitor our exposure to the TMT sector. Given a steady and cautious approach, there is no reason why UK smaller companies cannot show positive gains by the end of the financial year. SUMMARY OF RESULTS As at 31st January 2001 2001 2000 % change Total net assets (£'000) 86,473 83,187 4.0% Net asset value per share -basic 617.5p 593.0p 4.1% Share Price 517.5p 488.5p 5.9% Benchmark Index* 2,837.4 2,772.8 2.3% FT-SE Actuaries All-Share Index 3,030.1 2,975.9 1.8% Dividends per share 7.7p 10.7p (28.0%) Earnings per share 8.9p 12.5p (28.8%) Expense ratio (excluding performance fee)** 1.22% 1.30% - Expense ratio (including performance fee)** 1.43% 2.41% - *Extended Hoare Govett Smaller Companies Index (capital gains excluding investment trusts). ** This is the total expenses, excluding interest, incurred by the Company, including those charged to capital, as a percentage of average net assets (shareholders' funds). STATEMENT OF TOTAL RETURN (incorporating the revenue account) Year ended 31st January 2001 2001 2000 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Gains/(losses) on investments Realised - 15,323 15,323 - 10,446 10,446 Unrealised - (11,895)(11,895) - 23,635 23,635 Income 2,511 - 2,511 3,066 - 3,066 Investment management fee (878) (179) (1,057) (715) (740) (1,455) Other expenses (144) (9) (153) (137) (8) (145) Net return before finance costs 1,489 3,240 4,729 2,214 33,333 35,547 Interest payable and similar (236) - (236) (456) - (456) charges Return on ordinary activities for 1,253 3,240 4,493 1,758 33,333 35,091 the financial year before and after tax Dividends in respect of equity (1,078) - (1,078)(1,501) - (1,501) shares Transfer to reserves 175 3,240 3,415 257 33,333 33,590 Return per ordinary share: Basic 8.9p 23.1p 32.0p 12.5p 237.6p 250.1p The revenue 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. A dividend of 7.7p per share is proposed. BALANCE SHEET As at 31st January 2001 2001 2000 £'000 £'000 Fixed assets Investments 99,059 87,082 Current assets Debtors 571 2,367 Cash at bank and in hand 253 551 824 2,918 Creditors: amounts falling due within one year (2,088) (3,094) Bank overdrafts (11,322) (3,719) (13,410) (6,813) Net current liabilities (12,586) (3,895) Net assets 86,473 83,187 Capital and reserves Called-up share capital 14,003 14,028 Share premium account 21,244 21,244 Capital redemption reserve 25 - Capital reserves realised 38,007 23,001 unrealised 12,024 23,919 Revenue reserve 1,170 995 Total equity shareholders' funds 86,473 83,187 Net asset value per ordinary share: Basic 617.5p 593.0p CASH FLOW STATEMENT Year ended 31st January 2001 2001 2000 £'000 £'000 Net cash inflow from operating activities 673 2,118 Servicing of finance Bank interest paid (208) (453) Net cash outflow from servicing of finance (208) (453) Financial investment Purchase of investments (47,391) (33,413) Sale of investments 40,526 33,046 Net cash outflow from financial investment (6,865) (367) Equity dividends paid (1,501) (982) (Decrease)/ increase in cash (7,901) 316 Reconciliation of net cash flow to movement in net debt (Decrease) / increase in cash in the period (7,901) 316 Net debt at 1st February 2000 (3,168) (3,484) Net debt at 31st January 2001 (11,069) (3,168) The above results, which have been agreed with the auditors, are an abridged version of the Company's full accounts that have not yet been filed with the Registrar of Companies. The preliminary announcement has been prepared on the basis of the accounting policies as stated in the 2000 accounts. The Board approved this preliminary statement, which has been agreed with the auditors, on 21st March 2001. The financial information set out above does not constitute the Company's statutory accounts for the years ended 31st January 2001 or 2000, but is derived from those accounts. Statutory accounts for 2000 have been delivered to the Registrar of Companies and those for 2001 will be delivered following the Company's annual general meeting. The auditors have reported on the 2000 accounts; their report was unqualified and did not contain statements under s237(2) or (3) Companies Act 1985. The audit report on the 2001 accounts has yet to be signed. Copies of this statement will be available from the Company's registered office at Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxon, RG9 1HH
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