Annual Financial Report

RNS Number : 5535G

Montanaro European Smaller C.TstPLC

07 June 2013

 



MONTANARO EUROPEAN SMALLER COMPANIES TRUST PLC

 

Date:                7 June 2013

RESULTS FOR THE YEAR ENDED 31 MARCH 2013

 

Investment Objective

Montanaro European Smaller Companies Trust plc aims to achieve capital growth by investing principally in Continental European quoted smaller companies.

Highlights

·      Net asset value ('NAV') per Ordinary Share +18.6%

·      Share price +28.2%

·      Benchmark index (capital return) +14.7%

·      Total assets +12.8% (£106.0 million)

Chairman's Statement

During the year ended 31 March 2013, the Company's net asset value ('NAV) per share increased by 18.6% to 559.2p. This compares with an increase of 14.7% in the benchmark index, the MSCI Europe SmallCap (ex UK) Index. The share price increased by 28.2% during the year, to 519.3p, representing a discount to the NAV per share of 7.1%, compared to 14.1% at the start of the year.

The start of the year was marked by concerns over economic conditions in Europe and the future of the Eurozone. These faded as repeated proclamations from the European Central Bank worked to demonstrate its commitment to the Euro. As sentiment improved, institutional investors who had previously been underweight in Europe increased their exposure to the region. Investor confidence was also boosted by improved macro-economic data.

In contrast to last year, the Euro and other European currencies strengthened against sterling. An estimated 15p of the increase in the NAV per share during the year is attributable to currency strength within the portfolio.

Within the portfolio, most of the companies performed ahead of expectations and they remain in good financial health with strong balance sheets. The Investment Manager, Montanaro Asset Management ('Montanaro'), has consistently sought to invest in high quality, well managed smaller companies, and the success of this approach is reflected in the Company's long-term performance record.

The Company seeks to obtain long term capital growth and it is therefore pleasing to report that, since the appointment of Montanaro in September 2006, the NAV per share has increased by 62.6% compared with an increase of 20.3% in the benchmark index, with outperformance of the benchmark being obtained in five out of six complete financial years.

Earnings and Dividends

Reflecting good levels of dividend growth from many of the companies within the portfolio, revenue earnings per share for the year were 7.7p (2012: 6.5p). An interim dividend of 1.75p per share was paid on 11 January 2013 and the Board recommends the payment of a final dividend of 5.00p per share, payable on 26 July 2013 to shareholders on the register on 28 June 2013. This brings the total dividends for the year to 6.75p per share, an increase of 22.7% compared to the previous year.

Share Buy Backs and Treasury Shares

During the year we bought back 600,000 Ordinary Shares to be held in treasury, providing an enhancement of 2.6p to the NAV per share. At the end of the year the Company held 815,000 Ordinary Shares in treasury, available to be re-issued. The Board's stated policy on treasury shares is to re-issue shares at a discount to the NAV per share provided that such discount is narrower than the weighted average discount to the NAV per share at the time the shares were bought back by the Company.

Borrowings

At the end of the year, the Company had borrowings (net of cash) of 1.5% of the net asset value.  This is rather lower than usual reflecting the Investment Manager's  near-term cautious outlook. Gearing was used actively during the year within ranges approved by the Board, and contributed an estimated 3p to the NAV per share. 

We have a flexible €15 million revolving credit facility which enables gearing to be increased or decreased as considered appropriate. The facility matures in July 2013. It is the current intention of the Board to put in place a new facility of similar value at this time. The Board determines borrowing levels following recommendations from the Investment Manager and reviews this formally at each Board meeting.  

Outlook

Although investor confidence in Europe has improved, economic conditions remain challenging. Many companies are, however, cautiously optimistic in their outlook, and have large cash balances. This, combined with their ability to raise new capital on attractive terms, means it is likely that merger and acquisition activity will increase in the year ahead.

We are invested in a diversified portfolio of European smaller companies with strong management teams, sound balance sheets and good business franchises.  The portfolio benefits from Montanaro's extensive and experienced research within this large and often under researched area and from its risk control investment disciplines.  We believe, therefore, that we have a relatively low risk European smaller companies portfolio offering excellent longer-term returns.  Consequently, we look forward to the future with confidence.

A R IRVINE

Chairman

Consolidated Statement of Comprehensive Income

For the Year Ended 31 March 2013

	Revenue	Capital	Total
	£'000	£'000	£'000
Capital gains on investments
Gains on investments held at fair value	-	14,760	14,760
Exchange losses	-	(261)	(261)
	-	14,499	14,499
Revenue
Investment income	2,376	-	2,376
Other operating income	7	-	7
Total income	2,383	14,499	16,882
Expenditure
Management expenses (note 2)	(245)	(502)	(747)
Other expenses	(502)	-	(502)
Total expenditure	(747)	(502)	(1,249)
Profit before finance costs and taxation	1,636	13,997	15,633
Finance costs	(139)	(258)	(397)
Profit before taxation	1,497	13,739	15,236
Taxation	(211)	-	(211)
Total comprehensive income	1,286	13,739	15,025
Return per share (note 3)	7.7p	82.3p	90.0p

The total column of this statement represents the Group's Income Statement and Statement of Comprehensive Income, prepared in accordance with IFRS. The supplementary revenue return and capital return columns are both prepared under guidance published by the Association of Investment Companies.

All revenue and capital items in the above statement derive from continuing operations.

No operations were acquired or discontinued in the year.

All of the profit and total comprehensive income for the year is attributable to the owners of the Company.

Consolidated Statement of Comprehensive Income

For the Year Ended 31 March 2012

	Revenue	Capital	Total
	£'000	£'000	£'000
Capital losses on investments
Losses on investments held at fair value	-	(10,737)	(10,737)
Exchange gains	-	310	310
	-	(10,427)	(10,427)
Revenue
Investment income	2,309	-	2,309
Other operating income	26	-	26
Total income	2,335	(10,427)	(8,092)
Expenditure
Management expenses (note 2)	(241)	(447)	(688)
Other expenses	(515)	-	(515)
Total expenditure	(756)	(447)	(1,203)
Profit before finance costs and taxation	1,579	(10,874)	(9,295)
Finance costs	(172)	(319)	(491)
Profit before taxation	1,407	(11,193)	(9,786)
Taxation	(289)	-	(289)
Total comprehensive income	1,118	(11,193)	(10,075)
Return per share (note 3)	6.5p	(65.3)p	(58.8)p

Group Balance Sheet

As at 31 March 2013

		2013		2012
		£'000		£'000
Non-current assets
Investments held at fair value through profit and loss		94,360		82,502
Current assets
Trade and other receivables		433		192
Cash and cash equivalents		11,191		11,301
		11,624		11,493
Total assets		105,984		93,995
Current liabilities
Trade and other payables		(12,975)		(12,717)
Total liabilities		(12,975)		(12,717)
Net assets		93,009		81,278
Capital and reserves
Called-up share capital		8,724		8,724
Share premium account		5,178		5,178
Capital redemption reserve		2,212		2,212
Capital reserve		73,937		62,577
Revenue reserve		2,958		2,587
Shareholders' funds		93,009		81,278
Net asset value per share (note 5)		559.2p		471.6p

Consolidated Statement of Changes in Equity

For the year ended 31 March 2013

	Share capital	Share premium account	Capital redemption reserve	Capital reserve	Revenue reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 1 April 2012	8,724	5,178	2,212	62,577	2,587	81,278
Total comprehensive income	-	-	-	13,739	1,286	15,025
Shares repurchased	-	-	-	(2,379)	-	(2,379)
Dividends paid	-	-	-	-	(915)	(915)
Balance at 31 March 2013	8,724	5,178	2,212	73,937	2,958	93,009

Consolidated Statement of Changes in Equity

For the year ended 31 March 2012

	Share capital	Share premium account	Capital redemption reserve	Capital reserve	Revenue reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 1 April 2011	8,724	3,935	2,212	71,736	2,230	88,837
Total comprehensive income	-	-	-	(11,193)	1,118	(10,075)
Shares repurchased	-	-	-	(744)	-	(744)
Shares issued from treasury	-	1,243	-	2,778	-	4,021
Dividends paid	-	-	-	-	(761)	(761)
Balance at 31 March 2012	8,724	5,178	2,212	62,577	2,587	81,278

Consolidated Cash Flow Statement

For the Year Ended 31 March 2013

	2013		2012
	£'000		£'000
Cash flows from operating activities
Profit/(loss) before finance costs and taxation	15,633		(9,295)
Investment (gains)/losses	(14,760)		10,737
Withholding tax	(294)		(341)
Exchange losses/(gains)	261		(310)
(Increase)/decrease in receivables	(158)		104
Increase/(decrease) in payables	135		(923)
Purchases of investments	(24,768)		(29,850)
Sales of investments	27,670		25,599
Net cash inflow/(outflow) from operating activities	3,719		(4,279)
Cash flows from financing activities
Dividends paid	(915)		(761)
Interest paid	(457)		(468)
Shares repurchased	(2,379)		(744)
Issue of shares from treasury	-		4,021
Drawdown of borrowings	-		2,190
Net cash (outflow)/inflow from financing activities	(3,751)		4,238
Net decrease in cash and cash equivalents	(32)		(41)
Exchange losses	(78)		(444)
Decrease in cash and cash equivalents	(110)		(485)
Cash and cash equivalents at beginning of year	11,301		11,786
Cash and cash equivalents at end of year	11,191		11,301

Principal Risks and Risk Mitigation

The Board carefully considers the Company's principal risks and seeks to mitigate these risks through continued and regular review, policy setting, compliance with and enforcement of contractual obligations and active communication with the Manager, the Administrator and shareholders.

The Board applies the principles and recommendations of the UK Corporate Governance Code and the AIC's Code of Corporate Governance.  It also applies the principles detailed in the internal control guidance issued by the Financial Reporting Council.

The principal risk faced by the Company is that it fails to produce the capital appreciation stated as its objective, and the Company's net asset value ('NAV') does not rise over the longer term. The risks which might give rise to this event, together with other risks considered by the Board to be important to the Company and its shareholders, are summarised below. Mitigation of these risks is sought and achieved in many ways as described in italics.

External: events such as terrorism, disease, protectionism, inflation or deflation, changes in taxation, excessive stock market speculation, economic recessions, political instability and movements in interest rates and exchange rates could affect share prices in particular markets.

Portfolio diversification, both geographical and sectoral, can mitigate the consequences of such risky events. It is also possible to raise the level of cash, thereby reducing the risk of declining share prices and the effect of gearing on lower portfolio valuations. However, the portfolio's liquidity is not managed on the basis of market timing short term fluctuations.

Manager: should the Manager not be in a position to continue to manage the Company, performance may be impacted.

Montanaro has the largest specialist Continental European smaller company team in the UK. The Manager keeps the Board informed of developments within its business.

Investment and strategy:inappropriate strategy, including country and sector allocation, stock selection and the use of gearing could all lead to poor returns for shareholders.

At each Board Meeting the Manager discusses portfolio performance and strategy with the Directors and provides the Board and shareholders with monthly reports. The portfolio is well-diversified with typically 40-60 holdings, thereby reducing stock-specific risk. The Board formally reviews the performance of the Manager and its terms of appointment annually.

Portfolio liquidity: as with all small company investment trusts, there are times when the liquidity of the underlying portfolio is poor, such as when smaller companies are out of favour or during periods of adverse economic conditions. The Manager focuses on smaller companies where the opportunities may be more attractive but this can decrease overall underlying liquidity. This may result in the Manager being unable to buy or sell individual holdings within the portfolio. In addition, illiquid stockmarkets may impact the discount of the Company's share price to the NAV per share.

One of the benefits of an investment trust is that the Manager is rarely forced to buy or sell individual holdings at inopportune times. The Manager constantly reviews the underlying liquidity of the portfolio, which is well-diversified, and deals with a wide range of brokers to enhance its ability to execute and minimise liquidity risk.

Gearing: one of the benefits of an investment trust is its ability to use borrowings, which can enhance returns to shareholders in a rising stock market. However, gearing exacerbates movements in the NAV both positively and negatively and will exaggerate declines in NAV when share prices of investee companies are falling.

The Board is responsible for setting the gearing range within which the Manager may operate. It receives recommendations on gearing levels from the Manager, and monitors and discusses with the Manager the appropriate level of gearing at each Board Meeting.

Liquidity of the Company's shares: as with many small company investment trusts, there are times when the liquidity of the Company's shares is low. In the case of the Company, many of the shareholders are large financial institutions with a long-term investment horizon.  Unlike other investment trusts, where private individuals form a larger part of the share register, this may result in fewer shares being traded in the Company on a daily basis and make it difficult at times for investors to buy or sell shares.

The Manager is encouraged by the Board to market the Company to private client wealth managers and other potential new investors. The goal is to widen the shareholder base to enhance liquidity. In addition, the ability to buy back shares to be held in treasury for subsequent re-issue may enhance the liquidity of the Company's shares.

Discount volatility: as with all small company investment trusts, discounts can fluctuate significantly both in absolute terms and relative to their peer group.

The Board and Manager actively monitor the discount of share price to NAV per share and seek to manage this through liaising closely with the Company's Broker, share buy backs and effective marketing. The Board has stated its commitment to an active discount management policy, such that it will consider a buy back of shares if the discount of share price to NAV is greater than 10% for a sustained period of time. The Board encourages the Manager to market the Company to new investors to increase demand for the Company's shares, which may help to reduce the discount.

Regulatory: breach of regulatory rules could lead to suspension of the Company's Stock Exchange listing, financial penalties or a qualified audit report. Breach of Section 1158 of the Corporation Tax Act 2010 could lead to the Company being subject to tax on chargeable gains.

The Administrator monitors the Company's compliance with the Listing Rules of the UK Listing Authority and Section 1158 of the Corporation Tax Act 2010. Compliance with the principal rules is reviewed by the Directors at each Board Meeting.

Operational: failure of the Manager's or Administrator's systems, or those of other third party service providers could lead to an inability to provide accurate reporting and monitoring or a breach of Section 1158 of the Corporation Tax Act 2010.

The Board reviews operational issues in detail at each Board Meeting and the Audit Committee receives reports on the operation of internal controls.

Financial:inadequate controls by the Manager or Administrator or other third party service providers could lead to misappropriation of assets or a breach of Section 1158 of the Corporation Tax Act 2010.  Inappropriate accounting policies or failure to comply with accounting standards could lead to misreporting or breaches of regulations.

The Board reviews financial reports in detail at each Board Meeting.

Banking: a breach of the Company's loan covenants might lead to funding being summarily withdrawn.

The Administrator reviews compliance with the banking covenants on an ongoing basis and the Board reviews compliance at each Board Meeting.

Internal controls:inadequate or deficient controls of the Manager or Administrator or other third party providers might result in breaches of regulations and damage the trust and confidence of shareholders in the Company and lead to an increase in the discount.

The Board continually monitors and reviews issues that may impact the standing of the Company and lead to an increase in the discount.

Statement of Directors' Responsibilities in Respect of the Annual Financial Report

In accordance with Chapter 4 of the Disclosure and Transparency Rules, we confirm that to the best of our knowledge, in respect of the Annual Report and Accounts for the year ended 31 March 2013, of which this statement of results is an extract:

·      The financial statements have been prepared in accordance with IFRS as adopted by the European Union, on a going concern basis, and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and the Company;

·      The Annual Report includes a fair review of the important events that have occurred during the financial year and their impact on the financial statements;

·      The Annual Report includes a description of the Company's principal risks and uncertainties; and

·      The Annual Report includes details of related party transactions that have taken place during the financial year.

On behalf of the Board

A R Irvine

Director

Notes:

1.         Accounting Policies

The financial statements of the Group have been prepared in accordance with the Companies Act 2006, International Financial Reporting Standards ('IFRS'), which comprise standards and interpretations approved by the International Accounting Standards Board ('IASB'), and International Accounting Standards and Standing Interpretations Committee interpretations approved by the International Accounting Standards Committee ('IASC') that remain in effect, and to the extent that they have been adopted by the European Union.

The financial statements have been prepared on a going concern basis. Where presentational guidance set out in the Statement of Recommended Practice ('SORP') for investment companies issued by the Association of Investment Companies ('AIC') in January 2009 is consistent with the requirements of IFRS, the Directors have sought to prepare the financial statements on a basis compliant with the recommendations of the SORP.

2.         Management expenses include a performance fee of £47,000 in respect of the year ended 31 March 2013 (2012: Nil).

3.         Return per Ordinary Share is based on a weighted average of 16,687,607 Ordinary Shares in issue during the year (2012 - 17,140,801).

4.         The proposed final dividend of 5.00p per Ordinary Share, will be paid on 26 July 2013 to ordinary shareholders on the register at close of business on 28 June 2013.

5.         Excluding shares bought back and held in treasury there were 16,633,260 Ordinary Shares in issue at 31 March 2013 (2012 - 17,233,260). 

6.         This announcement is not the Company's statutory accounts.  Statutory accounts for the year to 31 March 2012, which were unqualified, have been lodged with the Registrar of Companies.  The statutory accounts for the year to 31 March 2013 will be delivered to the Registrar of Companies.

7.         The Annual Report and Accounts for the year ended 31 March 2013 will be posted to shareholders and are available for inspection at 80 George Street, Edinburgh EH2 3BU, the registered office of the Company, and on the Manager's website www.montanaro.co.uk. 

For further information please contact:

Montanaro Asset Management Limited

Tel: [phone]

 

END

 

 

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