Annual Financial Report

RNS Number : 9153E

Montanaro European Smaller C.TstPLC

07 June 2012

 



MONTANARO EUROPEAN SMALLER COMPANIES TRUST PLC

 

Date:                7 June 2012

RESULTS FOR THE YEAR ENDED 31 MARCH 2012

 

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 -12.0%

·      Share price -13.3%

·      Benchmark index -18.7%

·      Total assets -8.3% (£94.0 million)

Chairman's Statement

During the year ended 31 March 2012, the Company's NAV per share fell by 12% to 471.6p. This compares with a fall of 19% in the benchmark index, the MSCI Europe SmallCap (ex UK) Index. The share price fell by 13% to 405.0p, representing a discount to the NAV of 14%, compared to 13% at the start of the year.

Although it is disappointing to report a reduction in the NAV after last year's excellent gains, it is comforting to be able to report another year of relative outperformance against the benchmark. Since the appointment of Montanaro Asset Management Limited as Investment Manager in September 2006, the NAV per share has increased by 37% compared with an increase of 5% in the benchmark index.

A key feature of the year under review, and so far this year, has been the sovereign debt and banking crisis in Europe, which has created a significant degree of investor nervousness and stock market volatility.  Following steep falls in stock markets during the first half of the year, markets recovered some of their losses following the implementation of the European Central Bank's Long Term Refinancing Operations ('LTROs'), which led investors to re-assess the risk of a systemic crisis in Europe.  Markets made significant gains in the last three months of the financial year in particular, with a rise of more than 13% in the benchmark index.   This was not only in reaction to the LTROs, but also to positive economic indicators from both the US and China.

These developments in Europe also caused a weakening of the Euro and other European currencies against sterling.  An estimated 27p of the reduction in the NAV per share during the year is attributable to currency weakness within the portfolio.

Trading results from companies generally, and notably within the portfolio, were mostly ahead of expectation during the year and dividend growth has been good.  Company balance sheets remain strong, thereby providing some protection from the current uncertainties.

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 6.5p (2011: 3.9p).  An interim dividend of 1.75p per share was paid on 6 January 2012 and the Board recommends the payment of a final dividend of 3.75p per share, payable on 27 July 2012 to shareholders on the register on 29 June 2012.  This brings the total dividend for the year to 5.5p per share, an increase of 22% compared to the previous year.

Change to Articles of Association

Certain statutory rules governing investment trusts have recently been amended. In particular, the rule which previously prohibited an investment trust from distributing any surpluses arising from the realisation of its investments has been removed.

In light of this change, a resolution will be proposed at the Annual General Meeting to amend the Articles of Association to remove this prohibition.  The Board believes that this amendment, if approved by shareholders, will give the Company greater flexibility as it will enable it to consider distributions from capital.

Share Buy Backs and Treasury Shares

During the year, the Company sold 875,000 Ordinary Shares from treasury.  These shares were issued in accordance with the Board's stated policy on treasury shares, which is to 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.  The issue of shares from treasury during the year provided a round-trip gain of £1.2 million.

Subsequently within the financial year, the Company bought back 215,000 Ordinary Shares and, since the year-end, has bought back a further 600,000 Ordinary Shares to be held in treasury. 

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 our near-term cautious outlook.  The Company has a flexible €15 million revolving credit facility which enables gearing to be increased or decreased as considered appropriate.  The Board determines borrowing levels following recommendations from the Investment Manager and reviews this formally at each Board meeting.

Board Composition

Having served as a Director since 1998, John Lumsden has decided to retire from the Board at the Annual General Meeting. With his industry background and high degree of wisdom and common sense, John has made a significant contribution to the Company. On behalf of the Board, I would like to thank him for his contribution and support over the years.

Outlook

The ongoing austerity measures in Europe may well constrain economic growth in the region for some time. In addition, notwithstanding the impact of the effect of the recent LTROs, there are still concerns over the health of the banking sector and debt levels of some of the weaker European countries. These uncertainties will contribute to stock market volatility but market corrections will offer opportunities to investors to make attractive investments. 

The Company will continue to invest in quoted European smaller companies with strong management, sound balance sheets and good business franchises. The Company continues to benefit from Montanaro's extensive research capabilities within this large and often under-researched sector.  Although Europe is currently out of favour with many investors, the Investment Manager continues to identify good investment opportunities for attractive long-term returns. 

A R IRVINE

Chairman

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	(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 2)	6.5p	(65.3)p	(58.8)p

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 2011

	Revenue	Capital	Total
	£'000	£'000	£'000
Capital gains on investments
Gains on investments held at fair value	-	19,045	19,045
Exchange gains	-	417	417
	-	19,462	19,462
Revenue
Investment income	1,676	-	1,676
Other operating income	10	-	10
Total income	1,686	19,462	21,148
Expenditure
Management expenses	(241)	(1,358)	(1,599)
Other expenses	(477)	-	(477)
Total expenditure	(718)	(1,358)	(2,076)
Profit before finance costs and taxation	968	18,104	19,072
Finance costs	(120)	(223)	(343)
Profit before taxation	848	17,881	18,729
Taxation	(205)	-	(205)
Total comprehensive income	643	17,881	18,524
Return per share (note 2)	3.9p	107.9p	111.8p

 Group Balance Sheet

As at 31 March 2012

			2012			2011
			£'000			£'000
Non-current assets
Investments held at fair value through profit and loss			82,502			90,483
Current assets
Trade and other receivables			192			244
Cash and cash equivalents			11,301			11,786
			11,493			12,030
Total assets			93,995			102,513
Current liabilities
Trade and other payables			(12,717)			(13,676)
Total liabilities			(12,717)			(13,676)
Net assets			81,278			88,837
Capital and reserves
Called-up share capital			8,724			8,724
Share premium account			5,178			3,935
Capital redemption reserve			2,212			2,212
Capital reserve			62,577			71,736
Revenue reserve			2,587			2,230
Shareholders' funds			81,278			88,837
Net asset value per share (note 4)			471.6p			536.0p

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 Statement of Changes in Equity

For the year ended 31 March 2011

	Share capital	Share premium account	Capital redemption reserve	Capital reserve	Revenue reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 1 April 2010	8,724	3,935	2,212	53,855	2,333	71,059
Total comprehensive income	-	-	-	17,881	643	18,524
Dividends paid	-	-	-	-	(746)	(746)
Balance at 31 March 2011	8,724	3,935	2,212	71,736	2,230	88,837

Consolidated Cash Flow Statement

For the Year Ended 31 March 2012

	2012		2011
	£'000		£'000
Cash flows from operating activities
(Loss)/profit before finance costs and taxation	(9,295)		19,072
Investment losses/(gains)	10,737		(19,045)
Withholding tax	(341)		(185)
Exchange gains	(310)		(417)
Increase in receivables	104		57
(Decrease)/increase in payables	(923)		934
Purchases of investments	(29,850)		(21,276)
Sales of investments	25,599		30,505
Net cash (outflow)/inflow from operating activities	(4,279)		9,645
Cash flows from financing activities
Dividends paid	(761)		(746)
Interest paid	(468)		(345)
Shares repurchased	(744)		-
Issue of shares from treasury	4,021		-
Drawdown of borrowings	2,190		1,250
Net cash inflow from financing activities	4,238		159
Net (decrease)/increase in cash and cash equivalents	(41)		9,804
Exchange (losses)/gains	(444)		419
(Decrease)/increase in cash and cash equivalents	(485)		10,223
Cash and cash equivalents at beginning of year	11,786		1,563
Cash and cash equivalents at end of year	11,301		11,786

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 is believed to have 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.

Reputational: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 2012, 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.         Return per Ordinary Share is based on a weighted average of 17,140,801 Ordinary Shares in issue during the year (2011 - 16,573,260).

3.         The proposed final dividend of 3.75p per Ordinary Share, will be paid on 27 July 2012 to ordinary shareholders on the register at close of business on 29 June 2012.

4.         Excluding shares bought back and held in treasury there were 17,233,260 Ordinary Shares in issue at 31 March 2012 (2011 - 16,573,260). 

5.         This announcement is not the Company's statutory accounts.  Statutory accounts for the year to 31 March 2011, which were unqualified, have been lodged with the Registrar of Companies.  The statutory accounts for the year to 31 March 2012 will be delivered to the Registrar of Companies.

6.         The Annual Report and Accounts for the year ended 31 March 2012 will be posted to shareholders and is 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:

Charles Montanaro

Montanaro Asset Management Limited

Tel: [phone]

 

END

 

 

ACSFRMJTMBMMBBT