Annual Financial Report

RNS Number : 5155I

Montanaro European Smaller C.TstPLC

30 May 2014

 



MONTANARO EUROPEAN SMALLER COMPANIES TRUST PLC

 

Date:                30 May 2014

RESULTS FOR THE YEAR ENDED 31 MARCH 2014

 

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 +6.1%

·      Share price +4.0%

·      Benchmark index (capital return) +28.2%

·      Total assets +5.9% (£112.2 million)

Chairman's Statement

We have always been clear about the Company's objective: we want to give our shareholders good long term capital growth. Although the NAV per share increased by 6.1% during the year ended 31 March 2014, to 593.3p, this was disappointing against a market return of 28.2% as measured by our benchmark index.  The share price increased by 4.0% to end the year at 540.0p per share, representing a discount of 9.0%.

We didn't do as well as our benchmark index over the year because the best performing stocks were those at the cheaper, lower quality and more cyclical end of the market. As confidence returned to Europe and the risk of imminent crisis appeared to recede, the demand for equities increased. But that demand was mainly for the stocks the market perceived as cheap and which tended to be in the low quality and cyclical end of the market.  This is not where we invest. Our manager, Montanaro Asset Management Limited ('Montanaro'), buys shares in companies which have strong management teams, sound balance sheets and good business franchises, and which it believes offer the potential for good long term returns. The prices of these stocks did not rise to the same extent as the wider market last year. However, while the share prices of our investments have underperformed the market, their profits have not, a factor which gives us confidence for the future. 

It is also important to recognise the impact on the portfolio of currency movements. The Euro and other European currencies weakened against sterling during the year. This caused a reduction of an estimated 28p in the NAV per share.

Although the performance for the year was disappointing in relative terms, the Board remains supportive of Montanaro's investment style which has produced a good long term record. Since the appointment of Montanaro in September 2006, the NAV per share has increased by 72% compared with an increase of 54% in the benchmark index. The Company has outperformed the benchmark index in five of the last seven financial years. 

Earnings and Dividends

Revenue earnings per share for the year were 6.9p (2013: 7.7p). An interim dividend of 1.75p per share was paid on 10 January 2014 and the Board recommends the payment of a final dividend of 5.25p per share, payable on 25 July 2014 to shareholders on the register on 27 June 2014. This brings the total dividends for the year to 7.00p per share, a rise of 3.7% on last year.

Borrowings

At the end of the year, the Company had borrowings (net of cash) of 5.4% of the net asset value compared to 1.5% at the beginning of the year.  Gearing continued to be used actively within ranges approved by the Board. Over the year, the successful use of gearing contributed an estimated 4.4p to the NAV per share. 

The Board determines borrowing levels following recommendations from the Manager and reviews this formally at each Board meeting.

As previously reported, the Company's €15 million revolving credit facility matured during the year and was replaced with a five year, fixed rate secured loan of the same amount with broadly similar covenants. 

Management Fee Arrangements

The Board has been working hard to bring down the Company's operating costs. We have secured a significant  reduction in our secretarial fees and during the year we were also very pleased to announce that we agreed changes to the management fee arrangements with Montanaro such that, with effect from 1 April 2014, the basic management fee has come down  from 1.0% to 0.9% per annum of the Company's market capitalisation. In addition, there is no longer a performance fee. Collectively, these changes are estimated to bring total cost savings to shareholders of approximately £117,000 over the coming year.

Alternative Investment Fund Managers' Directive ('AIFMD')

The AIFMD relates to European legislation that creates a European-wide framework for regulating managers of alternative investment funds ('AIFs'). Closed-ended investment companies, such as this one, fall within the remit of these new regulations which come into force in July 2014.

The Board has reviewed the impact of this directive on the Company's operations and has decided that the most efficient approach is to appoint Montanaro as the Company's AIFM.  Under the directive, the Company is also required to appoint a depository. Unfortunately, all of these things add to, rather than take away from, the costs of running the Company. We estimate that the total annual ongoing cost to shareholders of our obligation to comply with AIFMD will come to approximately £84,000, which includes an annual fee of £50,000 payable to Montanaro for acting as the AIFM. Montanaro will also receive an initial AIFM set up fee of £25,000.

Outlook

We continue to be confident in European stock markets: loose monetary policy is likely to keep investor demand high and valuations of quality growth companies (of the kind held by the Company) do not suggest that this part of the market is particularly expensive. Montanaro has a good history of investing in high quality, quoted European small companies. The Board also believes that shareholders will continue to benefit from Montanaro's expertise and detailed research capabilities in the European smaller companies sector.

A R IRVINE

Chairman

Consolidated Statement of Comprehensive Income

For the Year Ended 31 March 2014

	Revenue	Capital	Total
	£'000	£'000	£'000
Capital gains on investments
Gains on investments held at fair value	-	6,321	6,321
Exchange gains	-	142	142
	-	6,463	6,463
Revenue
Investment income	2,317	-	2,317
Other operating income	1	-	1
Total income	2,318	6,463	8,781
Expenditure
Management expenses (note 2)	(294)	(545)	(839)
Other expenses	(527)	-	(527)
Total expenditure	(821)	(545)	(1,366)
Profit before finance costs and taxation	1,497	5,918	7,415
Finance costs	(140)	(260)	(400)
Profit before taxation	1,357	5,658	7,015
Taxation	(218)	-	(218)
Total comprehensive income	1,139	5,658	6,797
Return per share (note 3)	6.9p	34.0p	40.9p

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 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

Group Balance Sheet

As at 31 March 2014

		2014		2013
		£'000		£'000
Non-current assets
Investments held at fair value through profit and loss		104,060		94,360
Current assets
Trade and other receivables		295		433
Cash and cash equivalents		7,871		11,191
		8,166		11,624
Total assets		112,226		105,984
Current liabilities
Trade and other payables		(1,239)		(12,975)
Non-current liabilities
Interest-bearing bank loan		(12,304)		-
Total liabilities		(13,543)		(12,975)
Net assets		98,683		93,009
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		79,595		73,937
Revenue reserve		2,974		2,958
Shareholders' funds		98,683		93,009
Net asset value per share (note 5)		593.3p		559.2p

Consolidated Statement of Changes in Equity

For the year ended 31 March 2014

	Share capital	Share premium account	Capital redemption reserve	Capital reserve	Revenue reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 1 April 2013	8,724	5,178	2,212	73,937	2,958	93,009
Total comprehensive income	-	-	-	5,658	1,139	6,797
Dividends paid	-	-	-	-	(1,123)	(1,123)
Balance at 31 March 2014	8,724	5,178	2,212	79,595	2,974	98,683

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 Cash Flow Statement

For the Year Ended 31 March 2014

	2014		2013
	£'000		£'000
Cash flows from operating activities
Profit before finance costs and taxation	7,415		15,633
Investment gains	(6,321)		(14,760)
Withholding tax	(239)		(294)
Exchange (gains)/losses	(142)		261
Decrease/(increase) in receivables	156		(158)
(Decrease)/increase in payables	(37)		135
Purchases of investments	(21,893)		(24,768)
Sales of investments	19,511		27,670
Net cash (outflow)/inflow from operating activities	(1,550)		3,719
Cash flows from financing activities
Dividends paid	(1,123)		(915)
Interest paid	(505)		(457)
Shares repurchased	-		(2,379)
Net cash outflow from financing activities	(1,628)		(3,751)
Net decrease in cash and cash equivalents	(3,178)		(32)
Exchange losses	(142)		(78)
Decrease in cash and cash equivalents	(3,320)		(110)
Cash and cash equivalents at beginning of year	11,191		11,301
Cash and cash equivalents at end of year	7,871		11,191

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 as described in italics.

External: events such as terrorism, disease, protectionism, inflation or deflation, changes in regulation and 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 one of the largest specialist Continental European smaller company teams 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 influence 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.

Referendum on Scottish Independence: the Company is a Scottish registered company and the Board is mindful that there is uncertainty arising in relation to the referendum on Scottish Independence which is due to take place on 18 September 2014.  Such matters of uncertainty include a jurisdication and taxation of savings and pension plans, financial services regulation, investment trust status, currency and membership of the European Union.

The Board considers that, should the vote be in favour of independence, there will be a transitional period during which there will be an opportunity to assess the new situation and take any appropriate action.

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 2014, of which this statement of results is an extract:

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

·      the Business Model and Strategy includes a fair review of the development and performance of the business and the position of the Group and Company together with a description of the principal risks and uncertainties that they face.

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 £nil in respect of the year ended 31 March 2014 (2013: £47,000).

3.         Return per Ordinary Share is based on a weighted average of 16,633,260 Ordinary Shares in issue during the year (2013: 16,687,607).

4.         The proposed final dividend of 5.25p per Ordinary Share, will be paid on 25 July 2014 to ordinary shareholders on the register at close of business on 27 June 2014.

5.         Excluding shares bought back and held in treasury there were 16,633,260 Ordinary Shares in issue at 31 March 2014 (2013: 16,633,260). 

6.         This announcement is not the Company's statutory accounts.  Statutory accounts for the year to 31 March 2013, which were unqualified, have been lodged with the Registrar of Companies.  The statutory accounts for the year to 31 March 2014 will be delivered to the Registrar of Companies.

7.         The Annual Report and Accounts for the year ended 31 March 2014 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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