Annual Financial Report

RNS Number : 2963P

Montanaro European Smaller C.TstPLC

04 June 2015

 



MONTANARO EUROPEAN SMALLER COMPANIES TRUST PLC

 

Date:                4 June 2015

RESULTS FOR THE YEAR ENDED 31 MARCH 2015

 

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 -3.6%

·      Share price -4.6%

·      Benchmark index (capital return) +1.6%

·      Total assets -4.9% (£106.7 million)

Chairman's Statement

After a strong performance last year, the twelve month period to 31 March 2015 was volatile but ultimately unremarkable for investors in European smaller companies, with the MSCI Europe SmallCap (ex UK) Index ending the year 1.6% higher. Your Company's net asset value ('NAV') per share fared less well, falling by 3.6% over the year to 572.2p per share. The share price declined by 4.6% to 515.0p, representing a discount to the NAV of 10.0% as at 31 March 2015.

It is disappointing that the Company lagged the benchmark for the year, but its longer term performance remains good: since the appointment of Montanaro Asset Management Limited ('Montanaro') in September 2006, the NAV per share has increased by 66% compared with an increase of 57% in the benchmark index, thereby meeting its objective of achieving long term capital growth. Moreover, while the share prices of some of our investments underperformed the market during the year, their profits did not. The Board has discussed the reasons for the Company's recent underperformance at length with the Manager, and understands the reasons for it. We remain confident in its ability to manage the portfolio successfully and to meet the Company's stated investment objective.

The Euro weakened against Sterling by more than 10% during the year. This caused a reduction of nearly 80p in the NAV per share. Nevertheless this development is not entirely negative. Many of our companies are global market leaders and export their products around the world - the Euro's depreciation has now made them significantly more competitive versus their international peers.

Montanaro has not changed its investment approach over the years and continues to invest in high quality, growing companies run by strong management teams. This is a conservative, long-term strategy that has delivered attractive returns to investors. Portfolio turnover is kept to a minimum. Indeed, of the twenty largest holdings detailed in last year's Annual Report, only one - Vacon - is no longer in the portfolio and only because it was acquired during the year. We firmly believe that this approach will continue to lead to outperformance over the long term.

Earnings and Dividends

Revenue earnings per share for the year were 9.0p (2014: 6.9p). An interim dividend of 1.75p per share was paid on 9 January 2015. The Board recommends the payment of a final dividend of 5.75p per share payable on 27 July 2015 to shareholders on the register on 26 June 2015.

This brings the total dividends for the year to 7.50p per share, an increase of 7.1% on last year and the fourth consecutive year of a dividend increase.

Ongoing charges, expressed as a percentage of net assets, amount to 1.5% for the year. This is unchanged from the previous three years. The Company has benefitted from renegotiating fees payable to the Manager (as disclosed in last year's Annual Report) and the Administrator, saving £108,000 during the year. However, the Company has also been exposed to higher regulatory costs. The Alternative Investment Fund Managers Directive ('AIFMD'), which came into effect in July 2014, required us to appoint an Alternative Investment Fund Manager and a Depositary. As previously disclosed, Montanaro Asset Management Limited and BNY Mellon Trust & Depositary Limited were appointed to these positions. The increased costs arising from these appointments and work generally relating to the implementation of AIFMD was £100,000 for the year and is estimated at £86,000 for the current financial year.

There are more regulatory challenges ahead, including MIFID II (which is currently in draft form), which may increase our regulatory burden further.

As a Board we will continue to seek ways to lower the Company's cost base, but the regulatory headwinds which we are facing are unhelpful in this task.

Borrowings

The Company has a €15 million fixed rate secured loan which matures in September 2018. At the end of the year, the Company had borrowings (net of cash) of 6.8% of net assets compared to 5.4% at the beginning of the year.

Treasury Shares

During the year the Company issued 100,000 shares from treasury at a discount to the NAV per share, in accordance with its stated treasury shares policy. The Board believes that having the ability to hold shares in treasury for issue in this way provides flexibility in managing the Company's capital base, whilst still providing an enhancement to the NAV per share on the 'round trip' of buying back and re-issuing shares. The Board will seek to renew the Company's share buyback and share issuance authorities at the forthcoming Annual General Meeting.

The Board

The Board consists solely of independent non-executive Directors and we believe we have a good balance of skills, experience, diversity and knowledge of the Company and its business. However, through the Nomination Committee, we have been reviewing our composition and in light of the lengthening tenure of some of the Directors we have decided that a period of Board refreshment is appropriate. We have already started a process to identify potential candidates and hope to make a new appointment later this year with further appointments during the following three years.

Annual General Meeting

The Annual General Meeting will be held on Friday 24 July 2015 at 80 George Street, Edinburgh. Shareholders are encouraged to attend the Meeting where there will be an opportunity to meet and ask questions of the Board and the Manager.

Outlook

The combined effects of lower oil prices, a weaker Euro and falling interest rates should be positive for the European economy. There are tentative early signs that Europe has turned the corner and that a recovery is underway. Therefore, conditions are in place for European corporate profitability to surprise on the upside which in turn suggests that a positive year lies ahead for our investors. We expect 2015 to be a constructive year for the shares of European smaller companies, driven by stronger earnings growth than expected. Nevertheless we do note that valuations are no longer categorically cheap.

According to the UK's Investment Association, recent outflows from European smaller company funds exceeded those experienced throughout the whole of the Global Financial Crisis of 2007 and 2008, a sign perhaps that investors have thrown in the towel on this asset class. This augurs well. Historically, periods of capitulation have laid the foundations for a rise in share prices. After a pedestrian year, we look forward to a more rewarding period for investors in this coming year.

A R IRVINE

Chairman

Consolidated Statement of Comprehensive Income

For the Year Ended 31 March 2015

	Revenue	Capital	Total
	£'000	£'000	£'000
Capital losses on investments
Losses on investments held at fair value	-	(3,511)	(3,511)
Exchange gains	-	505	505
	-	(3,006)	(3,006)
Revenue
Investment income	2,522	-	2,522
Other operating income	1	-	1
Total income	2,523	(3,006)	(483)
Expenditure
Management expenses	(277)	(514)	(791)
Other expenses	(588)	-	(588)
Total expenditure	(865)	(514)	(1,379)
Profit/(loss) before finance costs and taxation	1,658	(3,520)	(1,862)
Finance costs	(124)	(230)	(354)
Profit/(loss) before taxation	1,534	(3,750)	(2,216)
Taxation	(40)	-	(40)
Total comprehensive income	1,494	(3,750)	(2,256)
Return per share (note 2)	9.0p	(22.5)p	(13.5)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 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	(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 2)	6.9p	34.0p	40.9p

Group Balance Sheet

As at 31 March 2015

		2015		2014
		£'000		£'000
Non-current assets
Investments held at fair value through profit and loss		102,239		104,060
Current assets
Trade and other receivables		592		295
Cash and cash equivalents		3,876		7,871
		4,468		8,166
Total assets		106,707		112,226
Current liabilities
Trade and other payables		(179)		(1,239)
Non-current liabilities
Interest-bearing bank loan		(10,777)		(12,304)
Total liabilities		(10,956)		(13,543)
Net assets		95,751		98,683
Capital and reserves
Called-up share capital		8,724		8,724
Share premium account		5,283		5,178
Capital redemption reserve		2,212		2,212
Capital reserve		76,228		79,595
Revenue reserve		3,304		2,974
Shareholders' funds		95,751		98,683
Net asset value per share (note 4)		572.2p		593.3p

Consolidated Statement of Changes in Equity

For the year ended 31 March 2015

	Share capital	Share premium account	Capital redemption reserve	Capital reserve	Revenue reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 1 April 2014	8,724	5,178	2,212	79,595	2,974	98,683
Total comprehensive income	-	-	-	(3,750)	1,494	(2,256)
Shares issued out of treasury	-	105	-	383	-	488
Dividends paid	-	-	-	-	(1,164)	(1,164)
Balance at 31 March 2015	8,724	5,283	2,212	76,228	3,304	95,751

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 Cash Flow Statement

For the Year Ended 31 March 2015

	2015		2014
	£'000		£'000
Cash flows from operating activities
(Loss)/profit before finance costs and taxation	(1,862)		7,415
Investment losses/(gains)	3,511		(6,321)
Withholding tax	(328)		(239)
Exchange gains	(505)		(142)
(Increase)/decrease in receivables	(8)		156
Decrease in payables	(63)		(37)
Purchases of investments	(24,338)		(21,893)
Sales of investments	21,651		19,511
Net cash outflow from operating activities	(1,942)		(1,550)
Cash flows from financing activities
Dividends paid	(1,164)		(1,123)
Interest paid	(333)		(505)
Shares issued out of treasury	488		-
Net cash outflow from financing activities	(1,009)		(1,628)
Net decrease in cash and cash equivalents	(2,951)		(3,178)
Exchange losses	(1,044)		(142)
Decrease in cash and cash equivalents	(3,995)		(3,320)
Cash and cash equivalents at beginning of year	7,871		11,191
Cash and cash equivalents at end of year	3,876		7,871

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 timing short-term market 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, gearing and strategy with the Directors. The Manager 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 financial 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 stock markets 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.

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 2015, 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 Company; and

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

On behalf of the Board

A R Irvine

Director

Notes:

1.         Accounting Policies

The financial statements of the Company 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 16,646,137 Ordinary Shares in issue during the year (2014: 16,633,260).

3.         The proposed final dividend of 5.75p per Ordinary Share, will be paid on 27 July 2015 to ordinary shareholders on the register at close of business on 26 June 2015.

4.         Excluding shares bought back and held in treasury there were 16,733,260 Ordinary Shares in issue at 31 March 2015 (2014: 16,633,260). 

5.         This announcement is not the Company's statutory accounts.  Statutory accounts for the year to 31 March 2014, which were unqualified, have been lodged with the Registrar of Companies.  The statutory accounts for the year to 31 March 2015 will be delivered to the Registrar of Companies.

6.         The Annual Report and Accounts for the year ended 31 March 2015 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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