Annual Financial Report

RNS Number : 1329T

Montanaro European Smaller C.TstPLC

29 June 2018

 

MONTANARO EUROPEAN SMALLER COMPANIES TRUST PLC

 

Date:                29 June 2018

LEI:                  213800CWSC5B8BG3RS21

RESULTS FOR THE YEAR ENDED 31 MARCH 2018

Investment Objective

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

The Company's benchmark index is the MSCI Europe SmallCap (ex UK) Index (in sterling terms).

Highlights

·      Net asset value ('NAV') per Ordinary Share +10.8%

·      Share price +15.1%

·      Benchmark index (capital return) +10.2%

·      Total assets +9.7% (£172.9 million)

Chairman's Statement

Results

The year to 31 March 2018 was another positive one for investors in European smaller companies: the MSCI Europe SmallCap (ex UK) Index (in sterling terms) rose by 10.2%. In comparison, the net asset value ('NAV') of your Company rose by 10.8% to 901.1p per share. The share price did even better - rising by 15.1% to 800.0p, as the discount narrowed from 14.5% to 11.2%.

Over the course of the year the Euro (representing 58.4% exposure of the NAV at year end) rose 2.6% against Sterling but both the Swedish Krona and the Swiss Franc (combined 31.3% exposure of the NAV) declined against Sterling resulting in almost no overall currency effect on the net asset value. We do not hedge currencies.

Since the appointment of Montanaro Asset Management Limited ('Montanaro') in September 2006, the NAV per share has increased by 161.9% compared with an increase of 132.3% in the benchmark index.

A review of the market, investment approach and an analysis of performance is set out in the Manager's Report together with more detail on the stocks in which the Company is invested.

Earnings and Dividends

Revenue earnings per share for the year were 9.5p (2017: 9.8p).

The Company's primary aim is to deliver capital growth to its shareholders. However, our substantial revenue reserve combined with the long-term growth in dividends of the companies in which we invest have allowed us to maintain a consistent and robust dividend payout.  An interim dividend of 1.75p per share was paid on 5 January 2018.  The Board recommends the payment of a final dividend of 6.75p per share payable on 3 September 2018 to shareholders on the register on 13 July 2018.  Subject to shareholder approval, this would bring the total dividends for the year to 8.50p per share, an increase of 3.0% compared to the previous year.

Directors

Over the last few years, we have taken steps to refresh the Board.  In the current year a recruitment process was undertaken by the Nomination Committee.  On 8 November 2017, Caroline Roxburgh was appointed to the Board. Caroline Roxburgh is a Chartered Accountant with over 30 years' experience in finance and audit and was formerly a Partner at PricewaterhouseCoopers LLP until her retirement in 2016.

Bruce Graham and Alex Hammond-Chambers will retire following the conclusion of the Annual General Meeting on 29 August 2018.  Bruce Graham (Chairman of the Audit Committee) and Alex Hammond-Chambers (Chairman of the Nomination Committee and Senior Independent Director) have served on the Board since 2003 and 2004 respectively and I would  like to thank them both for their outstanding contribution and firm commitment to the Board.  Following their retirement, Caroline Roxburgh will become Chairman of the Audit Committee, Richard Curling Chairman of the Nomination Committee and Merryn Somerset Webb the Senior Independent Director.

I have served on the Board since 1992 and as Chairman since 2004 and will also retire following the conclusion of the Annual General Meeting on 29 August 2018.  I am pleased to report that the Board intends to appoint Richard Curling to succeed me as Chairman. Richard has over 30 years' experience as a fund manager with extensive experience of investment trusts and has made a significant contribution to the Company since he joined the Board in 2015.  I know his counsel will serve the Company well.

The Nomination Committee is currently undertaking a further recruitment process with a view to appointing another non-executive director in the near future. This would bring the Board to four non-executive directors following these retirals.

Borrowings

The Board, in discussion with the Manager, regularly reviews the gearing strategy of the Company and approves the arrangement of any gearing facility.  Gearing increases or decreases the returns from underlying profits or losses generated by the investment portfolio.  This is a key feature of investment trusts that we believe offers a strong competitive advantage over alternative open-ended investment funds.  Therefore, the Board strongly encourages the active use of gearing by the Manager.

The Board has set a maximum limit on borrowing, net of cash, of 30% of shareholders' funds at the time of borrowing. At the end of the fiscal year, the Company had borrowings, net of cash, of 0.6% compared to 7.3% at the beginning of the year, the decline being explained within the Manager's Report.

The Company currently has borrowings in the form of fixed rate loans totalling €25 million which are due to mature on 13 September 2018. It is the current intention of the Board to secure further borrowing at an appropriate level.

Treasury Shares

During the year, the Company did not buy back shares into or sell shares from Treasury. The Board's stated Treasury shares policy is included in the Annual Report and Accounts. The Board will seek to renew the Company's share buyback and share issuance authorities at the forthcoming Annual General Meeting.

Annual General Meeting

The Annual General Meeting will be held on Wednesday 29 August 2018 at 12.30pm at the offices of BMO Global Asset Management, Quartermile 4, 7a Nightingale Way, 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

We continue to believe that the fundamentals behind the market remain positive. Global economies are growing and monetary policy remains accommodative.  However, it remains to be seen how markets respond to rising interest rates in the face of stronger economic growth, or indeed lower growth than expected.

Your portfolio consists of some of the highest quality companies in Europe. Their strong management teams, good growth prospects, sound balance sheets and cash generative business models should ensure that long-term returns will be attractive irrespective of short-term considerations.

A R IRVINE

Chairman

29 June 2018

Manager's Report

The Attractions of Quoted European Smaller Companies ('SmallCap')

The key attraction of investing in smaller companies is their long-term record of producing higher returns than large companies. In the UK, over the last 63 years, this has amounted to an average of 3.4% per annum ("the SmallCap Effect"). £1 invested in large companies in 1954 would now be worth £1,000, whereas the same £1 invested in smaller companies would now be worth over £7,200 - seven times more.

We have less data in Europe - it only goes back to 2000.  But what data we have suggests that the SmallCap Effect is even more pronounced here: European "small" companies have been outperforming large ones by over 7.1% per annum.

The market for European smaller companies is inefficient.  While some large companies are analysed by over 50 sell-side research institutions, many smaller companies in Europe have little or no such coverage. Following MiFID II, research coverage for small companies may well decline even further. We believe that this makes it easier for those with a high level of internal research capability to find attractive, undervalued and unrecognised investment opportunities.  This in turn makes it possible to deliver long-term performance over and above that of the index.

Montanaro

Montanaro was established in 1991. We have one of the largest and most experienced specialist teams in the UK dedicated exclusively to researching and investing in quoted smaller companies.

At 31 March 2018, Montanaro's assets under management stood at €2.8 billion.

Investment Process

Montanaro specialises in researching and investing in quoted smaller companies. We have a particular focus on those with a market value below €5 billion.

We have a disciplined, two-stage investment process.  Initially, we identify good businesses within our investable universe - the very best go onto our approved list of stocks.  In the second stage, we assess valuation and select the most attractive investments from the approved list for your portfolio.

We have an in-house team of eleven analysts who each focus on specific sectors.  Utilising their specialist industry knowledge and a range of proprietary screens, they are continually on the lookout for new investment ideas. With around 4,000 companies to choose from, they can afford to be picky.

We look for high quality companies that have strong growth prospects. They must be profitable, have good and experienced management and deliver sustainably high returns on capital employed.  We prefer those that can deliver self-funded organic growth without diluting their returns or straying from their areas of expertise.  Conversely, we avoid those with stretched balance sheets, poor cash generation, incomprehensible accounts or structurally challenged business models.  We also do not invest in companies that generate a significant proportion of sales from products with negative societal impacts such as tobacco, gambling, armaments or alcoholic drinks.

When we consider that we have identified a good company, it must still pass our stringent checklist and be approved by Montanaro's Investment Committee before it is added to our approved list.  A stock cannot be considered for inclusion in your portfolio until it has passed this hurdle.

Once approved, we conduct a detailed analysis of a stock's valuation and will wait until there is adequate upside before building a position. While in the short-term the market is usually focused on how quarterly results compare to consensus expectations, we place particular emphasis on understanding the extent to which a company can compound its cashflows over the long-term. We are willing to pay more for high quality, growing businesses.

We believe that a deep understanding of a company's business model, drivers and the way it is managed is the most important way to manage risk and to add value.  We therefore visit our investee companies on a regular basis.  We place great emphasis on management and seek to gain an understanding of their goals and aspirations by seeing them operate in their own environment.  Their track record is examined in detail along with board structure, the level of insider ownership and corporate governance policies.  We seek to understand where a company will be in 5 - 10 years rather than the next quarter.

Once a stock has been added to a portfolio, our analysts update its checklist and their assessment of its value regularly.  We will sell a holding if we believe that the company's underlying quality is deteriorating or if there has been a fundamental change to the investment case.

In summary, we invest in well managed, high quality, growth companies at sensible valuations. We keep portfolio turnover and transaction costs low and follow our companies closely over many years.  We would rather pay a little more for a higher quality, more predictable company that can be valued with greater certainty.  Finally, we align shareholders' interests with our own by investing meaningful amounts of our own money alongside yours.

Portfolio Construction

As discussed above, the portfolio is constructed by selecting stocks from our approved list.  We believe the best form of risk management is investing in fundamentally good businesses, which this approach is designed to ensure.  We also have a number of internal risk controls aimed at limiting our exposure to any individual company and ensuring liquidity is adequate for us to enter and exit a position if required.

We will generally hold between 40 and 60 companies in the portfolio. This means that our performance relative to the benchmark index can fluctuate.   However, over the long-term, our fundamental, research-driven investment approach has delivered attractive absolute and relative returns.

Country and sector distribution within the portfolio is driven by stock selection.  Overweight and underweight positions relative to those in the Benchmark are based on where the greatest value is perceived to be.  We do not try to position the portfolio based on economic or political forecasts.  Geographical and sector weightings are monitored and risk limits applied to ensure that your portfolio is not overly concentrated towards one specific macroeconomic outcome.

Our bottom-up, quality focused approach and aversion to macroeconomic predictions also tends to mean we have different weightings to certain sub-sectors compared to the index.  For example, we do not hold any commercial banks or mining companies but we are significantly overweight in healthcare.

More broadly, our investment approach does lead us to be continually overweight in higher quality and growth companies.  There are times when lower quality, "value" companies outperform and we will usually perform less well than the overall smaller companies market during such periods.

Performance Attribution

The year to 31 March 2018 again saw some strong performances from our largest contributors. Last year we discussed Biotage, which sells products for separation in analytical and organic chemistry applications, and Nemetschek, which provides software solutions to the construction industry.  Holdings in these two companies were new additions to the portfolio and it was therefore pleasing to see both performing particularly well during the year on the back of rapidly expanding profits.

Another strong performer was LEM Holding, which makes current and voltage transducers: revenue growth accelerated due to stronger industrial end markets and investors began to see the potential for the company's products in the hybrid and electric vehicle space.  Further contributions were made by longstanding portfolio holdings such as Sartorius Stedim, the developer of equipment used to manufacture biologic drugs, and Rational, the market-leading manufacturer of cooking appliances for commercial kitchens.

Our largest detractor was RaySearch Laboratories, a developer of software used for treatment planning in radiation therapy.  The company's sales continued to increase, but foreign exchange movements combined with significant investments for future growth caused operating profits to fall.  While we reduced our position significantly ahead of the subsequent share price decline, this limited rather than removed the impact on the portfolio. We believe that the long-term prospects for the business remain strong.  Last year, the holding in this company was the top contributor to performance.

Less dramatic falls were seen from the Swiss wealth manager VZ Holding and Italian disc brake specialist Brembo.  Nevertheless, both companies grew their revenues and profits in 2017 while simultaneously investing for future growth. We expect this to be the case in 2018 too and continue to hold the shares.

Portfolio Changes

We try to keep portfolio turnover as low as possible. Nonetheless, we typically make a few changes each year as we find new ideas that we believe will provide stronger long-term returns than existing holdings. Companies that become too large, get acquired or whose investment case deteriorates are also replaced with new stocks from our approved list.

In the year to 31 March 2018, we sold positions in various holdings including that in Virbac, the animal health company, as the company's balance sheet deteriorated following a significant acquisition and we grew concerned by the impact of generic competition for one of their key products as well as a weakening new product pipeline.  The holding in Fielmann, Europe's largest optician, was sold as we felt the valuation was too high given the company's long-term growth prospects; and we also removed the holding in asset manager Azimut as we did not like their increasingly acquisitive and unfocused approach to expansion.

New additions to the portfolio included investments in Thule, the global market leader in roof and bike racks; Grenke, which provides lease financing for IT equipment to small and medium sized businesses; and Fortnox, which provides cloud-based accounting systems to companies in Sweden.

At 31 March 2018, the portfolio consisted of 51 companies of which the top ten holdings represented 32.5% of the total net asset value.

Gearing

The Board determines levels of gearing following recommendation from the Manager.  The Company ended the fiscal year with gearing of 0.6% (31 March 2017: 7.3%) - lower than both last year and the level that our existing loans allow for.  This reflects our view that, while there are few signs of an imminent economic downturn, there are also fewer compelling investments available at the moment because valuations have risen and sentiment is strong.  Nevertheless, we remain ready to increase our gearing as and when opportunities arise.

Outlook

Our long term outlook remains positive, reflecting our view that the companies in which we invest have all the ingredients necessary to grow their profits  significantly and reinvest in their businesses at high returns on capital.  Given valuations that are not obviously over-extended, this should deliver attractive long-term returns to our investors.

MONTANARO ASSET MANAGEMENT LIMITED

29 June 2018

Statement of Comprehensive Income (audited)

For the Year Ended 31 March 2018

	Revenue	Capital	Total
	£'000	£'000	£'000
Capital gains on investments
Gains on investments held at fair value	-	15,962	15,962
Exchange losses	-	(284)	(284)
	-	15,678	15,678
Revenue
Investment income	3,094	-	3,094
Total income	3,094	15,678	18,772
Expenditure
Management expenses	(442)	(821)	(1,263)
Other expenses	(667)	-	(667)
Total expenditure	(1,109)	(821)	(1,930)
Profit before finance costs and taxation	1,985	14,857	16,842
Finance costs	(179)	(333)	(512)
Profit before taxation	1,806	14,524	16,330
Taxation	(223)	-	(223)
Total comprehensive income	1,583	14,524	16,107
Return per share (note 2)	9.5p	86.8p	96.3p

The total column of this statement represents the Company'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.

 Statement of Comprehensive Income (audited)

 For the Year Ended 31 March 2017

	Revenue	Capital	Total
	£'000	£'000	£'000
Capital gains on investments
Gains on investments held at fair value	-	31,339	31,339
Exchange losses	-	(1,133)	(1,133)
	-	30,206	30,206
Revenue
Investment income	2,978	-	2,978
Total income	2,978	30,206	33,184
Expenditure
Management expenses	(340)	(631)	(971)
Other expenses	(549)	-	(549)
Total expenditure	(889)	(631)	(1,520)
Profit before finance costs and taxation	2,089	29,575	31,664
Finance costs	(174)	(323)	(497)
Profit before taxation	1,915	29,252	31,167
Taxation	(280)	-	(280)
Total comprehensive income	1,635	29,252	30,887
Return per share (note 2)	9.8p	174.8p	184.6p

Balance Sheet (audited)

As at 31 March 2018

		2018		2017
		£'000		£'000
Non-current assets
Investments held at fair value through profit and loss		151,728		145,989
Current assets
Trade and other receivables		578		524
Cash and cash equivalents		20,574		11,144
		21,152		11,668
Total assets		172,880		157,657
Current liabilities
Trade and other payables		(201)		(272)
Interest-bearing bank loans		(21,903)		-
		(22,104)		(272)
Non-current liabilities
Interest-bearing bank loans		-		(21,335)
Total liabilities		(22,104)		(21,607)
Net assets		150,776		136,050
Capital and reserves
Called-up share capital		8,724		8,724
Share premium account		5,283		5,283
Capital redemption reserve		2,212		2,212
Capital reserve		130,916		116,392
Revenue reserve		3,641		3,439
Shareholders' funds		150,776		136,050
Net asset value per share (note 4)		901.1p		813.1p

Statement of Changes in Equity (audited)

For the year ended 31 March 2018

	Share Capital	Share Premium Account	Capital Redemption Reserve	Capital Reserve	Revenue Reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 1 April 2017	8,724	5,283	2,212	116,392	3,439	136,050
Total comprehensive income	-	-	-	14,524	1,583	16,107
Dividends paid	-	-	-	-	(1,381)	(1,381)
Balance at 31 March 2018	8,724	5,283	2,212	130,916	3,641	150,776

Statement of Changes in Equity (audited)

For the year ended 31 March 2017

	Share Capital	Share Premium Account	Capital Redemption Reserve	Capital Reserve	Revenue Reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 1 April 2016	8,724	5,283	2,212	87,140	3,059	106,418
Total comprehensive income	-	-	-	29,252	1,635	30,887
Dividends paid	-	-	-	-	(1,255)	(1,255)
Balance at 31 March 2017	8,724	5,283	2,212	116,392	3,439	136,050

Cash Flow Statement (audited)

For the Year Ended 31 March 2018

	2018		2017
	£'000		£'000
Cash flows from operating activities
Profit before finance costs and taxation	16,842		31,664
Investment gains	(15,962)		(31,339)
Exchange losses	284		1,133
Withholding tax	(325)		(457)
Investment income	(3,094)		(2,978)
Dividends received	3,142		2,913
(Decrease)/increase in payables	(71)		82
Purchases of investments	(26,404)		(31,123)
Sales of investments	36,627		35,210
Net cash inflow from operating activities	11,039		5,105
Cash flows from financing activities
Dividends paid	(1,381)		(1,255)
Interest paid	(478)		(461)
Net cash outflow from financing activities	(1,859)		(1,716)
Net increase in cash and cash equivalents	9,180		3,389
Exchange gains	250		429
Increase in cash and cash equivalents	9,430		3,818
Cash and cash equivalents at beginning of year	11,144		7,326
Cash and cash equivalents at end of year	20,574		11,144

Principal Risks and Uncertainties and Risk Mitigation

Most of the principal risks that could threaten the Company's objective, strategy, future returns and solvency are market related and comparable to those of other investment trusts investing primarily in quoted securities.

In accordance with the Guidance on Risk Management, Internal Control and Related Financial and Business Reporting, issued by the Financial Reporting Council, the Board has established an ongoing process for identifying, evaluating and managing the significant risks faced by the Company. It has also regularly reviewed the effectiveness of the Company's risk management and internal control systems for the period.

The principal risks and uncertainties faced by the Company, and the Board's mitigation approach are described below.

Investment and strategic risk. Inappropriate strategy, including country and sector allocation and stock selection could lead to poor returns for shareholders.

Mitigation: At each Board Meeting the Manager discusses portfolio performance and strategy with the Directors and performance against the benchmark and the peer group is reviewed. The Manager also provides the Board 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.

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.

Mitigation: The Board is responsible for setting the gearing range within which the Manager may operate and has set a maximum limit on borrowing, net of cash, of 30% of shareholders' funds at the time of borrowing.  The Company currently has loans totalling €25 million that mature in September 2018 and it does not anticipate any difficulty extending or replacing these with an appropriate level of borrowing. The Board receives recommendations on gearing levels from the Manager, and monitors and discusses with the Manager the appropriate level of gearing at each Board Meeting.

Other financial risks. The Company invests principally in Continental European quoted smaller companies and its principal risks are therefore market related with short term risk arising from the volatility in the prices of the Company's investments and foreign exchange.  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.

As with all small company investment trusts, there is liquidity risk at 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 portfolio is focused on investments in smaller European companies where the opportunities may be more attractive than in larger companies but where overall portfolio liquidity may be more challenging. This may result in difficulties in buying or selling individual holdings in difficult markets. In addition, illiquid stock markets may impact the discount of the Company's share price to the NAV per share.

Mitigation: Portfolio diversification, both geographical and sectoral, can mitigate the consequences of such risky events and the Board reviews the portfolio with the Manager on a regular basis.  However, it is not the Company's policy to hedge currency risk. The Board has also set investment restrictions and guidelines which are adhered to and reported on by the Manager. If required, it is also possible to raise the level of cash held, 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.

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 Manger 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.

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

Mitigation: The Board and Manager actively monitor the discount of share price to NAV per share and seek to influence this through liasing closely with the Company's Broker, share buybacks and effective marketing.  The Board has stated its commitment to an active discount management policy, such that it will consider a buyback of shares where the discount of share price to the NAV per share is greater than 10% for a sustained period of time and is significantly wider than the average for similar trusts.  Any such transaction must be value enhancing for shareholders and the Board will take into consideration the effect of the buyback on the liquidity of the Company's shares.  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. The Company carries on business as an investment trust and has been approved as such by HM Revenue & Customs subject to it continuing to meet eligibility conditions and ongoing requirements.  As a result, it is not liable to corporation tax on capital gains. Breach of Section 1158 of the Corporation Tax Act 2010 could lead to the Company being subject to tax on chargeable gains. Breach of regulatory rules could lead to suspension of the Company's Stock Exchange listing, financial penalties or a qualified audit report.

Mitigation: The Administrator monitors the Company's compliance with Section 1158 of the Corporation Tax Act 2010 including revenue forecasts and the amount of proposed dividends to ensure the rules are not breached.  The results are reported to the Board at each meeting. The Administrator monitors compliance with the Listing Rules of the UK Listing Authority and compliance with the principal rules is reviewed by the Directors at each Board Meeting.  The Board and AIFM also monitor changes in legislation which may have an impact on the Company.

Operational.  In common with most other investment trust companies, the Company has no employees.  The Company is therefore reliant on the services provided by third parties such as the Manager, the Administrator and the Custodian (as a delegate of the Depositary).  Disruption or 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 of the Company's financial position or a breach of regulatory and legal regulations.

Mitigation: The Board and the Audit Committee receives regular reports on the operation of internal controls to mitigate against the risk of failure, including those at the Manager, the Administrator and the Custodian.  These have been tested and monitored throughout the year which is evidenced from their control reports regarding their internal controls which are reported on by their reporting accountants. Quarterly reports are also received from the Depositary which is responsible for the safekeeping of all custodial assets of the Company. 

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

Mitigation: Montanaro has one of the largest specialist teams in the UK focusing on quoted European smaller companies. Montanaro operates a team approach in the management of the investment portfolio which mitigates against the impact of the departure of any one member of the investment team.  The Manager keeps the Board informed of developments within its business.

 

 

Viability Assessment and Statement

In accordance with the UK Corporate Governance Code, in order to assess the viability of the Company, the Board is required to assess its future prospects and has considered that a number of characteristics of its business model and strategy were relevant to this assessment:

•         The Company's objective is to achieve capital growth.
•         The Company's investment policy, which is subject to regular Board monitoring, means that the Company is invested principally in the securities of Continental European quoted smaller companies.
•         The Company is a closed-end investment trust, whose shares are not subject to redemptions by shareholders.
•         The Company's business model and strategy is not time limited.

Also relevant were a number of aspects of the Company's operational arrangements:

•         The Company retains title to all assets held by the Custodian under the terms of a formal agreement with the Depositary and Custodian.
•         The borrowing facilities, which remain available until September 2018, are also subject to formal agreements, including financial covenants with which the Company complied in full during the year.
•         Revenue and expenditure forecasts are reviewed by the Directors at each Board Meeting.

In considering the viability of the Company, the Directors carried out a robust assessment of the principal risks and uncertainties which could threaten the Company's objective and strategy, future performance and solvency, including the impact of a significant fall in equity markets or adverse currency movements on the Company's investment portfolio. These risks, their mitigations and the processes for monitoring them are set out above within Principal Risks and Uncertainties and Risk Mitigation and in the Report of the Audit Committee and in Notes 15 to 20 of the accounts within the Annual Report.

The Directors have also considered:

•         The level of ongoing charges incurred by the Company which are modest and predictable and that these were covered approximately 1.7 times by investment income and total 1.2% of average net assets;
•         Future revenue and expenditure projections;
•         The Company's borrowing in the form of fixed rate loans totalling €25 million, which are due to mature in September 2018, noting that the Company has a large margin of safety over the covenants on this debt and does not anticipate any difficulty extending or replacing this facility. This loan was covered 7.9 times by the Company's total assets at 31 March 2018;
•         Its ability to meet liquidity requirements given the Company's investment portfolio consists principally of Continental European quoted smaller companies which can be realised if required. It is estimated that approximately 95% of the portfolio could be liquidated within seven trading days;
•         The ability to undertake share buybacks if required;
•         That the Company's objective and policy continue to be relevant to investors; and
•         The Company has no employees, having only non-executive Directors and consequently does not have redundancy or other employment related liabilities (including pensions) or responsibilities.

These matters were assessed over a three year period to June 2021, and the Board will continue to assess viability over three year rolling periods, taking account of severe but plausible scenarios. In the absence of any adverse change to the regulatory environment and to the treatment of UK investment trusts a rolling three year period represents the horizon over which the Directors do not expect there to be any significant change to the Company's principal risks or their mitigation and they believe they can form a reasonable expectation of the Company's prospects.

Based on their assessment, and in the context of the Company's business model, strategy and operational arrangements set out above, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the three year period to June 2021. For this reason, the Board also considers it appropriate to continue adopting the going concern basis in preparing the Report and Accounts.

Directors' Responsibilities Statement in Relation to the Financial Statements

In accordance with Chapter 4 of the Disclosure Guidance and Transparency Rules, the Directors confirm, in respect of the Annual Report and financial statements for the year ended 31 March 2018 of which this statement of results is an extract, that to the best of his or her knowledge:

·      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;

·      the Strategic Report and the Report of the Directors include 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;

·      taken as a whole, the Annual Report and financial statements are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's position and performance, business model and strategy;

·      the financial statements include details on related party transactions; and

·      having assessed the principal risks and other matters discussed in connection with the Viability Statement, it is appropriate to adopt the going concern basis in preparing the financial statements.

On behalf of the Board

A R Irvine

Director

29 June 2018

Notes (audited):

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.

Where presentational guidance set out in the Statement of Recommended Practice ('SORP') for investment companies issued by the Association of Investment Companies ('AIC') 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. 

The accounting policies adopted are consistent with those of the previous financial year, except that the following amendments to IAS 7 has been adopted in the current year:

·      The IASB issued amendments to IAS 7 'Statement of Cash Flows' as part of its Disclosure Initiative and these require an entity to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes.  The amendments do not prescribe a specific format to disclose financing activities; however, an entity may fulfil the disclosure objective by providing a reconciliation between the opening and closing balances in the statement of financial position for liabilities arising from financing activities.  On initial application of the amendments, entities are not required to provide comparative information for preceding periods. 

The following new standards have been issued but are not effective for this accounting period and have not been adopted early:

·    In July 2014, the IASB issued the final version of IFRS 9 'Financial Instruments' which reflects all phases of the financial instruments project and replaces IAS 39 'Financial Instruments: Recognition and Measurements'. The standard introduces new requirements for classification and measurement of financial instruments, a new expected credit loss model for calculating impairment on financial assets, and hedge accounting.  IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application permitted.  Retrospective application is required with some exceptions. The adoption of IFRS 9 is unlikely to have a material effect on the Company's financial assets or financial liabilities, which will continue to be classified as fair value through profit or loss and held at amortised cost respectively.

·    IASB has issued a new standard for the recognition of revenue, IFRS 15 'Revenue from Contracts with Customers'. This will replace IAS 18 which covers contracts for goods and services.  The new standard is based on the principle that revenue is recognised when control of a good or service transfers to a customer - so the notion of control replaces the existing notion of risks and rewards.  The standard permits a modified retrospective approach for the adoption.  Under this approach entities will recognise transitional adjustments in retained earnings on the date of initial application (eg 1 April 2018), ie without restating the comparative period.  They will only need to apply the new rules to contracts that are not completed as of the date of initial application.  The standard will be effective for annual periods beginning on or after 1 January 2018.  It is currently anticipated that this standard will not have any impact on the Company's financial statements as presented for the current year, as the Company's income is predominantly dividend income and fair value gains which are not accounted for under IFRS 15.

2.         Return per Ordinary Share is based on a weighted average of 16,733,260 Ordinary Shares in issue during the year (2017: 16,733,260).

3.         The proposed final dividend of 6.75p per Ordinary Share, will be paid on 3 September 2018 to ordinary shareholders on the register at close of business on 13 July 2018.

4.         Excluding shares held in treasury there were 16,733,260 Ordinary Shares in issue at 31 March 2018 (2017: 16,733,260).  

5.         Financial Instruments

The Company's financial instruments comprise its investment portfolio, cash balances, bank loans, and debtors and creditors that arise directly from its operations. As an investment trust the Company holds a portfolio of financial assets in pursuit of its investment objective. The Company makes use of borrowings, as detailed in note 12 of the accounts (within the Annual Report) and the Chairman's Statement, to achieve improved performance in rising markets. The downside risk of borrowings may be reduced by raising the level of cash balances held.

The Company's principal risks are described within 'Principal Risks and Uncertainties and Risk Mitigation' above and within the Strategic Report in the Annual Report.

Financial risks arising from the Company's financial instruments are:

(i)       market price risk, being the risk that the value of investment holdings will fluctuate as a result of changes in market prices caused by factors other than interest rate or currency rate movements;

(ii)       interest rate risk, being the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates;

(iii)      foreign currency risk, being the risk that the value of investment holdings, investment purchases, investment sales, bank loans and accrued income will fluctuate because of movements in currency rates;

(iv)      credit risk, being the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company; and

(v)       liquidity risk, being the risk that the Company may not be able to liquidate quickly its investments to meet obligations associated with its financial liabilities.

Market Price Risk

Mitigation of market price risk is part of the fund management process and is typical of equity investment. The portfolio is managed with an awareness of the effects of adverse price movements through detailed and continuing analysis with an objective of maximising overall returns to shareholders. Further information on the investment portfolio is set out in the Annual Report.

Interest Rate Risk

Fixed Rate

The Company has two fully drawn fixed rate term loans with ING Bank N.V., one of €15 million, with a Sterling equivalent of £13.2 million as at 31 March 2018 (2017: £12.8 million), at a rate of interest of 2.90% per annum and one of €10 million with a Sterling equivalent of £8.8 million as at 31 March 2018 (2017: £8.6 million), at a rate of interest of 0.9275% per annum.

Floating Rate

When the Company retains cash balances, the cash is primarily held in accounts at the custodian. Interest received or paid on cash balances and bank overdrafts is at market rates and is monitored and reviewed by the Investment Manager and the Board. As at 31 March 2018, the cash position of the Company was £20.6 million (2017: £11.1 million).

Foreign Currency Risk

The Company invests in overseas securities and holds foreign currency cash balances and foreign currency borrowings which give rise to currency risks. It is not the Company's policy to hedge this risk.

Credit Risk

Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company. The Company has in place a monitoring procedure in respect of counterparty risk which is reviewed on an ongoing basis. The carrying amounts of financial assets best represent the maximum credit risk exposure at the balance sheet date.

Credit risk arising on transactions with brokers relates to transactions awaiting settlement. Risk relating to unsettled transactions is considered to be small due to the short settlement period involved and the financial stability and credit quality of the brokers used, which are monitored on an ongoing basis by the Manager. The Manager also monitors the quality of service provided by the brokers used to further mitigate this risk.

There were no significant concentrations of credit risk to counterparties at 31 March 2018 or 31 March 2017. No individual investment exceeded 4.2% of the investment portfolio at 31 March 2018 (2017: 3.7%).

A significant majority of the assets of the Company, including those that are traded on a recognised exchange, are held in segregated accounts on behalf of the Company by The Bank of New York Mellon SA/NV (London Branch), the Company's custodian. Bankruptcy or insolvency of this or other custodians may cause the Company's rights with respect to securities held by the custodians to be delayed. The Board monitors the Company's risk by reviewing the custodian's internal control reports.

6.         This announcement is not the Company's full statutory accounts in terms of Section 434 of the Companies Act 2006.  Audited statutory accounts for the year to 31 March 2017, which were unqualified, have been lodged with the Registrar of Companies.  The audited statutory accounts for the year to 31 March 2018 will be delivered to the Registrar of Companies following the Annual General Meeting to be held on 29 August 2018.

7.         The audited Annual Report and Accounts for the year ended 31 March 2018 will be posted to shareholders and will be available for inspection at Quartermile 4, 7a Nightingale Way, Edinburgh, EH3 9EG, 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

 

 

FR FLMITMBATBRP