Final Results

RNS Number : 3519N

Montanaro European Smaller C.TstPLC

09 June 2010

 



MONTANARO EUROPEAN SMALLER COMPANIES TRUST PLC

 

Date:                9 June 2010

RESULTS FOR THE YEAR ENDED 31 MARCH 2010

 

Investment Objective

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

Highlights

·      NAV per share increased by 67% to 428.76p

·      Share price increased by 69% to 373p

·      Share price total return of 74%

·      Maintained basic dividend of 4.5p per share

Chairman's Statement

Following two years of losses, European stock markets performed strongly during the year ended 31 March 2010. It is pleasing to report a significant increase in the Company's share price and net asset value ('NAV') per share over the period.

During the year ended 31 March 2010, the Company's NAV per share increased by 67% to 428.76p. This compares to an increase of 71% in the benchmark index, which at the end of the year was the MSCI Europe SmallCap (ex UK) Index (in sterling terms). The share price increased by 69% to 373p per share, reflecting a narrowing of the discount to 13% at the end of the year.

European stock markets performed strongly over the year as investors' risk appetite returned and there was evidence of improving economic conditions and corporate profitability. However, investors remain concerned over fiscal deficits and sovereign credit risk. The final quarter of the year was dominated by concerns over the stability of the Euro.

It is worth noting that, despite the problems of the Euro, currency changes did not have a material impact on the returns for the year (which are expressed in sterling) because the Pound was also weak during the year. It is not the Company's normal policy to hedge currency exposure, although currency hedging is permitted by the investment policy. 

The principal reason for the underperformance of the Company against the benchmark index was the strong rally in the share prices of low quality companies, in particular in the first half of the financial year. The Company enjoyed good relative performance in the second half of the year as higher quality, less leveraged companies began to outperform.

Realignment of Portfolio

As set out in my statement last year, since the change of Manager in 2006 the Company has invested in quoted companies both within Continental Europe and in the United Kingdom. As at 31 March 2009, 18% of the Company's portfolio was invested in UK quoted companies.

After discussions with advisers and shareholders, the Board decided that it would be more appropriate for the Company to be invested exclusively in Continental European quoted companies. During the year, the Manager therefore realigned the portfolio, selling all the positions in UK quoted small companies.

To reflect this change, with effect from 1 June 2009, the Company's benchmark changed to the MSCI Europe SmallCap (ex UK) Index (in sterling terms), which comprises only small companies in Continental Europe.

Share Buy-Backs and Discount Management Policy

The discount of share price to NAV as at 31 March 2010 was 13%.

Since September 2006, the Board's stated intention has been to apply an active discount management policy. During this period, the Company has purchased 875,000 ordinary shares at discounts of between 7% and 17% and at a weighted average discount of 10%. All shares bought back are held in treasury for subsequent re-issue or cancellation in accordance with the Company's policy on treasury shares.

The Board remains committed to an active discount management policy, but the abnormal market conditions and significant stock market volatility since 2008 made it difficult to maintain the discount at the previous targeted level of 5%. Therefore, following consultation with a number of the Company's shareholders, the Board announced a change to the Company's discount management policy during the year, such that the Board will in future consider a buy back of shares if the discount of share price to NAV is greater than a target of 10% for a sustained period of time.

The Company will seek to renew its share buy back authority at the Annual General Meeting. Shares which are bought back by the Company may be cancelled or held in treasury.

The making and timing of any share buy-backs will continue to be at the absolute discretion of the Board.

Earnings and Dividends

Revenue earnings per share for the year were 4.77p (2009: 8.82p). The decrease for the year is due principally to the absence of recoveries associated with VAT on investment management fees. Special dividends of 2.83p per share were paid in respect of VAT related recoveries during the year ended 31 March 2009. As previously reported, those special dividends were of an exceptional nature and will therefore not be repeated in future years.

A first interim dividend of 1.75p per Ordinary Share was paid on 8 January 2010 and a second interim dividend of 2.75p per Ordinary Share was paid on 1 April 2010. This brings the total dividend for the year to 4.50p per share, unchanged from the level of basic dividend paid in respect of the previous year.

Borrowings

As a reflection of a more optimistic outlook by the Manager during the earlier part of the financial year, the Company's borrowings increased from £2.5 million to £9.8 million.

The Board reviews borrowings on a regular basis and receives recommendations from the Manager on gearing levels. The Company's borrowings are represented by a flexible revolving credit facility, which enables gearing to be increased or decreased as considered appropriate.

Outlook

Although there have been signs of improving economic conditions in Europe, there are still significant uncertainties ahead, with governments needing to address debt levels, and concerns over the stability of the Euro due to the poor economic health of some of the weaker countries in the EU.

Stock market levels should, however, continue to be supported by improved corporate profitability and easy monetary conditions. Smaller companies traditionally outperform their larger counterparts during a period of recovery and, with the Manager continuing to focus on high quality companies with strong management teams, the Board believes that the Company is well placed to take advantage of attractive investment opportunities. 

A R IRVINE

Chairman

Consolidated Statement of Comprehensive Income

For the Year Ended 31 March 2010

	Revenue	Capital	Total
	£'000	£'000	£'000
Capital gains/(losses) on investments
Gains on investments held at fair value	-	29,246	29,246
Exchange losses	-	(135)	(135)
	-	29,111	29,111
Revenue
Investment income	1,747	-	1,747
Other income	13	-	13
Total income	1,760	29,111	30,871
Expenditure
Management expenses	(176)	(328)	(504)
Other expenses	(497)	-	(497)
Total expenditure	(673)	(328)	(1,001)
Profit before finance costs and taxation	1,087	28,783	29,870
Finance costs	(68)	(126)	(194)
Profit before taxation	1,019	28,657	29,676
Taxation	(229)	-	(229)
Total comprehensive income	790	28,657	29,447
Return per share	4.77p	172.91p	177.68p

Consolidated Statement of Comprehensive Income

For the Year Ended 31 March 2009

	Revenue	Capital	Total
	£'000	£'000	£'000
Capital gains/(losses) on investments
Losses on investments held at fair value	-	(26,364)	(26,364)
Exchange gains	-	880	880
	-	(25,484)	(25,484)
Revenue
Investment income	2,005	-	2,005
Other income	403	-	403
Total income	2,408	(25,484)	(23,076)
Expenditure
Management expenses	88	164	252
Other expenses	(433)	-	(433)
Total expenditure	(345)	164	(181)
Profit before finance costs and taxation	2,063	(25,320)	(23,257)
Finance costs	(82)	(153)	(235)
Profit before taxation	1,981	(25,473)	(23,492)
Taxation	(494)	322	(172)
Total comprehensive income	1,487	(25,151)	(23,664)
Return/(loss) per share	8.82p	(149.16)p	(140.34)p

Group Balance Sheet

			As at 31 March           2010			As at 31 March 2009
			£'000			£'000
Non-current assets
Investments held at fair value			79,114			40,655
Current assets
Other receivables			375			393
Cash and cash equivalents			1,563			4,491
			1,938			4,884
Total assets			81,052			45,539
Current liabilities
Other payables			(9,993)			(2,886)
Total liabilities			(9,993)			(2,886)
Net assets			71,059			42,653
Capital and reserves
Called-up share capital			8,724			8,724
Share premium account			3,935			3,935
Capital redemption reserve			2,212			2,212
Capital reserve			53,855			25,198
Revenue reserve			2,333			2,584
Shareholders' funds			71,059			42,653
Net asset value per share			428.76p			257.36p

Consolidated Statement of Changes in Equity

for the year ended 31 March 2010

	Share capital	Share premium account	Capital redemption reserve	Capital reserve	Revenue reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 1 April 2009	8,724	3,935	2,212	25,198	2,584	42,653
Total comprehensive income	-	-	-	28,657	790	29,447
Dividends paid	-	-	-	-	(1,041)	(1,041)
Balance at 31 March 2010	8,724	3,935	2,212	53,855	2,333	71,059

Consolidated Statement of Changes in Equity

for the year ended 31 March 2009

	Share capital	Share premium account	Capital redemption reserve	Capital reserve	Revenue reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 1 April 2008	8,724	3,935	2,212	52,238	1,952	69,061
Total comprehensive income	-	-	-	(25,151)	1,487	(23,664)
Ordinary shares purchased to be held in treasury	-	-	-	(1,889)	-	(1,889)
Dividends paid	-	-	-	-	(855)	(855)
Balance at 31 March 2009	8,724	3,935	2,212	25,158	2,584	42,653

Consolidated Cash Flow Statement

	Year Ended 31 March			Year Ended 31 March
	2010			2009
	£'000			£'000
Cash flows from operating activities
Profit/(loss) before finance costs and taxation	29,870			(23,257)
(Gains)/losses on investments	(29,246)			26,364
Withholding tax	(199)			(172)
Exchange losses/(gains)	135			(880)
Operating cash flows before investments in working capital	560			2,055
(Increase)/decrease in receivables	(154)			30
Decrease in payables	(12)			(85)
Net cash from operating activities	394			2,000
Cash flows from investing activities
Purchases of investments	(34,217)			(20,143)
Sales of investments	24,971			20,651
Net cash (outflow)/inflow in investing activities	(9,246)			508
Cash flows from financing activities
Dividends paid	(1,041)			(855)
Interest paid	(212)			(231)
Own shares purchased to be held in treasury	-			(1,889)
Drawdowns/(repayments) of borrowings	7,056			(8,015)
Net cash inflow/(outflow) from financing activities	5,803			(10,990)
Net decrease in cash and cash equivalents	(3,049)			(8,482)
Realised exchange gains	121			737
Increase in cash and cash equivalents	(2,928)			(7,745)
Cash and cash equivalents at beginning of year	4,491			12,236
Cash and cash equivalents at end of year	1,563			4,491

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 Combined Code on Corporate Governance 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 are summarised below. Mitigation of these risks is sought and achieved in many ways as described in italics below.

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

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

Montanaro has the largest specialist 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 50-60 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 not 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 a target of 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 842 of the Income and Corporation Taxes Act 1988 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 842 of the Income and Corporation Taxes Act 1988. 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 third party service providers could lead to an inability to provide accurate reporting and monitoring or a breach of Section 842 of the Income and Corporation Taxes Act 1988.

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 842 of the Income and Corporation Taxes Act 1988.  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.

At each Board Meeting the Board reviews compliance with the banking covenants.

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.

Directors' Responsibility Statement

The Directors are responsible for preparing the Annual Report and the Group financial statements in accordance with applicable United Kingdom law and those International Financial Reporting Standards as adopted by the European Union.

Under company law the Directors must not approve the Group financial statements unless they are satisfied that they present fairly the financial position, financial performance and cash flows of the Group for that period.  In preparing the Group financial statements, the Directors are required to:

·      select suitable accounting policies in accordance with IAS8: Accounting Policies, Changes in Accounting Estimates and Errors and then apply them consistently;

·      present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

·      provide additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group's financial position and financial performance;

·      state that the Group has complied with IFRSs, subject to any material departures disclosed and explained in the financial statements; and

·      make judgements and estimates that are reasonable and prudent.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group's transactions and disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the Group financial statements comply with the Companies Act 2006 and Article 4 of the IAS Regulation.  They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.  

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.

2.         Earnings per Ordinary Share is based on a weighted average of 16,573,260 Ordinary Shares in issue during the year (2009 - 16,861,863). 

3.         A second interim dividend of 2.75p per share (2009 - final dividend of 2.75p per share) was paid on 1 April 2010.

4.         Excluding shares bought back and held in treasury there were 16,573,260 Ordinary Shares in issue at 31 March 2010 (2009 - 16,573,260). 

5.         These are not statutory accounts. Statutory accounts for the year to 31 March 2009, which were unqualified, have been lodged with the Registrar of Companies.  The statutory accounts for the year to 31 March 2010 will be delivered to the Registrar of Companies following the Company's Annual General Meeting.

6.         The Annual Report and Accounts are available at www.montanaro.co.uk. 

For further information please contact:

Charles Montanaro

Montanaro Asset Management Limited

Tel: [phone]

 

END

 

 

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