Final Results

RNS Number : 2999T

Montanaro European Smaller C.TstPLC

03 June 2009

 



MONTANARO EUROPEAN SMALLER COMPANIES TRUST PLC

Date:        3 June 2009

RESULTS FOR THE YEAR ENDED 31 MARCH 2009

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 decreased by 35.9% compared to a decrease of 39.1% in the benchmark index

• Basic dividends increased by 12.5% to 4.5p per share

• Special dividends of 2.83p per share

Chairman's Statement

'Against a backdrop of exceptionally tough economic conditions, the year to 31 March 2009 was a poor year for European smaller company stocks and for the Company's net asset value per share. However, the Board is re-assured that the Company has continued to perform well relative to its benchmark index.'

During the year ended 31 March 2009, the Company's net asset value ('NAV') per share decreased by 35.9% to 257.36p per share. This compares to a decrease of 39.1% in the benchmark index, the MSCI Europe SmallCap Index (in sterling terms). In common with other investors in Europe, the Company benefited, in absolute terms, from the strengthening of the Euro against sterling during the year, with an estimated enhancement of some 25p to the NAV per share. 

As the year progressed, concerns increased over the stability of the banking sector and deteriorating economic conditions. Government intervention was required to recapitalise and, in some cases, nationalise a number of banks, and significant fiscal stimulus packages were announced by governments around the world in an attempt to limit the global economic slowdown. It is too early to know how effective these measures will prove to be but, in both the UK and in Europe, there is likely to be a contraction in economic activity for 2009. 

During this period of uncertainty stockmarkets have declined materially, characterised by high volatility. Investor sentiment has generally been poor and there has been a lack of clarity on the outlook for corporate earnings. There has been an increase in the number of profit warnings and towards the end of the period companies were increasingly adopting a pessimistic outlook for 2009. 

Earnings and Dividends

Revenue earnings per share for the year were 8.82p (2008: 4.84p). The increase was due to good dividend growth within the portfolio and the effect of a strengthening of the Euro against sterling. It was also due to the recovery of VAT on management fees and associated interest as explained in more detail below.

A basic interim dividend of 1.75p per Ordinary Share was paid on 9 January 2009 and the Board has declared a final dividend of 2.75p per Ordinary Share, payable on 24 July 2009 to shareholders on the register on 26 June 2009. This brings the total basic dividend for the year to 4.5p per share (2008: 4.00p).

In view of the enhancement to earnings from the recovery of VAT and associated interest during the year, the Board also paid a special interim dividend of 1.05p per Ordinary Share on 9 January 2009. In light of the amounts received by the Company since the publication of the Interim Report, the Board has declared a second special dividend of 1.78p per Ordinary Share, payable on 24 July 2009 to shareholders on the register on 26 June 2009. This brings the total special dividends in respect of the year to 2.83p per share.

Shareholders should be aware that the special dividends relating to VAT on management fees are of an exceptional nature and will not therefore be repeated in future years.

Share Buy-Backs and Discount Management Policy

The discount of share price to NAV as at 31 March 2009 was 14.2%.

Shareholders will be aware of the Board's stated intention to apply an active discount management policy, buying back shares if the discount is greater than 5% for a sustained period, to protect value for shareholders. The Board remains committed to this policy but the abnormal market conditions and significant stockmarket volatility experienced during the year made it difficult to maintain the discount at that level. One of the worst periods since the Great Depression means that we currently face very unusual circumstances.

In line with its policy, the Company bought back 625,000 shares during the year, equivalent to 3.6% of its shares in issue at the beginning of the year, at an average discount of 10.6%. These buy-backs provided an enhancement of 1.2p per share to the NAV. The shares were bought back to be held in treasury, for subsequent re-issue or cancellation in accordance with the Company's policy on treasury shares.

The Company will seek to renew its share buy back authority at the Annual General Meeting. The making and timing of any share buy-backs will continue to be at the absolute discretion of the Board.

Borrowings

Reflecting the Manager's cautious view of markets, the Company held a net cash position throughout most of the year. The Company does, however, continue to have a flexible revolving credit facility which will enable the Manager to put gearing in place when this is considered appropriate.

VAT on Investment Management Fees

Following the European Court of Justice ruling in June 2007 that investment trusts should be regarded as special investment funds, management fees paid by the Company are no longer subject to VAT.

In previous years, the Board took the steps necessary to ensure that the Company's position was protected to enable it to recover VAT paid in the past on investment management fees. During the year, the Company recovered VAT of £718,000, which has been allocated between revenue and capital in accordance with the accounting policies applicable to the allocation of fees at the time the VAT was suffered. It also received associated interest of £220,000, which has been allocated to revenue. These receipts provided an enhancement of 5.66p per share to the NAV and 2.79p to the revenue earnings per share. 

Realignment of Portfolio

Shareholders will be aware that, since the change of Manager in 2006, the Company has invested in companies quoted within Continental Europe and the United Kingdom. As at 31 March 2009 17.7% of the Company's portfolio was invested in UK quoted companies. Since the year end, and having consulted with some of the Company's larger shareholders, the Board has decided that it would be more appropriate for the Company to be invested primarily in Continental European quoted companies. The Manager will therefore realign the portfolio through a withdrawal from all UK quoted companies during the current financial year. To reflect this change, the Company's benchmark will also change, to one comprising companies in Continental Europe. 

This realignment of the portfolio is not a change in the Company's stated investment policy and does not require shareholder approval.

Outlook

There is likely to be a further deterioration in economic conditions in both the UK and Europe during the remainder of 2009. However, as the year progresses, there should be increased clarity over the timing of an economic recovery and the outlook for corporate earnings. Quoted smaller companies traditionally do well as equities recover and the Board believes that the Company is well placed to take advantage of attractive investment opportunities in such an environment.

A R IRVINE

Chairman

Consolidated Income Statement

For the Year Ended 31 March 2009

	Revenue	Capital	Total
	£'000	£'000	£'000
Income
Investment income	2,005	-	2,005
Other operating income	403	-	403
	2,408	-	2,408
Losses on investments held at fair value	-	(26,364)	(26,364)
Exchange gains	-	880	880
Total income	2,408	(25,484)	(23,076)
Expenses
Investment management fee	88	164	252
Other expenses	(433)	-	(433)
Profit/(loss) before finance costs and tax	2,063	(25,320)	(23,257)
Finance costs	(82)	(153)	(235)
Net operating profit/(loss) before tax	1,981	(25,473)	(23,492)
Tax	(494)	322	(172)
Net profit/(loss)	1,487	(25,151)	(23,664)
Earnings per share	8.82p	(149.16)p	(140.34)p

The total column of this statement is the Profit and Loss Account of the Group.

All revenue and capital items in the above statement derive from continuing operations.

No operations were acquired or discontinued in the year.

The accompanying notes are an integral part of this statement.

  Consolidated Income Statement 

For the Year Ended 31 March 2008

	Revenue	Capital	Total
	£'000	£'000	£'000
Income
Investment income	1,827	-	1,827
Other operating income	242	-	242
	2,069	-	2,069
Losses on investments held at fair value	-	(2,775)	(2,775)
Exchange losses	-	(1,059)	(1,059)
Total income	2,069	(3,834)	(1,765)
Expenses
Investment management fee	(265)	(492)	(757)
Other expenses	(547)	-	(547)
Profit/(loss) before finance costs and tax	1,257	(4,326)	(3,069)
Finance costs	(212)	(393)	(605)
Net operating profit/(loss) before tax	1,045	(4,719)	(3,674)
Tax	(204)	83	(121)
Net profit/(loss)	841	(4,636)	(3,795)
Earnings per share	4.84p	(26.66)p	(21.82)p

  Group Balance Sheet 

			As at 31 March     2009			As at 31 March  2008
			£'000			£'000
Non-current assets
Investments held at fair value			40,655			67,552
Current assets
Other receivables			393			223
Cash and cash equivalents			4,491			12,236
			4,884			12,459
Total assets			45,539			80,011
Current liabilities
Other payables			(2,886)			(10,950)
Total liabilities			(2,886)			(10,950)
Net assets			42,653			69,061
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			25,198			52,238
Revenue reserve			2,584			1,952
Shareholders' funds			42,653			69,061
Net asset value per share			257.36p			401.56p

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
Net loss on realisation of investments	-	-	-	(4,698)	-	(4,698)
Decrease in unrealised appreciation	-	-	-	(21,666)	-	(21,666)
Exchange gains	-	-	-	880	-	880
Management fees charged to capital	-	-	-	164	-	164
Interest charged to capital	-	-	-	(153)	-	(153)
Retained net revenue for the year	-	-	-	-	1,487	1,487
Taxation	-	-	-	322	-	322
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	25,198	2,584	42,653

  Consolidated Statement of Changes in Equity

for the year ended 31 March 2008

	Share capital	Share premium account	Capital redemption reserve	Capital reserve	Revenue reserve	Total
	£’000	£’000	£’000	£’000	£’000	£’000
Balance at 1 April 2007	8,724	3,935	2,212	57,767	1,809	74,447
Net gain on realisation of investments	-	-	-	4,081	-	4,081
Decrease in unrealised appreciation	-	-	-	(6,856)	-	(6,856)
Exchange losses	-	-	-	(1,059)	-	(1,059)
Management fees charged to capital	-	-	-	(492)	-	(492)
Interest charged to capital	-	-	-	(393)	-	(393)
Retained net revenue for the year	-	-	-	-	841	841
Taxation	-	-	-	83	-	83
Ordinary shares purchased to be held in treasury	-	-	-	(893)	-	(893)
Dividends paid	-	-	-	-	(698)	(698)
Balance at 31 March 2008	8,724	3,935	2,212	52,238	1,952	69,061

  Consolidated Cash Flow Statement 

	Year Ended 31 March			Year Ended 31 March
	2009			2008
	£'000			£'000
Cash flows from operating activities
Loss before finance costs and taxation	(23,257)			(3,069)
Losses on investments	26,364			2,775
Withholding tax	(172)			(121)
Exchange (gains)/losses	(880)			1,059
Operating cash flows before investments in working capital	2,055			644
Decrease/(increase) in receivables	30			(25)
(Decrease)/increase in payables	(85)			1
Net cash from operating activities	2,000			620
Cash flows from investing activities
Purchases of investments	(20,143)			(18,922)
Sales of investments	20,651			27,079
Net cash inflow in investing activities	508			8,157
Cash flows from financing activities
Dividends paid	(855)			(698)
Interest paid	(231)			(626)
Own shares purchased to be held in treasury	(1,889)			(893)
(Repayments)/drawdowns of borrowings	(8,015)			128
Net cash outflow from financing activities	(10,990)			(2,089)
Net (decrease)/increase in cash and cash equivalents	(8,482)			6,688
Realised currency gains/(losses)	737			(604)
Increase in cash and cash equivalents	(7,745)			6,084
Cash and cash equivalents at beginning of year	12,236			6,152
Cash and cash equivalents at end of year	4,491			12,236

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 one of the largest specialist European SmallCap teams in the UK. Succession planning within Montanaro is monitored by the Board.

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 50-80 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 intention to implement an active policy of share buy-backs if the share price is at a discount greater than 5% to the NAV per share 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.

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 for the year ended 31 March 2009, of which this statement of results is an extract:

• The financial statements have been prepared in accordance with applicable International Financial Reporting Standards, on a going concern basis, and give a true and fair view of the assets, liabilities, financial position and return of the Company and its subsidiary taken as a whole;

• The Annual Report includes a fair review of the important events that have occurred during the financial year and their impact on the financial statements; and

• The Annual Report includes a description of the principal risks and uncertainties that the Group faces.

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 International Financial Reporting Standards (‘IFRS’), which comprise standards and interpretations approved by the International Accounting Standards Board (‘IASB’), and the 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 accounting policies adopted in the preparation of the Annual Report and financial statements are consistent with those followed in the previous year.

 

2.         Earnings per Ordinary Share is based on a weighted average of 16,861,863 Ordinary Shares in issue during the year (2008 – 17,390,589). 

 

3.         The final dividend of 2.75p per share (2008 – 2.25p) will be paid on 24 July 2009 to shareholders on the register on 26 June 2009. The second special dividend of 1.78p per share (2008 – nil) will be paid on 24 July 2009 to shareholders on the register on 26 June 2009.

 

4.         Excluding shares bought back and held in treasury there were 16,573,260 Ordinary Shares in issue at 31 March 2009 (2008 – 17,198,260). 

 

5.                   These are not statutory accounts in terms of Section 240 of the Companies Act 1985. Statutory accounts for the year to 31 March 2008, which were unqualified, have been lodged with the Registrar of Companies. The statutory accounts for the year to 31 March 2009 will be delivered to the Registrar of Companies following the Company’s Annual General Meeting.

 

6.         The Annual Report will be sent to shareholders and will be available for inspection at the Company’s registered office,
            80 George Street, Edinburgh EH2 3BU and at www.montanaro.co.uk

For further information please contact:

Charles Montanaro

Montanaro Investment Managers Limited

Tel: [phone] 

 

END

 

 

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