Half Yearly Report

RNS Number : 1198H

Montanaro European Smaller C.TstPLC

26 November 2015

 



MONTANARO EUROPEAN SMALLER COMPANIES TRUST PLC

 

Date:                26 November 2015

HALF YEARLY FINANCIAL REPORT FOR THE SIX MONTHS ENDED 30 SEPTEMBER 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 -0.4%

·      Share price +0.4%

·      Benchmark index (capital return) -4.7%

·      Total assets -0.2% (£106.5 million)

Chairman's Statement

Performance

During the first half of the fiscal year most European economies continued to show some improvement - something we had expected and had thought would be reflected in the performance of smaller companies. However against a backdrop of increasing concern over the expected rise in US interest rates and the slowdown in emerging markets, it was not: the MSCI Europe Small Cap (ex UK) index fell by 4.7% in sterling terms over the period. We believe however that investors in the Company can take heart from two trends within this. The first is that smaller companies have outperformed larger companies in Europe. This doesn't usually happen when sentiment is weak but suggests that investors are interested in the fact that smaller companies have both higher exposure to their home markets and lower exposure to the carnage in the commodity and basic materials sectors than larger companies. The second is that the Company's net asset value (NAV) only fell by 0.4% during the period: it has therefore outperformed the index by 4.3%. At the same time the discount to NAV narrowed slightly over the period, from 10.0% to 9.3%.

The Company's Manager focuses exclusively on looking for and investing in very high quality and growing smaller companies. As our history shows, this is an approach that tends to deliver outperformance over the long term but which is also subject to periods of underperformance. We have just been through one of those periods:  after Mario Draghi promised to do "whatever it takes" to save the Euro, high quality companies dramatically underperformed their lower quality counterparts. It is therefore pleasing to see the Company beginning to outperform again. We have gained from currency movements: the strengthening of the Euro over the period added 4.4p to the Company's NAV. In addition, we have continued to see excellent results from the majority of our top holdings.

Since the appointment of Montanaro Asset Management Limited as Manager in September 2006, the NAV per share has risen by 66.3%, compared to the Company's benchmark index which has increased by 49.1%.  However, in the five years to 30 September 2015, (which includes the period of underperformance referred to above) the NAV per share increased by 24.9% compared with an increase of 36.0% in the Company's benchmark. 

Earnings and Dividends

Revenue earnings per share for the period were 7.6p (2014: 7.5p).  The Board has declared an unchanged interim dividend of 1.75p per Ordinary Share, payable on 8 January 2016 to shareholders on the register on 11 December 2015.

Borrowings

At the end of the period, the Company had borrowings (net of cash) of 6.5% of the net asset value compared to 6.8% as at 31 March 2015.

The Company has a €15 million fixed rate secured loan which matures in September 2018.  The Board determines borrowing levels following recommendations from the Manager and reviews this formally at each Board meeting.

The Board

As I explained in my Chairman's Statement in the Annual Report we have embarked upon a period of Board refreshment. A recruitment process was undertaken by the Nomination Committee and since the period end, effective 2 November 2015, Richard Curling was appointed to the Board. Richard has over 30 years experience as a Fund Manager and also has considerable experience of investment trusts.  Effective 12 November 2015 Richard Martin has retired from the Board.  I wish to thank Richard for his outstanding contribution and firm commitment to the Board since his appointment in 2006.

Outlook

It is now clear that economic growth rates in many emerging markets are falling or already negative. The pain being felt in these countries is, in most cases, further exacerbated by the strong US Dollar and weak commodity prices. Europe is not immune to a slowdown in global growth. However, improved credit conditions appear to be helping domestic economies to deliver slow but steady progress. Moreover, it seems likely that the European Central Bank will be overseeing a loose monetary policy environment for the foreseeable future. We believe this presents a favourable backdrop for the market as a whole and for the successful and resilient growth companies in the Company's portfolio. We enter the second part of the fiscal year as confident as ever in the long term future of this Company. 

A R IRVINE

Chairman

26 November 2015

Statement of Comprehensive Income

for the six months ended 30 September 2015 (unaudited)

	Revenue	Capital	Total
	£'000	£'000	£'000
Capital losses on investments
Losses on investments held at fair value	-	(88)	(88)
Exchange losses	-	(193)	(193)
	-	(281)	(281)
Revenue
Investment income	1,973	-	1,973
Other operating income	-	-	-
Total income	1,973	(281)	1,692
Expenditure
Management expenses	(146)	(270)	(416)
Other expenses	(248)	-	(248)
Total expenditure	(394)	(270)	(664)
Profit/(loss) before finance costs and taxation	1,579	(551)	1,028
Finance costs	(60)	(112)	(172)
Profit/(loss) before taxation	1,519	(663)	856
Taxation	(255)	-	(255)
Total comprehensive income	1,264	(663)	601
Return/(loss) per share	7.6p	(4.0)p	3.6p

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 during the period.

All of the profit/(loss) and total comprehensive income for the period is attributable to the owners of the Company.

Statement of Comprehensive Income

for the six months ended 30 September 2014 (unaudited)

	Revenue	Capital	Total
	£'000	£'000	£'000
Capital losses on investments
Losses on investments held at fair value	-	(11,932)	(11,932)
Exchange gains	-	231	231
	-	(11,701)	(11,701)
Revenue
Investment income	1,927	-	1,927
Other operating income	1	-	1
Total income	1,928	(11,701)	(9,773)
Expenditure
Management expenses	(132)	(244)	(376)
Other expenses	(273)	-	(273)
Total expenditure	(405)	(244)	(649)
Profit/(loss) before finance costs and taxation	1,523	(11,945)	(10,422)
Finance costs	(65)	(121)	(186)
Profit/(loss) before taxation	1,458	(12,066)	(10,608)
Taxation	(208)	-	(208)
Total comprehensive income	1,250	(12,066)	(10,816)
Return/(loss) per share	7.5p	(72.5)p	(65.0)p

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 during the period.

All of the profit/(loss) and total comprehensive income for the period is attributable to the owners of the Company.

Statement of Comprehensive Income

For the Year Ended 31 March 2015 (audited)

	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/(loss) per share	9.0p	(22.5)p	(13.5)p

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.

All of the profit and total comprehensive income for the year is attributable to the owners of the Company.

Balance Sheet

As at 30 September 2015

		As at 30 September 2015 (unaudited)	As at 30 September 2014 (unaudited)	As at 31 March 2015 (audited)
		£'000	£'000	£'000
Non-current assets
Investments held at fair value through profit and loss		101,552	90,810	102,239
Current assets
Trade and other receivables		331	248	592
Cash and cash equivalents		4,657	7,716	3,876
		4,988	7,964	4,468
Total assets		106,540	98,774	106,707
Current liabilities
Trade and other payables		(161)	(178)	(179)
Non-current liabilities
Interest-bearing bank loan		(10,989)	(11,602)	(10,777)
Total liabilities		(11,150)	(11,780)	(10,956)
Net assets		95,390	86,994	95,751
Capital and reserves
Called-up share capital		8,724	8,724	8,724
Share premium account		5,283	5,178	5,283
Capital redemption reserve		2,212	2,212	2,212
Capital reserve		75,565	67,529	76,228
Revenue reserve		3,606	3,351	3,304
Shareholders' funds		95,390	86,994	95,751
Net asset value per share		570.1p	523.0p	572.2p

Statement of Changes in Equity

For the six months ended 30 September 2015 (unaudited)

	Share capital	Share premium account	Capital redemption reserve	Capital reserve	Revenue reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 1 April 2015	8,724	5,283	2,212	76,228	3,304	95,751
Total comprehensive income	-	-	-	(663)	1,264	601
Dividends  paid	-	-	-	-	(962)	(962)
Balance at 30 September 2015	8,724	5,283	2,212	75,565	3,606	95,390

Statement of Changes in Equity

For the six months ended 30 September 2014 (unaudited)

	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	-	-	-	(12,066)	1,250	(10,816)
Dividends  paid	-	-	-	-	(873)	(873)
Balance at 30 September 2014	8,724	5,178	2,212	67,529	3,351	86,994

Statement of Changes in Equity

For the year ended 31 March 2015 (audited)

	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

Condensed Statement of Cash Flows

	Six months to		Six months to		Year to
	30 September		30 September		31 March
	2015		2014		2015
	(unaudited)		(unaudited)		(audited)
	£'000		£'000		£'000
Net cash inflow/(outflow) from operating activities	1,899		1,379		(1,942)
Cash flows from financing activities	(1,126)		(1,052)		(1,009)
	773		327		(2,951)
Exchange gains/(losses)	8		(482)		(1,044)
Increase/(decrease) in cash and cash equivalents	781		(155)		(3,995)

Reconciliation of profit/(loss) before finance costs and tax to net cash inflow/(outflow) from operating activities

Profit/(loss) before finance costs and tax	1,028		(10,422)		(1,862)
Losses on investments held at fair value	88		11,932		3,511
Exchange losses/(gains)	193		(231)		(505)
Withholding tax	(138)		(297)		(328)
Purchases of investments	(14,512)		(6,314)		(24,338)
Sales of investments	15,111		6,635		21,651
Changes in working capital and other non cash items	129		76		(71)
Net cash inflow/(outflow) from operating activities	1,899		1,379		(1,942)

Statement of Principal Risks and Uncertainties

The principal risk faced by the Company is that it fails to produce the capital appreciation stated as its objective, and its net asset value does not rise over the longer term.  The risks which might give rise to this event can be categorised as external, manager, investment and strategy, portfolio liquidity, gearing, regulatory, operational, financial, banking and internal controls.  In addition, shareholders face the risks of liquidity of the Company's shares and discount volatility.

These risks, and the way in which they are mitigated, are described in more detail under the heading Principal Risks and Risk Mitigation within the Business Model and Strategy in the Company's Annual Report for the year ended 31 March 2015.  The Company's principal risks and uncertainties have not changed materially since the date of that report and are not expected to change materially for the remaining six months of the Company's financial year.

Directors' Responsibility Statement in Respect of the Interim Report

We confirm that to the best of our knowledge:

·      the condensed set of financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting' and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company;

·      the Chairman's Statement (constituting the Interim Management Report) includes a fair review of the information required by the Disclosure and Transparency Rules ('DTR') 4.2.7R, being an indication of important events that have occurred during the first six months of the financial year and their impact on the financial statements;

·      the Statement of Principal Risks and Uncertainties shown above is a fair review of the information required by DTR 4.2.7R; and

·      the condensed set of financial statements includes a fair review of the information required by DTR 4.2.8R, being related party transactions that have taken place in the first six months of the financial year and that have materially affected the financial position or performance of the Company during the period, and any changes in the related party transactions described in the last Annual Report that could do so.

On behalf of the Board

A R IRVINE

Director

26 November 2015

Notes to the Accounts

1.         The condensed unaudited financial statements have been prepared in accordance with International Financial Reporting Standard ('IFRS') IAS 34 'Interim Financial Reporting' and the accounting policies set out in the statutory accounts of the Company for the year ended 31 March 2015. The condensed financial statements do not include all of the information required for a complete set of IFRS financial statements and should be read in conjunction with the financial statements of the Company for the year ended 31 March 2015, which were prepared under full IFRS requirements, to the extent that they have been adopted by the European Union.

2.         Earnings for the first six months should not be taken as a guide to the results for the full year.

3.         Management expenses:

	Six months to 30 September 2015			Six months to 30 September 2014			Year ended 31 March 2015
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Investment management fee	137	254	391	132	244	376	256	475	731
AIFM fee	9	16	25	-	-	-	21	39	60
	146	270	416	132	244	376	277	514	791

            The Company's Investment Manager is Montanaro Asset Management Limited ('Montanaro').  Montanaro receives an investment management fee of 0.9% per annum of the Company's market capitalisation (payable monthly in arrears).

            With effect from 22 July 2014, Montanaro is also entitled to a fee of £50,000 per annum for acting as the Company's AIFM and during the year ended 31 March 2015 was paid an additional £25,000 in relation to the initial set up costs of this service.

4.         Earnings per Ordinary Share is based on a weighted average of 16,733,260 Ordinary Shares in issue during the period (year ended 31 March 2015: 16,646,137 and six months ended 30 September 2014: 16,633,260), excluding those shares bought back and held in treasury.

5.         The interim dividend relating to the year ending 31 March 2016 of 1.75p per Ordinary Share will be paid on 8 January 2016 to shareholders on the register on 11 December 2015.  In accordance with IFRS, this dividend has not been recognised in these financial statements.  The ex-dividend date for this payment is 10 December 2015.

            A final dividend relating to the year ended 31 March 2015 of 5.75p per Ordinary Share was paid during the six months to 30 September 2015 and amounted to £962,000.

6.         The net asset value per Ordinary Share is based on 16,733,260 Ordinary Shares in issue at the end of the period (31 March 2015: 16,733,260 and 30 September 2014: 16,633,260), excluding those shares bought back and held in treasury.  As at 30 September 2015 there were 715,000 Ordinary Shares held in treasury (31 March 2015: 715,000 and 30 September 2014: 815,000).

7.         The Board has considered the requirements of IFRS 8 'Operating Segments'. The Board is of the view that the Company is engaged in a single segment of business, being that of investing in European quoted smaller companies, and that therefore the Company has only a single operating segment. The Board of Directors, as a whole, has been identified as constituting the chief operating decision maker of the Company. The key measure of performance used by the Board to assess the Company's performance is the change in the Company's net asset value, as calculated under IFRS, and therefore no reconciliation is required between the measure of profit or loss used by the Board and that contained in the financial statements.

8.         The Company held the following categories of financial instruments at the period end:

	Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
30 September 2015
Investments	101,552	-	-	101,552
Loan	-	(11,591)	-	(11,591)
30 September 2014
Investments	90,810	-	-	90,810
Loan	-	(12,331)	-	(12,331)
31 March 2015
Investments	102,239	-	-	102,239
Loan	-	(11,476)	-	(11,476)

The above table provides an analysis of investments based on the fair value hierarchy described below and which reflects the reliability and significance of the information used to measure their fair value. The levels are determined by the lowest (that is the least reliable or least independently observable) level of impact that is significant to the fair value measurement for the individual investment in its entirety as follows:

Level 1 reflects financial instruments quoted in an active market.

Level 2 reflects financial instruments whose fair value is evidenced by comparison with other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable markets.

Level 3 reflects financial instruments whose fair value is determined in whole or in part using a valuation technique based on assumptions that are not supported by prices from observable market transactions in the same instrument and not based on available observable market data.

There were no transfers of investments between levels during the period ended 30 September 2015 (year ended 31 March 2015 and period ended 30 September 2014: none).

The following table summarises the Company's Level 1 investments that were accounted for at fair value between the beginning and end of the period.

	30 September 2015 £'000	30 September 2014 £'000	31 March 2015 £'000
Opening book cost	75,994	76,280	76,280
Holding gains	26,245	27,780	27,780
Opening fair value	102,239	104,060	104,060
Purchases at cost	14,512	5,317	23,341
Sales - proceeds           - (losses)/gains on sales	(15,111) (1,858)	(6,635) 474	(21,651) (1,976)
Holding gains/(losses)	1,770	(12,406)	(1,535)
Closing fair value	101,552	90,810	102,239
Closing book cost	73,537	75,436	75,994
Holding gains	28,015	15,374	26,245
Closing valuation	101,552	90,810	102,239

Listed fixed asset investments are valued at fair value through profit or loss.  For listed securities this is either bid price or the last traded price depending on the convention of the exchange on which the investment is listed.  The interest-bearing bank loan is recognised in the Balance Sheet in accordance with IFRS.  The fair value of the loan is based on indicative break costs compared to its value as stated on the Balance Sheet at amortised cost of £10,989,000 (31 March 2015: £10,777,000 and 30 September 2014: £11,602,000).  The fair value of all other financial assets and liabilities is represented by their carrying value in the Balance Sheet.

Other aspects of the Company's financial risk management objectives and policies are consistent with those disclosed in the financial statements as at and for the year ended 31 March 2015.

9.         Rates of exchange (to sterling):

	30 September 2015		31 March 2015
Danish Krone	10.12		10.33
Euro	1.36		1.38
Norwegian Krone	12.92		11.96
Swedish Krona	12.70		12.80
Swiss Franc	1.48		1.44

10.        Going Concern:

In assessing the going concern, the Directors have had regard to the guidance issued by the Financial Reporting Council.  They have considered the current cash position of the Company, the availability of the fixed rate loan and compliance with its covenants, the Company's other liabilities and forecast revenues.  The Directors have also taken into account the Company's investment policy, which is subject to regular Board monitoring processes and is designed to ensure that the Company is invested mainly in liquid, listed securities.  The Company retains title to all assets held by its custodian.

The Directors believe in light of the controls and review processes that are in place and bearing in mind the nature of the Company's business and assets, the Company has adequate resources to continue in operational existence for a period of at least twelve months from the date of approval of the accounts.  Accordingly, the accounts continue to be prepared on the basis that the Company is a going concern.

11.        These are not statutory accounts in terms of Section 434 of the Companies Act 2006 and have not been audited or reviewed by the Company's Auditor.  The information for the year ended 31 March 2015 has been extracted from the latest published financial statements which received an unqualified audit report and have been filed with the Registrar of Companies.  No statutory accounts in respect of any period after 31 March 2015 have been reported on by the Company's Auditor or delivered to the Registrar of Companies. The Half-Yearly Financial Report is available on the Manager's website: www.montanaro.co.uk.

For further information please contact:

Montanaro Asset Management Limited

Tel: [phone]

 

END

 

 

IR EQLFLEFFZFBV