Half-year Report

RNS Number : 5290X
Montanaro UK Smlr Cos Inv Tst PLC
27 November 2017
 

Montanaro UK Smaller Companies Investment Trust PLC ("MUSCIT" or the "Company")

Half-Yearly Report for the six months to 30 September 2017

 

MUSCIT was launched in March 1995 and is a closed-ended investment trust with shares premium listed on the London Stock Exchange ("LSE").

 

Investment Objective

MUSCIT's investment objective is capital appreciation through investing in small quoted companies listed on the LSE or traded on the Alternative Investment Market ("AIM") and to outperform its benchmark, the Numis Smaller Companies Index (excluding investment companies) ("NSCI").

 

No unquoted investments are permitted.

 

Investment Policy

The Company seeks to achieve its objective and to manage risk by investing in a diversified portfolio of quoted UK small companies. At the time of initial investment, a potential investee company must be profitable and no bigger than the largest constituent of the NSCI, which represents the smallest 10% of the UK Stock Market by value. At the start of 2017, this was any company below £1.43 billion in size. The Manager focuses on the smaller end of this Index.

 

In order to manage risk, the Manager limits any one holding to a maximum of 4% of the Company's investments at the time of initial investment. The portfolio weighting of each investment is closely monitored to reflect the underlying liquidity of the particular company. The Company's AIM exposure is also closely monitored by the Board and is limited to 30% of total investments, with Board approval required for exposure above 25%.

 

The Manager is focused on identifying high-quality, niche companies operating in growth markets. This typically leads the Manager to invest in companies that enjoy high barriers to entry, pricing power, a sustainable competitive advantage and strong management teams. The portfolio is  constructed on a "bottom-up" basis.

 

The Alternative Investment Fund Manager ("AIFM"), in consultation with the Board, is responsible for determining the gearing levels of the Company and has determined that the Company's borrowings should be limited to 25% of shareholders' funds. Gearing is used to enhance returns when the timing is considered appropriate. The Company currently has credit facilities of £30 million with ING Bank, of which £20 million was utilised via the Fixed Rate Term Loan as at 30 September 2017. Net gearing at that date amounted to 2.7%.

 

Highlights

for the six months to 30 September 2017

 

Results


As at  

30 September 

2017  

As at   

31 March   

2017   

 

 

% Change

Ordinary share price

     560.0p

510.0p 

9.8

Net asset value ("NAV") per Ordinary share

701.9p

631.6p

11.1

Discount to NAV

20.2%

19.3%


NSCI*

8,214.9   

7,701.3   

6.7

 

* Capital only.

 


As at   

30 September   

2017   

As at   

31 March   

2017   

 

 

% Change

Gross assets

£258.5m

   £232.2m

11.3

Net assets

£235.0m

£211.4m

11.1

Market capitalisation

£187.5m

£170.7m

9.8

Net gearing employed*

2.7%

2.7%


Ongoing charges

0.8%

1.2%


Portfolio turnover**

10.5%

31.5%


 

*   Borrowing net of cash.

** Calculated using average transactions as a percentage of the average total investments at fair value during the period.

 

Performance

Capital Return Percentage

6 months

3 year

10 year

Since launch

Share Price

9.8

20.0

25.8

51.8

89.2

489.5

NAV (excluding current period revenue)

11.6

17.4

34.7

52.1

101.6

603.8

Benchmark*

6.7

16.7

31.6

76.3

32.9

176.9

 

Total Return Percentage

6 months

3 year

10 year

Since launch

Share Price**

11.9

22.4

33.5

66.4

132.4

584.8

NAV**

12.8

19.2

41.2

64.5

139.1

703.8

Benchmark*

8.5

20.2

43.5

103.0

80.9

434.8

 

*     The Benchmark is a composite index comprising the FTSE SmallCap Index (excluding investment companies) until 31 March 2013 and the NSCI Index from 1 April 2013 onwards.

**    Returns have been adjusted for dividends paid.

†     Source: The Association of Investment Companies ("AIC").

 

 

Capital Structure

As at 30 September 2017 and the date of this report, the Company had 33,475,958 Ordinary shares of 10p each in issue (none of which were held in Treasury). Holders of Ordinary shares have unrestricted voting rights of one vote per share at all general meetings of the Company.

 

Manager's Review

 

Once again, the last six months has been a period dominated by politics.  The most significant event was the decision by the British government to call a snap General Election, adding to the numerous European elections that were already diarised for 2017.  Investors reacted to this announcement positively.  A large majority government was predicted, one that would wash away Brexit uncertainty before negotiations with the European Union got underway.  As this coincided with improving economic data, it was understandable that in April UK SmallCap enjoyed its best month of outperformance versus the All-Share since January 2014.  Indeed, at this stage investors were so optimistic that net inflows were finally seen into UK Funds.  

 

Alas, the subsequent hung Parliament in June put an end to this optimism.  As other markets pushed through all-time highs, UK SmallCap continued to trade at its greatest P/E discount to LargeCap since 2001 - a remarkable 41%.  Therefore, it was unsurprising that the SmallCap Effect returned with such a bang: the asset class outperformed its LargeCap peer by some 7% during the period under review.   

 

During the six months ending 30 September 2017, the Company's NAV increased by 11%, an outperformance of 4% compared to the NSCI benchmark.

 

This strong performance was driven by a combination of factors.  Firstly, the style headwinds which had been so prevalent during the latter half of 2016 began to dissipate.  The final quarter of last year was a particularly torrid time for Quality investors as Low Quality and Value stocks soared, boosted by Donald Trump's election and a rising oil price.  Thankfully, this momentum proved short-lived and High Quality has outperformed Low Quality over the last six months.

 

Stock selection has also aided performance, with few disappointments in the Portfolio and strong earnings momentum visible in many company results.  Pleasingly, the changes made to the Portfolio in the Summer of 2016 appear to be bearing fruit.  In particular, the reallocation to AIM companies has proven beneficial. 

 

Outlook

 

Brexit and the accompanying uncertainty is a dampener to investment sentiment, both at the stock market and corporate levels.  Uncertainty is never welcome.  Investors should be more discerning than ever about the types of businesses they own.  Indeed, while the second quarter of 2017 saw a good earnings season, things have not been as rosy since then: profit warnings in the UK are on the rise.  In such an environment, the case for active management should strengthen.  Quality companies with strong fundamentals, the like of which we hold in the Trust, should be well-rewarded if they can deliver on realistic expectations. 

 

Although Sterling has strengthened during the period, the currency remains at historically low levels.  Indeed, against a basket of currencies, Sterling is close to the bottoms of February 1993, December 1995 and January 2009.  Some historical basis therefore exists for believing that Sterling could continue to rise from here.  Clearly, this would benefit domestically focused companies at the expense of the large multinationals that are over-represented in the FTSE 100 index.  This would support the case for continued outperformance by UK SmallCap.

 

Montanaro Asset Management Limited

24 November 2017

 

Twenty Largest Holdings

as at 30 September 2017

 

Holding

Sector

Value

£'000

Market cap

£m

% of

portfolio

30 September 2017

% of

portfolio

31 March 2017

Marshalls

Construction and Materials

7,194

869

3.0

3.5

4imprint Group

Media

6,866

514

2.8

2.7

Cineworld Group

Travel and Leisure

6,775

1,856

2.8

3.0

Cranswick

Food Producers

6,642

1,503

2.7

2.9

Consort Medical

Health Care, Equipment and Services

6,522

535

2.7

2.9

Restore

Support Services

6,500

587

2.7

1.8

NCC Group

Software and Computer Services

6,495

599

2.7

1.8

Rathbone Brothers

Financial Services

6,485

1,329

2.7

2.8

Dechra Pharmaceuticals

Pharmaceuticals and Biotechnology

6,324

1,901

2.6

3.3

Polypipe Group

Construction and Materials

6,324

836

2.6

2.3

Big Yellow Group

Real Estate/Real Estate Investment Trusts

6,245

1,200

2.6

3.0

Hilton Food Group

Food Producers

5,990

537

2.5

2.5

Renishaw

Electronic and Electrical Equipment

5,954

3,467

2.4

2.1

Clarkson

Industrial Transportation

5,722

865

2.3

2.4

Mears Group

Support Services

5,592

503

2.3

2.7

Shaftesbury

Real Estate/Real Estate Investment Trusts

5,588

2,835

2.3

2.7

Brewin Dolphin

Financial Services

5,586

989

2.3

1.8

Smart Metering Systems

Support Services

5,560

626

2.3

2.1

Diploma

Support Services

5,320

1,205

2.2

2.2

Dignity

General Retailers

5,189

1,151

2.1

2.5

Twenty Largest Holdings

122,873


50.6







A full portfolio listing is available on request from the Manager.

 

Breakdown by Index (Ex Cash)

 

 

 

Classification

% of portfolio

as at

30 September 2017

% of portfolio

as at

31 March 2017

FTSE 250*

9%

12%

NSCI

23%

71%

UK AIM

66%

15%

Other

2%

2%

 

* Represents those holdings that are in the FTSE 250 and are above the threshold for the NSCI.

 

Interim Management Report and Responsibility Statement

 

Interim Management Report

The important events that have occurred during the period under review and the key factors influencing the financial statements are set out in the Manager's Review.

 

The principal risks facing the Company are unchanged since the date of the Annual Report and Accounts for the year ended 31 March 2017 and continue to be as set out in that report on pages 10 and 11 and pages 43 to 45. These include, but are not limited to, liquidity and discount management, corporate ownership and management structure of Montanaro, poor investment performance, risk oversight, key man risk, operational risk and breach of regulation. The principal financial risks include, but are not limited to, credit risk, market price risk, interest rate risk, liquidity risk, gearing and use of derivatives.

 

Responsibility Statement

The Directors confirm that to the best of their knowledge:

 

·      The condensed set of financial statements, which has been neither reviewed nor audited by the external Auditor, has been prepared in accordance with Financial Reporting Standard ("FRS") 104 'Interim Financial Reporting' and gives a true and fair view of the assets, liabilities, financial position and profit of the Company; and

 

·      This Half-Yearly Report includes a fair review of the information required by:

 

DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

 

DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the Company during that period, and any changes in the related party transactions described in the last Annual Report that could do so.

 

This Half-Yearly Report was approved by the Board of Directors on 24 November 2017 and the above Responsibility Statement was signed on its behalf by Roger Cuming, Chairman.

 

Condensed Income Statement (unaudited)

for the six months to 30 September 2017

 


6 months to 30 September 2017

   6 months to 30 September 2016


Revenue

£'000

Capital

£'000

Total 

£'000

Revenue

£'000

Capital

£'000

Total  

£'000

Gains on investments at fair value through profit or loss

-

25,078

25,078

-  

11,219

11,219 

Income

3,146

-

3,146

2,858

2,858 

Management fee

(162)

(485)

(647)

(237)

(711)

(948)

Other expenses

(247)

-

(247)

(250)

(250)

Movement in fair value of derivative financial instruments

-

 -

-

-  

69

69 

Net return before finance costs and taxation

2,737 

24,593

27,330 

2,371

10,577

12,948 

Interest payable and similar charges

(74) 

(223)

(297)

(106)

(318)

(424)

Net return before taxation

2,663

24,370

27,033

2,265

10,259

12,524 

Taxation (Note 3)

(6)

(6)

(4)

(4)

Net return after taxation

2,657

24,370 

27,027 

2,261

10,259 

12,520 

 

Return per Ordinary share: Basic and diluted

7.9p

  

72.8p

80.7p

6.8p

   30.6p

37.4p

 


Year to 31 March 2017


Revenue  

£'000  

Capital  

£'000  

Total 

£'000 

Gains on investments at fair value through profit or loss

-  

22,299 

22,299 

Income

4,535  

-  

4,535 

Management fee

(480) 

(1,439) 

(1,919)

Other expenses

(495) 

-  

(495)

Movement in fair value of derivative financial instruments

-  

141 

141 

Net return before finance costs and taxation

3,560  

 21,001  

 24,561 

Interest payable and similar charges

(193) 

(579) 

(772)

Net return before taxation

3,367  

 20,422  

23,789 

Taxation (Note 3)

(10) 

-  

(10)

Net return after taxation

3,357  

 20,422  

 23,779 

 

Return per Ordinary share: Basic and diluted

10.0p

 61.0p 

71.0p

 

The total column of this statement is the Statement of Total Comprehensive Income of the Company prepared in accordance with Financial Reporting Standards ("FRS 102"). The supplementary revenue return and capital return columns are prepared in accordance with the Statement of Recommended Practice issued in November 2014 and updated in January 2017 by the AIC ("AIC SORP").

 

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

 

There are no items of other comprehensive income and therefore the net return after taxation is also the total comprehensive income for the period.

 

No operations were acquired or discontinued in the period.

 

Condensed Statement of Changes in Equity (unaudited)

for the six months to 30 September 2017

 

 

 

 

6 months to 30 September 2017

Called-up

share

capital

£'000

Share

premium

account

£'000

Capital

redemption

reserve

£'000

Special 

reserve*

£'000 

Capital 

reserve*

£'000 

Distributable 
revenue 

reserve*

£'000 

Total 

equity 

shareholders'

funds 

£'000 

As at 31 March 2017

3,348

19,307

1,362

4,642 

176,165

6,616 

         211,440

Total comprehensive income:








Fair value movement of investments

-

-

-

    25,078

                    -

           25,078

Costs allocated to capital

-

-

-

(708)

                     - 

    (708)

Net revenue for the period

-

-

-

        2,657 

2,657 


-

-

-

24,370

             2,657

           27,027 

Dividends paid in the period (note 4)

-

-

-

 (3,515)

            (3,515)

As at 30 September 2017

3,348

19,307

1,362

4,642

200,535

             5,758

      234,952 









6 months to 30 September 2016








As at 31 March 2016

3,348

19,307

1,362

4,642 

155,743

6,607 

191,009 

Total comprehensive income:








Fair value movement of investments

-

-

-

11,219

11,219 

Costs allocated to capital

-

-

-

   (1,029)

(1,029)

Movement in fair value of derivative financial instruments

-

-

-

69

                   69 

Net revenue for the period

-

-

-

2,261 

2,261 


-

-

-

10,259

2,261 

           12,520

Dividends paid in the period

-

-

-

(3,348)

(3,348)

As at 30 September 2016

3,348

19,307

1,362

4,642 

166,002

              5,520 

         200,181









Year to 31 March 2017








As at 31 March 2016

3,348

19,307

1,362

4,642 

155,743

6,607 

         191,009 

Total comprehensive income:








Fair value movement of investments

-

-

-

22,299

-  

           22,299 

Costs allocated to capital

-

-

-

(2,018)

-  

(2,018)

Movement in fair value of derivative financial instruments

-

-

-

-

 141

-  

 141 

Net revenue for the year

-

-

-

-

3,357 

3,357 


-

-

-

-

20,422

3,357 

          23,779

Dividends paid in the year (note 4)

-

-

-

-

(3,348)

(3,348)

As at 31 March 2017

3,348

19,307

1,362

4,642 

176,165

6,616 

         211,440 

 

*    These reserves are distributable, excluding any unrealised capital reserve. The special reserve can be used for the repurchase of the Company's own shares.

 

Condensed Balance Sheet (unaudited)

as at 30 September 2017

 


As at  

30 September  

2017  

£'000  

As at  

30 September  

2016  

£'000  

As at  

31 March  

          2017  

£'000  

Fixed assets




Investments at fair value (note 5)

242,685

220,984  

217,475  

Current assets




Debtors

2,082

650  

479  

Cash at bank

13,688

4,009  

14,261  


15,770

4,659  

14,740  





Creditors: amounts falling due within one year




Other creditors

       (3,503)

(390) 

(775) 

Revolving credit facility

-

(25,000) 

Interest rate swap

-

(72) 


(3,503)

(25,462) 

(775) 

Net current assets/(liabilities)

12,267

(20,803) 

13,965  

Total assets less current liabilities

254,952

200,181  

231,440  





Creditors: amounts falling due after more than one year




Fixed rate credit facility

(20,000)

-   

(20,000) 

Net assets

234,952

200,181  

211,440  





Share capital and reserves




Called-up share capital

3,348

3,348  

3,348  

Share premium account

19,307

19,307  

19,307  

Capital redemption reserve

1,362

1,362  

1,362  

Special reserve

4,642

4,642  

4,642  

Capital reserve

200,535

166,002  

176,165  

Distributable revenue reserve

5,758

5,520  

6,616  

Total equity shareholders' funds

234,952

200,181  

211,440  





Net asset value per Ordinary share

701.9p

598.0p

631.6p





Number of Ordinary shares in issue

33,475,958

33,475,958  

33,475,958  

Notes to the Financial Statements

as at 30 September 2017

 

1 Financial Information

The condensed financial statements for the six months ended 30 September 2017 comprise the statements together with the related notes. The Company applies FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' in its annual financial statements and the AIC SORP issued in November 2014 and updated in January 2017. The condensed financial statements for the six months to 30 September 2017 have been prepared in accordance with FRS 104. The financial statements have been prepared on the basis of the same accounting policies as set out in the Company's Annual Report and Accounts for the year ended 31 March 2017.

 

Following the adoption of FRS 102, the Company elected not to present the statement of cash flows per paragraph 7.1.A.

 

The financial information contained in this Half-Yearly Report does not constitute full statutory accounts as defined in section 434 of the Companies Act 2006. The financial information for the six months to 30 September 2017 and 30 September 2016 has not been audited or reviewed by the Company's Auditor pursuant to the Auditing Practices Board guidance on such reviews.

 

The information for the year ended 31 March 2017 has been extracted from the latest published Annual Report and Accounts, which have been filed with the Registrar of Companies. The Report of the Auditors on those financial statements was unqualified and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

 

2 Management Expenses and Finance Costs

Management fees and finance costs are allocated 75% to the capital reserve and 25% to the revenue account. Costs arising on early settlement of debt are allocated 100% to capital, in accordance with the requirements of the AIC SORP. All other expenses are allocated in full to the revenue account.

 

3 Tax Credit/Charge on Ordinary Activities

The tax charge for the six months to 30 September 2017 is £6,000 (six months to 30 September 2016: £4,000; year to 31 March 2017: £10,000). The tax charge comprises a corporation tax charge for the six months to 30 September 2017 of £nil (six months to 30 September 2016: £nil; year to 31 March 2017: £nil) and irrecoverable withholding tax suffered of £6,000 (six months to 30 September 2016: £4,000; year to 31 March 2017: £10,000).

 

The corporation tax charge is based on an estimated effective tax rate of 0% as investment gains are exempt from tax owing to the Company's status as an investment trust and there is expected to be an excess of management expenses over taxable income.

 

4 Dividends


6 months to

30 September

2017

£'000

Year to

31 March

2017

£'000

Paid

2017 Final dividend of 10.50p (2016: 10.00p) per Ordinary share

3,515

3,348

 

 

5 Fair Value Hierarchy

 

For investments actively traded in organised financial markets, fair value is generally determined by reference to quoted market bid prices or closing prices for SETS (London Stock Exchange's electronic trading service) stocks sourced from the London Stock Exchange on the Balance Sheet date, without adjustment for transaction costs necessary to realise the asset.

 

In accordance with FRS 104, the Company must disclose the fair value hierarchy of financial instruments.

 

The fair value hierarchy consists of the following three levels:

 

·     

level 1

-

The unadjusted quoted price in an active market for identical assets or liabilities that the entity can access at the measurement date;

·     

level 2

-

Inputs other than quoted prices included within level 1 that are observable (i.e. developed using market data) for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

·     

level 3

-

Inputs are unobservable (i.e. for which market data is unavailable) for the asset or liability.

 

For financial instruments (within the scope of FRS 102), which are measured at fair value in the Balance Sheet, an entity shall disclose the following for each class of financial instruments. The level in the fair value hierarchy into which the fair value measurements are categorised in their entirety.

 

The table below sets out fair value measurements of financial assets in accordance with the FRS 102 fair value hierarchy system:

 


30 September 2017

31 March 2017


Level 1

£'000

Level 2

£'000

Total

£'000

Level 1

£'000

Level 2

£'000

Total

£'000

Equity investments

242,685

-

242,685

217,475

-

217,475

242,685

-

242,685

217,475

-

217,475

 

There are no financial liabilities measured a fair value for the period ended 30 September 2017 (31 March 2017: none).

 

There were no level 3 investments.

 

6 Going Concern

The Company has adequate financial resources to meet its investment commitments and as a consequence, the Directors believe that the Company is well placed to manage its business risks. After making appropriate enquiries and due consideration of the Company's cash balances, the liquidity of the Company's investment portfolio and the cost base of the Company, the Directors have a reasonable expectation that the Company has adequate available financial resources to continue in operational existence for the foreseeable future and accordingly have concluded that it is appropriate to continue to adopt the going concern basis in preparing the Half-Yearly Report, consistent with previous years.

 

7 Segmental Reporting

The Company has one reportable segment, being investing primarily in a portfolio of quoted UK small companies.

 

8 Related Party Transactions

Under the Listing Rules, the Manager is regarded as a related party of the Company. However, the existence of an independent Board of Directors demonstrates that the Company is free to pursue its own financial and operating policies and therefore, in terms of FRS 102, the Manager is not considered a related party. The relationship between the Company, its Directors and the Manager is disclosed in the Directors' Report in the Annual Report and Accounts for the year ended 31 March 2017.

 

The amounts charged by the Manager during the period were £647,000 (six months to 30 September 2016: £948,000; year to 31 March 2017: £1,919,000). At 30 September 2017, the amount due to the Manager, included in creditors, was £129,000. From 1 April 2017, the management fee reduced from 0.85% to 0.50% per annum  of the gross assets of the Company.

 

Directors

 

Roger Cuming (Chairman)

Kate Bolsover

Arthur Copple

James Robinson

 

Principal Advisers

 

AIFM and Manager

Montanaro Asset Management Limited

53 Threadneedle Street

London EC2R 8AR

www.montanaro.co.uk

enquiries@montanaro.co.uk

 

Depositary

BNY Mellon Trust & Depositary (UK) Limited

BNY Mellon Centre

160 Queen Victoria Street

London EC4V  4LA

Administrator

Link Alternative Fund Administrators Limited

Beaufort House

51 New North Road

Exeter EX4 4EP

Tel: 01392 477500

Fax: 01392 498288

 

Custodian

Bank of New York Mellon SA/NV

London Branch

One Canada Square

London E14 5AL

Company Secretary and Registered Office

Maitland Administration Services Limited

Springfield Lodge

Colchester Road

Chelmsford CM2 5PW

Tel: 01245 398984

Fax: 01245 398951

 

Banker

ING Bank N.V.

London Branch

60 London Wall

London EC2M 5TQ

 

Registrar

Link Asset Services

Shareholder Services Department

The Registry

34 Beckenham Road

Beckenham

Kent BR3 4TU

Tel: 0871 664 0300

(calls will cost 12p per minute plus network charges)

shareholderenquiries@link.co.uk

www.linkassetservices.com

Broker

Cenkos Securities plc

6-8 Tokenhouse Yard

London EC2R 7AS

 

 

Auditor

Ernst & Young LLP

25 Churchill Place

Canary Wharf

London E14 5EY

 

 

Montanaro UK Smaller Companies Investment Trust PLC

 

Registered in England and Wales No. 3004101

An investment company as defined under

section 833 of the Companies Act 2006

 

Sources of Further Information

Information on the Company, including this Half-Yearly Report is available on the Company's website: www.montanaro.co.uk/muscit.

 

Key Dates

March

Company year end

June

Annual results

July

Annual General Meeting

August

Dividend payable

November

Half-yearly results

 

Frequency of NAV Publication

The Company's NAV is released to the LSE on a daily basis.

 

ISA Status

The Company is fully eligible for inclusion in ISAs.

 

AIC

The Company is a member of the AIC.

 

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on this announcement (or any other website) is incorporated into, or forms part of, this announcement.

 

END


This information is provided by RNS
The company news service from the London Stock Exchange
 
END
 
 
IR DGBDBLSDBGRL
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