Octopus AIM VCT 2 plc : Final Results

Octopus AIM VCT 2 plc

Final Results            

30 March 2016

Octopus AIM VCT 2 plc, managed by Octopus Investments Limited, today announces the final results for the year ended 30 November 2015.

These results were approved by the Board of Directors on 29 March 2016.

You may, in due course, view the Annual Report in full at www.octopusinvestments.com by navigating Investor, Venture Capital Trusts, Octopus AIM VCT 2 plc.  All other statutory information will also be found there.

Financial Summary

	30 November 2015	30 November 2014
Net assets (£'000s)	52,317	45,016
Profit/(Loss) on ordinary activities for the year after tax (£'000s)	4,047	(528)
Net asset value ("NAV")  per share	80.6p	80.3p
Ordinary Dividends per share - paid in year	4.0p	4.0p
Special Dividend per share - paid in year	2.0p	-
Final Dividend per share proposed *	2.0p	2.0p

*The proposed final dividend of 2.0p will, if approved by shareholders, be paid on 20 May 2016 to shareholders on the register on 29 April 2016.

Chairman's Statement

Introduction

I would particularly like to welcome new shareholders who have joined the share register and I do hope that I will see some of you at the AGM in May.

The year to 30 November 2015 has not been quite the one we expected at the outset, with both political and economic surprises creating conditions for market volatility. However, it would be wrong to draw a straight line between events affecting large company share prices and smaller companies, that have managed to grow, raise new capital and exceed market expectations. Reflecting this, after adding back the 6 pence in dividends paid out during the year, the VCT's Net Asset Value rose by 7.7% on a total return basis during the year.

Royal Assent was also given to the second Finance Act of the year, bring new VCT regulations which reconcile with EU State Aid rules.  Your Manager is not expecting to have to change their approach in any substantial way as a result of these new regulations. Your Company has launched a further offer for new shares and continued to buy back from selling shareholders. 

Performance

The Net Asset Value on 30 November 2015 was 80.6p per share, which compared with 80.3p a year before.  Adding back the 6p of dividends paid in the year, to adjust the year end NAV to 86.5p gives a total return of 7.7%. In the same twelve months, the FTSE All Share Index has risen by 0.6% on a total return basis and the FTSE SmallCap (excluding investment companies) Index has risen by 12.4% also on a total return basis.  The FTSE AIM All Share Index rose by 3% on a total return basis.

As these figures show it has certainly been the year of smaller companies and the portfolio has benefitted from this. Particular positive performance contributions have tended to come from the more established companies in the portfolio which are profitable and in many cases dividend paying.  These include Breedon Aggregates, GB Group, Tasty, Animalcare, Craneware and Staffline. As the year progressed it became apparent that investors' risk appetite was diminishing and companies thought to be in need of further capital particularly saw their share prices vulnerable to downward pressure. As and when such companies need and justify more capital, it is to be hoped that the new VCT regulations will permit follow-on investment in support of growth.  There have been signs that the appetite for takeovers has started to revive.  Chime Communications was taken over and several portfolio companies have accelerated their growth through acquisitions during the year.

Despite an unsettled stockmarket new issues have continued to float on AIM and secondary fundraisings have been even more in evidence.  In the year under review AIM has raised £5.6 billion of new capital, fulfilling its purpose of providing additional growth capital for its members. The final month or two of 2015 saw strong marketing activity by companies potentially seeking an AIM listing and there are signs that the level of new issue activity is picking up again in 2016.

New VCT Regulations

VCTs have always been subject to UK regulations, not least as they confer tax benefits on investors. In recent years these regulations have become subject themselves to European State Aid rules. The Chancellor proposed new rules in his Summer Budget in July 2015 and, following discussions with European authorities in Brussels, these became law following the granting of Royal Assent in November 2015. In summary these introduce an age restriction of seven years, after which companies cannot qualify for initial VCT investment, a total State Aid lifetime restriction of £12m per company, a stricter definition of the use of VCT funds and finally some restriction on 'non-qualifying' investments.

At present it is difficult to assess the precise impact these new regulations will have on your Company, but since the companies looking at AIM at the end of 2015 were well aware of them it is not obvious, at this stage, that there will be a slowdown in potential new AIM companies. I do not propose to speculate here about the impact of the new regulations.  However, your Managers do not believe that they have to change their investment approach substantially.

Dividends

For over five years now your Board has had a policy of providing shareholders with a 5% yield amended more recently to establish a minimum 3.6p annual payment. Special dividends are by definition special and do not form part of the minimum payment. So in respect of the year to November 2015, your Board has so far declared and paid a 2p interim dividend. Subject to approval at the AGM, your Board has declared a final dividend of 2.0p, which will be paid on 20 May 2016 to shareholders on the register on 29 April 2016.  This is in line with both the 3.6p minimum payment and the 5% yield target.

Dividend Reinvestment Scheme

In common with a number of other VCTs in the industry, your Company has started a Dividend Reinvestment Scheme (DRIS) following approval at the AGM in 2014.  Some shareholders have already taken advantage of this opportunity.  For investors who do not need income, but value the additional tax relief on their reinvested dividends, this is an attractive scheme and I hope that more shareholders will find it useful.  In the course of the year 304,687 new shares have been issued under this scheme. The dividend referred to above will be eligible for the DRIS.

Share Buybacks

During the year to 30 November 2015 your Company continued to buy back shares in the market from selling shareholders and purchased 1,219,689 ordinary shares for a total consideration of £925,000. We have maintained a discount of approximately 5%, which your Board monitors and intends to retain as a policy which fairly balances the interests of both remaining and selling shareholders. Buybacks remain an essential practice for VCTs as providing a means of selling is an important part of the initial investment decision and has enabled your Company to grow. As such therefore I hope you will all support the appropriate resolution at the AGM.

Share Issues

A prospectus was issued in August 2014 and the final issue of shares under that prospectus was made in July 2015.  In total £11.4m was raised.  After some discussion your Board decided that a new prospectus should be issued and this was published on 21 December 2015.  The proposal is to raise £8m initially and possibly a further £4m if there is both demand from investors and adequate opportunities amongst qualifying companies. That decision will be taken by your Board at the time.

Risks and Uncertainties

In accordance with the Listing Rules under which your Company operates your Board has to comment on potential risks and uncertainties, which could have a material impact on the Company's performance.  A risk arises from the requirement to maintain compliance with HMRC regulations requiring 70 per cent of your Company's assets to be invested in qualifying holdings. Other risks include economic conditions, which impact particularly on smaller companies in which your Company invests and this could have an adverse impact on share prices. 

VCT Status

PricewaterthouseCoopers LLP provides your Board and Investment Manager with advice concern continuing compliance with HMRC regulations for VCTs. Your Board has been advised that the Company is in compliance with the conditions laid down by HMRC for maintaining approval as a VCT.  A key requirement is to maintain at least 70 per cent qualifying investment level.  As at 30 November 2015 some 89.2 per cent of the portfolio as measured by HMRC regulations was invested in qualifying investments.

Annual General Meeting

The Annual General Meeting will be held on 11 May 2016.  I very much hope that you will be able to come.  After the formal business, our Investment Managers will make a presentation and there will, of course, be a chance for you to ask questions.   At the Annual General Meeting, a resolution will be proposed to extend the life of the Company until 2021 in order to preserve the VCT status of the Company for the benefit of both existing shareholders and new investors participating in the present share offer.

Outlook

Markets generally in the last few months have displayed significant volatility and fears for global economic growth have been more pronounced.  While many of the widely reported international concerns are of less relevance to smaller UK companies and to those in the portfolio, the EU referendum now casts a shadow over the market for the next three months.

There is no reason to be disheartened as far as smaller companies are concerned, despite this background.  Many will continue to prosper and many in the portfolio, for example those in the healthcare and pharmaceutical sectors, are looking to make progress over two or more years, so these more immediate events are of little direct relevance. Other companies can make good commercial progress despite these conditions and it is notable that several have put out encouraging trading statements in the first three months of 2016.  However, it is quite possible that their share prices will not reflect that progress, so there will be a derating of smaller company shares while volatile market conditions persist.

Keith Mullins

Chairman

29 March 2016

Investment Manager's Review

Introduction

Smaller company share prices have proved resilient during the year to 30 November 2015 in contrast to the FTSE 100 which saw some steep declines in some of its members exposed to a weak oil price and international markets, particularly in the second half of the period.  The general background continued to be challenging, especially for larger companies.  The temporary euphoria of a majority single party government in May was followed by worries over the slowdown in Chinese economic growth, the continuing hiatus in the Eurozone and the political difficulties caused by the European immigrant crisis.

Small companies that have been able to demonstrate growth have been much less affected by these worries and the narrowing of the valuation gap between smaller companies and larger ones that we commented on in the interim statement continued in the second half of the year. Within the portfolio it has been the more mature companies that have tended to see their share prices perform with some of the earlier stage investments seeing their share prices suffer from a lack of risk appetite.  Overall it seems quite likely, at this stage, that similar conditions will prevail through 2016, with companies only seeing their share prices perform as a result of positive results rather than on any general market trends.

While AIM itself has had some criticism in 2015, it has in fact been performing well. It has continued to support existing companies even though the number of new flotations were lower than in the previous twelve months. The benefit of increased market nervousness is that valuations have been more realistic than they were a year ago, which bodes well for investing the cash being raised under the current offer.

The Alternative Investment Market

The second half of the year to November 2015 saw more volatility in the FTSE AIM Index compared to the more general rise which occurred in the first six months. While, in the second half, the index fell by around 2%, on a capital only basis, for the year as a whole the FTSE AIM Index was slightly higher, by 3%.  As an Index it underperformed smaller companies more generally because of its higher exposure to resource stocks.  Despite this volatility, and a lower level of new listings on AIM than in 2014, the market raised a very substantial sum, £5.6 billion, for existing AIM listed companies for the year as a whole. That is the highest level of secondary fundraising on AIM since 2010 and is proof that the market will support companies with good reasons for asking for additional growth capital.

The year to November 2015 finished too with a large number of companies testing the temperature of the water, as they examined the possibility of floating in the first quarter of 2016. Whether the early turbulence of the market upsets some of those intentions remains to be seen (at the time of writing), but the inference of many of our meetings with those companies was that their growth plans were basically set and now just needed to be financed. Assuming that owners and managers set a higher priority on growth than some arbitrary valuation, we would expect to see a healthy flow of new companies coming to AIM in 2016. We also expect to see many existing AIM companies continue to use their listing to raise finance for further growth.

Performance

Dividend payments in the year were higher than usual as a result of a special dividend paid out of the profit from the Advanced Computer Software holding which was taken over in March 2015. Adding these back to show the total return, the Net Asset Value increased in the year by almost exactly the same amount as the dividends paid out, giving a total return of 7.7%, a progression on the 4.6% achieved in the first half. This compares with a total return for the FTSE Smallcap Index of 12.4% and for AIM of 3%. The FTSE All Share Index was affected by a sell off in larger companies perceived to be exposed to global growth and a weak oil price and it underperformed returning only 1% in the twelve month period.   The portfolio benefited from its exposure to small growing companies many of which are operating in the domestic economy that has been enjoying better growth than many of its international counterparties.

Within the portfolio it was once again the older, more established and already profitable companies that tended to perform best in these market conditions, with a number of the not yet profitable earlier stage companies seeing their share prices decline. Among the latter Mycelx, highlighted in the accounts a year ago, continued to suffer from a weak share price as a result of fears about the prolonged effect of a low oil price.  The management has cut costs and is preserving its cash. Several other earlier stage companies had a negative impact on the performance of the NAV in the year including Oxford Pharmascience and Proxama. Oxford Pharmascience has a technology that reduces the harmful effects of drugs on the stomach through slow release of the active ingredients. Although the share price has performed poorly, the company raised £20m in 2015 and so has cash to fund further trials if it should prove necessary. Proxama, a company with near field communications technology to allow people to transact by tapping their mobile phone, has seen its share price decline on fears that it will need more money in order to execute its strategy.  It has recently announced a series of contracts that indicate that it may finally be managing to get some sales traction.

EKF Diagnostics was the other holding that performed particularly badly in the year.  Difficulties with its US molecular diagnostics laboratory were compounded by some lumpy order patterns in its point of care diagnostics business, and the company ended up announcing a strategic review which resulted in a potential bid.  When that went away, the company announced that it would be cutting costs and concentrating its efforts on restoring shareholder value through focusing on the point of care business.  The shares should begin to recover once the figures start to show the benefit of this strategy, which is being led by a new chairman.

On a positive note some of the more established holdings in the portfolio enjoyed strong share price gains in the year and more than compensated for the poor share price performance of anything considered by the market to be small and early stage. Breedon, Brooks Macdonald, Idox, Vertu Motors and GB Group all saw their share prices respond well to good figures showing strong progress in their respective businesses with the promise of further growth to come.  They are all now well established, and by VCT standards, sizeable businesses.  Encouragingly, several other portfolio companies saw their businesses develop significantly in the year and were rewarded with share price gains.  Tasty, a restaurant operator, has now built its estate to more than 50 outlets and has the funding to grow it by 15 units a year out of existing resources.  This fund first invested in 2008 and it took three years before the company reached profitability, since when it has accelerated its growth plans. Adept Telecom made a significant acquisition, increasing its ability to win business with larger customers and Animalcare demonstrated that it could successfully launch several new animal medicines into the market in a twelve month period.  DP Poland, which owns the Dominos Pizza franchise in Poland, is still a long way from profitability but it has now demonstrated a financial model that works, and the shares have strengthened as a result. 

The non-qualifying element of the equity portfolio also did well in the year as our strategy of investing in larger more liquid, profitable companies to counterbalance new earlier stage qualifying holdings paid off.  Staffline was once again the best contributor but Restore, RWS and Gooch and Housego all did well.

Portfolio Activity

Having made four new qualifying investments and three further qualifying investments into existing holdings in the first half of the year, we added five further new qualifying holdings at a cost of £2.04m as well as three further qualifying investments into existing holdings in the second half, making a total of £4.78m invested in the year. Two of the follow-on investments were in Microsaic and Nektan, both of which have yet to generate any significant sales and are still proving their business models.  The third was in Learning Technologies, a Group supplying companies with online training courses which is now profitable and expanding organically and by acquisition.  All of the new investments were in existing AIM companies.  Among them, only Scientific Digital Imaging is already profitable although Tyratech is already selling its head lice treatment based on natural plant extracts to WalMart in the US and Boots in the UK and will be using the funds raised to accelerate its sales towards profitability.  Haydale also has existing sales.  It has a technology to functionalise graphene to enable its properties of strength and conductivity to be used in conjunction with other substances.  Oxford Pharmascience is a drug formulation company that has developed new slow release versions of common drugs such as non-steroidal anti-inflammatories to reduce stomach irritation and disguise taste.  The funding was to pay for further proof of concept trials ahead of an expected license deal with a large pharma company.  Re-Neuron is a leading UK cell therapy company with a number of therapeutic treatments in early stage trials including for the treatment of strokes. It is a small holding reflecting the early stage of its treatments.

We have also invested in non-qualifying holdings with a view to improving returns over time. During October and November we invested a number of larger AIM companies, which we know well and which, as relatively developed profitable and dividend paying companies, represent a balance to the risk, which the younger qualifying companies necessarily inject into the portfolio. In total we invested £2.8m into new non-qualifying holdings. In aggregate therefore we have invested over £7.5m in the year into November 2015, which compares with the £11.7m raised as a result of the last prospectus published by the company.

The major sale in the year was the disposal, as a result of its acquisition by venture capital, of Advanced Computer Software Group, which we dealt with in the interim statement.  In the second half of the year Chime Communications was also taken over.  Proceeds from that sale were £0.8m recording a profit of £0.3m.  Enables IT was also taken over, and as a result the fund now has a holding in 1 Spatial, a software Group which specialises in managing vast quantities of geospatial data. A number of other holdings were trimmed, but the only other holding which was sold entirely was Goals Soccer Centres, which had always been a non-qualifying holding and produced a small profit.

Outlook

Markets have had a very unsettled start to 2016, with worries about a further slowdown in China, continuing weakness in the oil price and worries about the possibility of rising interest rates exacerbated by a new uncertainty posed by the EU referendum in June.  Despite the US raising rates in December, the prospect of a rate rise in the UK still seems to be some way off, and forecasts remain for slow economic growth.  As far as the domestic economy is concerned this is a similar outlook to this time last year and goes some way to explain why many smaller UK focused companies have continued to publish encouraging trading statements which have often been followed by upgrades to analysts' forecasts.  We believe that share price performance will continue to be driven by the progress of individual companies and take comfort from the fact that 85% by value of the portfolio is represented by profitable companies and 65% by dividend paying companies.

A relatively positive UK economic outlook is also a reason to believe that capital raising and flotations will remain a significant feature of AIM this year. In those circumstances we would expect to invest the present cash balance profitably for shareholders in new qualifying holdings.

The AIM Team

Octopus Investments Limited

29 March 2016

Directors' Responsibility Statement

The Directors are responsible for preparing the Strategic Report, Directors' Report, Directors' Remuneration Report and the financial statements in accordance with applicable law and regulations. They are also responsible for ensuring that the annual report includes information required by the Listing Rules of the Financial Conduct Authority.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom accounting standards and applicable law). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.

In preparing these financial statements the Directors are required to:

• select suitable accounting policies and then apply them consistently;
• make judgments and accounting estimates that are reasonable and prudent;
• state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business;
• prepare a strategic report, a Directors' report and Directors' remuneration report which comply with the requirements of the Companies Act 2006.

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

The Directors confirm that:

• so far as each Director is aware, there is no relevant audit information of which the Company's auditor is unaware; and
• the Directors have taken all the steps that they ought to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that the auditors are aware of that information.

The Directors are responsible for preparing the annual report in accordance with applicable law and regulations. The Directors consider the annual report and the financial statements, taken as a whole, provides the information necessary to assess the Company's performance, business model and strategy and is fair, balanced and understandable.

The Directors are responsible for ensuring the annual report and financial statements are made available on a website and for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of the financial statements and other information included in annual reports may differ from legislation in other jurisdictions  The Directors responsibility also extends to the ongoing integrity of the financial statements contained therein.

The Directors confirm, to the best of their knowledge:

• that the financial statements, prepared in accordance with UK Generally Accepted Accounting Practice, (United Kingdom Standard and applicable laws), give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company taken as a whole; and
• the annual report, including the strategic report, includes a fair review of the development and performance of the business and the position of the Company taken as a whole, together with a description of the principal risks and uncertainties that it faces.

On Behalf of the Board

Keith Mullins

Chairman

29 March 2016

Income Statement
		Year to 31 December 2015			Year to 31 December 2014
		Revenue	Capital	Total	Revenue	Capital	Total
		£'000	£'000	£'000	£'000	£'000	£'000
Gain on disposal of fixed asset investments		-	172	172	-	455	455
Gain on valuation of fixed asset investments		-	4,555	4,555	-	(359)	(359)
Investment Income		547	-	547	478	-	478
Investment management fees		(230)	(689)	(919)	(203)	(609)	(812)
Other expenses		(308)	-	(308)	(290)	-	(290)
Return on ordinary activities before tax		9	4,038	4,047	(15)	(513)	(528)
Taxation on return on ordinary activities		-	-	-	-	-	-
Return  on ordinary activities after tax		9	4,038	4,047	(15)	(513)	(528)
Earnings per share - basic and diluted		-	6.6p	6.6p	-	(1.1p)	(1.1p)

There is no other comprehensive income for the period.

• the 'Total' column of this statement represents the statutory income statement of the Company; the supplementary revenue return and capital return columns have been prepared in accordance with the AIC Statement of Recommended Practice
• all revenue and capital items in the above statement derive from continuing operations
• the Company has only one class of business and derives its income from investments made in shares and securities and from bank and money market funds

Other than revaluation movements arising on investments held at fair value through the income statement, there were no differences between the loss as stated above and at historical cost.

Balance Sheet

		As at 30 November 2015		As at 30 November 2014
		£'000	£'000	£'000	£'000
Fixed asset investments*			44,968		36,745
Current assets:
Investments*		5,397		588
Debtors		54		397
Cash at bank		2,010		7,393
		7,461		8,378
Creditors: amounts falling due within one year		(112)		(107)
Net current assets			7,349		8,271
Net assets			52,317		45,016
Called up equity share capital			6		6
Share premium			11,575		8,979
Special distributable reserve			34,841		34,183
Capital reserve realised			(8,373)		(10,457)
Capital reserve unrealised			14,406		12,452
Revenue reserve			(138)		(147)
Total equity shareholders' funds			52,317		45,016
Net asset value per share - basic and diluted			80.6p		80.3p

*Held at fair value through profit and loss

The statements were approved by the Directors and authorised for issue on 29 March 2016 and are signed on their behalf by:

Keith Mullins

Chairman

Statement of Cash Flows

			Year to 31  December  2015 £'000	Year to 31  December  2014 £'000
Cash flows from operating activities
Return on ordinary activities before tax			4,047	(528)
Adjustments for:
Decrease in debtors			343	(341)
Decrease in creditors			5	58
Loss on disposal of fixed assets			(172)	(455)
(Gain)/loss on valuation of fixed asset investments			(4,555)	359
Cash from operations			(332)	(907)
Income taxes paid			-	-
Net cash generated from operating activities			(332)	(907)
Cash flows from investing activities
Purchase of fixed asset investments			(8,883)	(3,358)
Sale of fixed asset investments			5,387	2,571
Total cash flows from investing activities			(3,496)	(787)
Cash flows from financing activities
Purchase of own shares			(925)	(1,048)
Issue of own shares			7,958	8,853
Dividends paid			(3,779)	(2,079)
Total cash flows from financing activities			3,254	5,726
Increase in cash and cash equivalents			(574)	4,032
Opening cash and cash equivalents			7,981	3,949
Closing cash and cash equivalents			7,407	7,981
Closing cash and cash equivalents is represented by:
Cash at bank			2,010	3,363
Short term deposits			5,397	586
Total cash and cash equivalents			7,407	3,949

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This announcement is distributed by NASDAQ OMX Corporate Solutions on behalf of NASDAQ OMX Corporate Solutions clients.
The issuer of this announcement warrants that they are solely responsible for the content, accuracy and originality of the information contained therein.
Source: Octopus AIM VCT 2 plc via Globenewswire

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