Octopus AIM VCT 2 plc : Half-yearly report

Octopus AIM VCT 2 plc 
Half-Yearly Results

24 July 2014

Octopus AIM VCT 2 plc, managed by Octopus Investments Limited, today announces the half-yearly results for the six months ended 31 May 2014.

These results were approved by the Board of Directors on 24 July 2014.

You may shortly view the half-yearly report in full by visiting www.octopusinvestments.com/investors/shareholder-information/aim-vct-2/. All other statutory information will also be found there.

 

Financial Summary

	Six months to 31 May 2014	Six months to 31 May 2013	Year to 30 November 2013
Net assets (£'000s)	46,454	33,431	39,818
Net profit/(loss) after tax (£'000s)	3,126	4,244	9,713
Net asset value per share ('NAV')	89.3p	74.3p	84.4p

The Directors have declared a dividend of 2.0 pence per Ordinary share, payable from capital reserves. This dividend will be paid on 17 October 2014 to those shareholders on the register at 19 September 2014.

Investment Policy
The Company's investment policy has been designed to enable it to comply with the VCT qualifying conditions. The Board intends that the long-term disposition of Company's assets will be not less than 80 per cent in a portfolio of qualifying AIM, ISDX Growth Market traded investments or unquoted companies where the management view an initial public offering (IPO) on AIM or the ISDX Growth Market is a short to medium term objective. Now the qualifying target has been achieved, the Board intends that approximately 20 per cent of its funds will be invested in non-qualifying investments generally comprising gilts, floating rate securities and short-term money market deposits with, or issued by, major companies and institutions with a minimum Moody's long term debt rating of 'A'.  A proportion of the 20 per cent could be invested in an authorised UK smaller company fund managed by Octopus or direct in equity investments and bonds. This 20 per cent could provide a reserve of liquidity which should maximise the Company's flexibility as to the timing of investment acquisitions and disposals, dividend payments and share buybacks.

Risk is spread by investing in a number of different businesses across a range of industry sectors using a mixture of securities. The maximum amount invested in any one company is limited to the amount permitted pursuant to VCT legislation in a fiscal year and no more than 15 per cent of the Company's assets, at cost, will be invested in the same company.  The value of an individual investment is expected to increase over time as a result of trading progress and a continuous assessment is made of its suitability for sale.  However, shareholders should be aware that the Company's qualifying investments are held with a view to long-term capital growth as well as income and will often have limited marketability; as a result it is possible that individual holdings may grow in value to the point where they represent a significantly higher proportion of total assets prior to a realisation opportunity being available. Investments will normally be made using the Company's equity shareholders' funds and it is not intended that the Company will take on any borrowings.

The Company's Articles permit borrowings of amounts up to 10 per cent of the sum equal to the aggregate of the amount paid up on the allotted or issued share capital of the Company and the amount standing to the credit of the capital and revenue reserves of the Company (whether or not distributable) after adding thereto or deducting therefrom any balance to the credit or debit of the profit and loss account.

No material changes may be made to the Company's investment policy described above without the prior approval of shareholders by the passing of an Ordinary Resolution. The Directors will continually monitor the investment process and ensure compliance with the investment policy.

Chairman's Statement

Overview
The six months under review can be divided into two quarters, with share prices continuing their upward trajectory in the first three months, followed by a much weaker period as investors became unsettled by comments from the various authorities around the world regarding the likely future course of quantitative easing.  Although the market has remained fairly stable despite geopolitical worries around the situation in the Ukraine as well as a looming general election, it has been markedly less tolerant of poor trading news with the result that individual share prices have become more vulnerable to shocks.

The dynamic for new issues has been similar.  After two strong months for new admissions to AIM in November and December, the market seemed to get carried away with its own success and a great many companies sought to float in the first quarter of 2014 at increasingly optimistic valuations. This appeared to present few problems in the first quarter of 2014, but more recently a feeling of sobriety has emerged with floats no longer succeeding indiscriminately. In some cases headier valuations have been cut to get issues away. Your VCT has been able to monitor these investment opportunities without having to get involved with investments at the wrong price as it is already well past its 70%  investment threshold for HMRC purposes. More recently prices have started to settle back at more realistic levels although there has been no slowing in the rate of companies looking to float. This is encouraging from the point of view of investing the funds that we are looking to raise in a linked offer with the Octopus AIM VCT over the coming twelve months.

Performance
The Net Asset Value of the VCT moved ahead strongly in the first four months of the period, helped by a general rise in smaller company indices and some positive newsflow from the existing portfolio companies.  More recently the NAV has given back some of its very strong gains of the past two years, but the NAV still rose by 8.2% in the six month period if the 2p dividend paid out on 22^nd May in is added back.  This compares with a 3% rise in the Smaller Companies Index (ex Investment Trusts) and a 1.5% fall in AIM.  The latter figure was affected by a few large constituents of the AIM Index which fell in the period and that are not part of the VCT qualifying universe.

As the tone of the market became more cautious we saw some of the more expensively rated shares in the portfolio give back some of their recent outperformance. This was regardless of good results and news about initial contracts for the new GIANT big data product in the case of Fusionex or more announcements about partnerships from Proxama and WANDisco, both of which have pioneering technologies with the potential for mass market application.

Among the larger, more established holdings, Advanced Computer Software and Breedon Aggregates were once again strong positive contributors to performance. We have taken some profits in Breedon Aggregates in the period, although it remains one the fund's larger positions. Other established holdings which have done well for the fund include Netcall, Quixant (where we have also taken profits) and GB Group.  IDOX has also seen its shares recover after a setback in profits growth in 2013 and it now seems to be back on track.  In the non-qualifying part of the portfolio Staffline has once again performed particularly well.

There have, inevitably, been some holdings which have had setbacks in the period. 

In the period, the Company made three new qualifying investments totalling £1 million and three further qualifying investments into existing holdings, which amounted to £0.4 million. The new investments were Proxama, which is developing mobile telephone wallets and other contactless payments systems; Nasstar, which has a desktop operating system creating greater efficiency and productivity and Rated People, which is currently unlisted and operates a website for customers to find a building contractor for a specific job.  The follow-on investments were Corac, which is growing its engineering operations and continuing to develop it frictionless compressor technology in field trials; Nektan, which is developing third party mobile games and Learning Technology Group, which has now acquired its main competitor in the online learning industry.  

Your managers have continued to use non-qualifying investments with the objective of enhancing performance.  In the period they added a new holding in Skyepharma, in the wake of its restructuring of its previously debt encumbered balance sheet, so that it is now in a position to develop its drug portfolio more effectively without having to consider debt and interest payments. The holding in GB Group was also added to, so that non-qualifying investments totalled £0.6 million.

There were a number of disposals in the six months realising approximately £1.6 million. Although the entire holding in Snacktime was sold at a loss, the disposals were in aggregate profitable.  In particular profits were taken in Matchtech, Advanced Computer Software, Animalcare, Omega Diagnostics, Proxama, Breedon Aggregates, EKF and Sinclair IS Pharma, which was reduced after it increased its debt levels.

Share Buy-backs
In the six months to May 2014, the company bought back 813,743 Ordinary shares.  It is evident from conversation which your managers have that this facility remains an important consideration to investors.  Your Board remains committed to maintaining its buy-back policy and welcomes the recent HMRC clarification that this will not be caught by other changes to VCT regulations.

Dividend
The object of the Board's dividend policy, when it was set at the time of the merger in 2010, was that shareholders should benefit as the NAV rose. With the rise in the NAV over the last year, the Board has declared progressively higher dividends. I am delighted to say that this trend continues. The Board, in line with its annualised 5% yield target, has declared an interim dividend of 2.0p. This will be paid on 17 October 2014 to shareholders on the register on 19 September 2014.

It remains the Board's intention to maintain a minimum annual dividend payment of 3.6p per share, which we would expect to pay in two instalments each year.

Fundraising
In June the company announced its intention to raise new capital, by the issue of a new prospectus. I would hope that this will be published in August. The intention is to have a combined offer with the other AIM VCT managed by Octopus and to seek to raise up to £8 million. Should there be exceptional demand, your Board may consider increasing this total to £12 million.  As you will have seen from my remarks above, there appear to be no shortage of interesting opportunities where new capital can potentially be deployed, although it is fair to say that in recent months your managers have declined most such opportunities, largely on grounds of valuation. It seems that this situation is changing as advisors set more realistic value expectations amongst founders and vendors. The pipeline of opportunities remains substantial and we have just made an investment of £800,000 into Ergomed, a profitable company providing services to the pharmaceutical sector.

Outlook
In the last report and accounts, I remarked that despite many intractable global problems, the UK is slowly recovering economically.  Both points have found further empirical evidence in the six months to May.  While there are some adverse financial consequences, not least in the strength of Sterling, which impacts a few holdings, the vast majority of the portfolio stands to benefit from the UK's continuing recovery. From your manager's contact with the managements of these companies, it is clear that conditions remain generally helpful, that those managements remain as determined as ever to grow their companies, that product innovations remains as high a priority as ever and that their assessment of their individual prospects remains encouraging for investors.  There will be hiccups, but order levels are high, margins generally expanding and customers are paying.  That seems a sound basis for expecting a revival of the rising trend in NAV apparent earlier in this year, which seems to have been upset, to some extent at least, by a greater emphasis on the global concerns amongst investors at large recently.

Keith Mullins
Chairman
24 July 2014

Responsibility Statement of the Directors in respect of the half-yearly report

We confirm that to the best of our knowledge:

• the half-yearly financial statements have been prepared in accordance with the statement "Half-Yearly Financial Reports" issued by the UK Accounting Standards Board;

• the half-yearly report includes a fair review of the information required by the Financial Services Authority Disclosure and Transparency Rules, being:

• an indication of the important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements.
• a description of the principal risks and uncertainties for the remaining six months of the year; and
• a description of related party transactions that have taken place in the first six months of the current financial year, that may 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.

On behalf of the Board
Keith Mullins
Chairman
24 July 2014

Income Statement
	Six months to 31 May 2014			Six months to 31 May 2013			Year to 30 November 2013
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Gain/(loss) on disposal of fixed asset investments	-	214	214	-	217	217	-	582	582
Gain/(loss) on valuation of fixed asset investments	-	3,279	3,279	-	4,292	4,292	-	9,574	9,574
Income	186	-	186	154	-	154	414	-	414
Investment management fees	(106)	(319)	(425)	(74)	(222)	(296)	(160)	(479)	(639)
Other expenses	(128)	-	(128)	(123)	-	(123)	(218)	-	(218)
Profit/(loss) on ordinary activities before tax	(48)	3,174	3,126	(43)	4,287	4,244	36	9,677	9,713
Taxation on profit/(loss) on ordinary activities	-	-	-	-	-	-	-	-	-
Profit/(loss) on ordinary activities after tax	(48)	3,174	3,126	(43)	4,287	4,244	36	9,677	9,713
Return per share - basic and diluted	(0.1)p	6.4p	6.3p	(0.1)p	9.9p	9.8p	0.1p	22.2p	22.3p

• The 'Total' column of this statement is the profit and loss account of the Company; the supplementary revenue return and capital return columns have been prepared under guidance published by the Association of Investment Companies.
• all revenue and capital items in the above statement derive from continuing operations.
• The Company has no recognised gains or losses other than those disclosed in the income statement.

Reconciliation of Movements in Shareholders' Funds
	Six months to 31 May 2014	Six months to 31 May 2013	Year to 30 November 2013
	£'000	£'000	£'000
Shareholders' Funds at start of period	39,818	28,712	28,712
Profit/(loss) on ordinary activities after tax	3,126	4,244	9,713
Purchase of own shares	(682)	(7,935)	(8,280)
Issue of shares	5,235	9,174	11,154
Shares to be issued	-	-	122
Dividends paid	(1,043)	(764)	(1,603)
Shareholders' Funds at end of period	46,454	33,431	39,818

Balance Sheet
	As at 31 May 2014		As at 31 May 2013		As at 30 November 2013
	£'000	£'000	£'000	£'000	£'000	£'000
Fixed asset investments*		39,770		30,290		35,862
Current assets:
Investments*	587		1,833		586
Debtors	26		142		56
Cash at bank	6,178		1,224		3,363
	6,791		3,199		4,005
Creditors: amounts falling due within one year	(107)		(58)		(49)
Net current assets		6,684		3,141		3,956
Net assets		46,454		33,431		39,818
Called up equity share capital		4		4		5
Share premium		5,362		10,929		5
Shares to be issued		-		-		122
Special distributable reserve		34,549		22,672		35,231
Capital redemption reserve		1		1		-
Capital reserve - realised		(9,566)		(6,772)		(8,550)
- unrealised		16,284		6,808		13,137
Revenue reserve		(180)		(211)		(132)
Total equity shareholders' Funds		46,454		33,431		39,818
Net asset value per share		89.3p		74.3p		84.4p

*Held at fair value through profit and loss

The statements were approved by the Directors and authorised for issue on 24 July 2014 and are signed on their behalf by:

Keith Mullins
Chairman

Company Number: 05528235

Cash Flow Statement
	Six months to 31 May 2013	Six months to 31 May 2013	Year to 30 November 2013
	£'000	£'000	£'000
Net Cash (outflow)/inflow from operating activities	(279)	(274)	(375)
Taxation: UK Corporation tax paid	-	-	-
Financial investment
Purchase of fixed asset investments	(2,074)	(1,366)	(3,104)
Disposal of fixed asset investments	1,658	1,238	3,050
Management of liquid resources
Purchase of current asset investments	-	(2,201)	(3,953)
Disposal of current asset investments	-	3,217	6,217
Equity dividends paid
Dividends paid	(1,043)	(764)	(1,603)
Financing
Proceeds from issue of shares	5,235	9,174	3,720
Shares to be issued	-	-	122
Purchase of own shares	(682)	(7,935)	(846)
Increase/(decrease) in cash at bank	2,815	1,089	3,228

Reconciliation of Operating Profit before Taxation to Cash Flow from Operating Activities
	Six months to 31 May 2014	Six months to 31 May 2013	Year to 30 November 2013
	£'000	£'000	£'000
Gain/(loss) on ordinary activities before tax	3,126	4,244	9,713
(Gain)/loss on disposal of fixed asset investments	(214)	(217)	(582)
(Gain)/loss on valuation of fixed asset investments	(3,279)	(4,292)	(9,574)
Decrease/(increase) in debtors	30	132	218
Increase/(decrease) in creditors	58	(141)	(150)
Net cash (outflow)/inflow from operating activities	(279)	(274)	(375)

Reconciliation of Net Cash Flow to Movement in Net Cash Resources
	Six months to 31 May 2014	Six months to 31 May 2013	Year to 30 November 2013
	£'000	£'000	£'000
Increase/(decrease) in cash at bank	2,815	1,089	3,228
Movement in cash equivalents	1	(1,017)	(2,264)
Opening net cash resources	3,949	2,985	2,985
Net cash resources at end of period	6,765	3,057	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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