Half-yearly Report
Montanaro UK Smaller Companies Investment Trust PLC ("MUSCIT")
Half-yearly Report for the six months ended 30 September 2011
MUSCIT was launched in March 1995 and is listed on the London Stock Exchange.
Investment Objective
The investment objective is capital appreciation through investing in small
quoted companies listed on the London Stock Exchange or traded on the
Alternative Investment Market ("AIM") and to achieve relative outperformance of
its benchmark, the FTSE SmallCap (excluding investment companies) Index
("SmallCap").
No unquoted investments are permitted.
Investment Policy
The Company seeks to achieve its objective and to diversify risk by investing
in a portfolio of quoted UK smaller companies. At the time of initial
investment, a potential investee company must be profitable and smaller than
the largest constituent of the RBS HGSC Index, which represents the smallest
10% of the UK Stock Market by value. At the end of September 2011, the largest
company in the RBS HGSC had a market capitalisation of over £1.6 billion in
size. The Manager focuses on the smaller end of this Index.
In order to manage risk the Manager will normally limit any one holding to a
maximum of 4% of the Company's investments. 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 to be 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 therefore constructed
on a "bottom up" basis and there are no sectoral constraints placed on the
Manager.
The Board, in consultation with the Manager, is responsible for determining the
gearing strategy of the Company. Gearing is used to enhance returns when the
timing is considered appropriate. The Company currently has a credit facility
of £15 million through ING Bank of which £15 million was drawn as at 30
September 2011. The Board has agreed to limit borrowings to 25% of
shareholders' funds.
Investment Philosophy
Over the very long-term SmallCap has delivered superior returns relative to
LargeCap. Less detailed research is a primary cause of continuing inefficiency
in the asset class. The Manager believes that it can exploit this inefficiency
by devoting its significant in-house analytical resource to both proprietary
idea generation and research.
The Manager further believes that a conservative, long-term approach to
investing in high quality companies will deliver superior returns and has
developed its own screening and valuation tools to help identify companies
which are not only of the highest quality but also undervalued. Key to success
is emphasis on management quality, first hand research and meetings with
management, as well as experience and commonsense.
Highlights
for the six months to 30 September 2011
Results
> Net Asset Value ("NAV") including current period revenue: -7% (£131 million)
> Share price: -8%
> FTSE SmallCap Index: -14%
As at As at
30 September 31 March
2011 2011
NAV per Ordinary share 390.32p 421.65p
(including current period
revenue)
Ordinary share price 326.00p 355.00p
NAV Performance vs SmallCap
(to 30 September 2011)
6 months 3 years 5 years Since
inception
March 1995
% % % %
NAV (excluding (6.7) 51.3 28.2 291.9
current period
revenue)
FTSE SmallCap Index (13.9) 7.5 (34.4) 33.5
Outperformance 7.2 43.8 62.6 258.4
Capital Structure
As at 30 September 2011 the Company had 33,475,958 Ordinary shares of 10p each
in issue (none of which were held in Treasury).
Manager's Review
In the last two financial years, the NAV of the Company has increased by 54%
and 39% respectively. So perhaps it is no surprise that the market experienced
some profit taking in the first half of the current year. Despite being geared
through the period, we continued to outperform in difficult markets thanks to
good stock selection.
The first quarter ended 30 June 2011 started well: M&A activity remained
strong; the earnings season in the spring was positive and exceeded
expectations. However, the after effects of the Japanese earthquake on the 11
March, concerns about a Greek default and mixed economic data in Europe and the
United States all led to increased volatility.
The second financial quarter was a difficult period for equity markets with
further concerns of a global slowdown and fears of renewed European sovereign
contagion issues surrounding the potential Greek default. The FTSE-SmallCap
Index fell by over 14% in the quarter.
Amidst all the doom and gloom, the portfolio benefitted from one takeover
(Group NBT - domain management for the internet) and several strong individual
performances where stocks rose by 20% or more: Immunodiagnostic Systems
(healthcare company involved in Vitamin D diagnostic testing); Dignity (funeral
Services); Booker (food wholesaling) and NCC (software escrow and web
assurance). This shows that sound, fundamentally based stock selection can add
value even when times are hard.
Outlook
It is unsurprising that investors are cautious. The outlook for global economic
growth is largely in the hands of politicians. To date, they have been slow to
grasp the scale of the challenge and to take decisive action to restore
confidence. Investors dislike uncertainty and have been reducing equities in
portfolios in favour of bonds, cash and gold. As a result, equity valuations
are close to their 2008 lows.
Having lived through several economic and stock market cycles since 1991 when
Montanaro was formed, it is clear that the best time to invest is when the
economic outlook is uncertain, investor sentiment is negative, valuations based
on both price/earnings and price/book are attractive, company balance sheets
are strong and there is plenty of cash around. These conditions prevail today.
Sentiment can be very fickle and tends to change unexpectedly and unpredictably
. We are currently fully invested and indeed the most geared we can recall, a
reflection of our contrarian view and confidence about the future.
Montanaro Asset Management
29 November 2011 .
Thirty Largest Holdings
as at 30 September 2011
Holding Sector Value % of Market
cap
£'000 portfolio £m
Brooks Macdonald General Financials 4,697 3.3 136
Group
Dialight Electronic and Electrical 4,620 3.2 245
Equipment
Oxford Instruments Electronic and Electrical 4,444 3.1 446
Equipment
NCC Group Software and Computer Services 4,355 3.1 230
SDL Software and Computer Services 4,063 2.8 514
Fenner Industrial Engineering 4,056 2.8 601
Devro Food Producers 4,055 2.8 387
James Fisher Industrial Transportation 3,944 2.8 255
Immunodiagnostics Health Care Equipment and 3,932 2.8 291
Services
Ocean Wilsons Industrial Transportation 3,928 2.8 447
Holdings
Ten Largest Holdings 42,094 29.5
Victrex Chemicals 3,826 2.7 918
Latchways Support Services 3,734 2.6 119
Domino Printing Electronic and Electrical 3,696 2.6 513
Sciences Equipment
Domino's Pizza Travel and Leisure 3,564 2.5 722
Brammer Support Services 3,545 2.5 286
Shaftesbury Real Estate/ Real Estate 3,517 2.5 1,167
Investment Trusts
Genus Pharmaceuticals and 3,432 2.4 632
Biotechnology
Dignity General Retailers 3,400 2.4 465
Albemarle & Bond General Financials 3,311 2.3 194
Holdings
Croda International Chemicals 3,300 2.3 2,233
Twenty Largest 77,419 54.3
Holdings
Ricardo Support Services 3,281 2.3 180
Abcam Pharmaceuticals and 3,263 2.3 663
Biotechnology
Consort Medical Health Care Equipment and 3,197 2.3 152
Services
Mears Group Support Services 3,191 2.2 236
M.P. Evans Group Food Producers 3,028 2.1 228
Dechra Pharmaceuticals and 2,941 2.1 326
Pharmaceuticals Biotechnology
AG Barr Beverages 2,858 2.0 464
Chemring Group Aerospace and Defence 2,748 1.9 1,026
Fidessa Group Software and Computer Services 2,748 1.9 579
Premier Oil Oil and Gas Producers 2,605 1.8 1,626
Thirty Largest 107,279 75.2
Holdings
Analysis of Investment Portfolio by FTSE Classification
as at 30 September 2011
Classification % of
portfolio
UK FTSE 250 30.8
UK FTSE SmallCap 39.2
UK FTSE Fledgling 7.8
UK AIM/PLUS 17.1
UK other equities 5.1
100.0
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 and uncertainties for the remaining six months of the
financial year are reviewed in the Outlook section of the Manager's Review. The
Company actively monitors its counterparty exposures and has been particularly
vigilant during the period.
The principal risks facing the Company are substantially unchanged since the
date of the Annual Report for the year ended 31 March 2011 and continue to be
as set out in that report on pages 14 to 16 and pages 35 to 37.
Risks faced by the Company include, but are not limited to, Investment Manager,
investment and strategy, discount volatility, credit risk, market price risk,
interest rate risk, liquidity risk, gearing, regulatory risk, operational risk
and financial risk, banking, reputational and Company viability.
Under the Listing Rules the Manager is regarded as a related party of the
Company. The amounts paid to the Manager during the period were £798,000 (30
September 2010: £622,000; year to 31 March 2011: £2,162,000). At 30 September
2011, the amount due to Montanaro Asset Management Limited, included in
creditors, was £276,000.
However, the existence of an independent Board of Directors demonstrates that
the Company is free to pursue its own financial and operating policies.
Therefore in terms of FRS 8 "Related Party Transactions" the Manager is not
considered a related party.
Responsibility Statement
The Directors confirm that to the best of their knowledge:
â— the condensed set of financial statements has been prepared in accordance
with the Statement on Half-yearly Financial Reports issued by the UK Accounting
Standards Board and gives a true and fair view of the assets, liabilities and
financial position of the Company;
â— the Manager's Review (constituting the interim management report) includes a
fair review of the information required by DTR 4.2.7R of the Disclosure 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;
â— the Statement of Principal Risks and Uncertainties above is a fair review of
the information required by DTR 4.2.7R; and
â— the financial statements include a fair review of the information required by
DTR 4.2.8R of the Disclosure 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 29 November
2011 and the above responsibility statement was signed on its behalf by David
Gamble, Chairman.
Income Statement (unaudited)
for the six months to 30 September 2011
6 months to 30 September 6 months to 30 September Year to 31 March 2011
2011 2010
Revenue Capital Total Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
(Losses)/gains on - (9,106) (9,106) - 20,804 20,804 - 40,006 40,006
investments
designated at
fair value
through profit or
loss
Dividends and 1,915 - 1,915 1,620 - 1,620 3,639 - 3,639
interest
Management fee (399) (399) (798) (311) (311) (622) (688) (688) (1,376)
Management - - - - - - - (786) (786)
performance fee
Other expenses (142) - (142) (169) - (169) (316) - (316)
Net return before 1,374 (9,505) (8,131) 1,140 20,493 21,633 2,635 38,532 41,167
finance costs and
taxation
Interest payable (48) (48) (96) (64) (64) (128) (119) (119) (238)
and similar
charges
Net return before 1,326 (9,553) (8,227) 1,076 20,429 21,505 2,516 38,413 40,929
taxation
Taxation (Note 2) - - - - - - - - -
Net return after 1,326 (9,553) (8,227) 1,076 20,429 21,505 2,516 38,413 40,929
taxation
Return per 3.96p (28.54)p (24.58)p 3.21p 61.03p 64.24p 7.51p 114.75p 122.26p
Ordinary share
The total column of this statement is the profit and loss account of the
Company. The supplementary revenue and capital columns are presented under
guidance issued by the Association of Investment Companies ("AIC").
All revenue and capital items in the above statement derive from continuing
operations. No operations were acquired or discontinued in the period.
No Statement of Total Recognised Gains and Losses has been prepared as all such
gains and losses are shown in the Income Statement.
Reconciliation of Movements in Shareholders' Funds (unaudited)
for the six months to 30 September 2011
Called-up Share Capital Special Capital Distributable Total
revenue
share premium redemption reserve reserve equity
reserve
capital account reserve shareholders
funds
6 months to 30 £'000 £'000 £'000 £'000 £'000 £'000 £'000
September 2011
As at 1 April 2011 3,348 19,307 1,362 4,642 108,565 3,929 141,153
Fair value movement - - - - (9,106) - (9,106)
of investments
Costs allocated to - - - - (447) - (447)
capital
Net revenue for the - - - - - 1,326 1,326
period
Dividends paid in - - - - - (2,263) (2,263)
period
As at 30 September 3,348 19,307 1,362 4,642 99,012 2,992 130,663
2011
6 months to 30
September 2010
As at 1 April 2010 3,348 19,307 1,362 4,642 70,152 2,484 101,295
Fair value movement - - - - 20,804 - 20,804
of investments
Costs allocated to - - - - (375) - (375)
capital
Net revenue for the - - - - - 1,076 1,076
period
Dividends paid in - - - - - (1,071) (1,071)
period
As at 30 September 3,348 19,307 1,362 4,642 90,581 2,489 121,729
2010
Year to 31 March
2011
As at 1 April 2010 3,348 19,307 1,362 4,642 70,152 2,484 101,295
Fair value movement - - - - 40,006 - 40,006
of investments
Costs allocated to - - - - (1,593) - (1,593)
capital
Net revenue for the - - - - - 2,516 2,516
year
Dividends paid in - - - - - (1,071) (1,071)
the year
As at 31 March 2011 3,348 19,307 1,362 4,642 108,565 3,929 141,153
Balance Sheet (unaudited)
as at 30 September 2011
As at As at As at
30 September 30 September 31 March
2011 2010 2011
£'000 £'000 £'000
Fixed assets
Investments designated at fair value 142,732 133,549 153,175
through profit and loss
Current assets
Debtors 2,937 486 3,838
Cash at bank 922 2,968 406
3,859 3,454 4,244
Creditors: amounts falling due within
one year
Other creditors (928) (274) (1,266)
Revolving credit facility (15,000) (15,000) (15,000)
(15,928) (15,274) (16,266)
Net current liabilities (12,069) (11,820) (12,022)
Total assets less current liabilities 130,663 121,729 141,153
Net assets 130,663 121,729 141,153
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 99,012 90,581 108,565
Distributable revenue reserve 2,992 2,489 3,929
Total equity shareholders' funds 130,663 121,729 141,153
Net asset value per Ordinary share 390.32p 363.63p 421.65p
Summarised Statement of Cash Flows (unaudited)
as at 30 September 2011
Note As at As at As at
30 September 30 September 31 March
2011 2010 2011
£'000 £'000 £'000
Net cash inflow from operating 3 397 712 1,895
activities
Servicing of finance
- Interest and similar charges (98) (94) (286)
paid
Net cash outflow from servicing (98) (94) (286)
of finance
Capital expenditure and
financial investment
- Purchases of investments (13,340) (40,190) (54,882)
- Sales of investments 15,820 36,415 47,554
Net cash inflow/(outflow) from 2,480 (3,775) (7,328)
capital expenditure and
financial investment
Equity dividends paid (2,263) (1,071) (1,071)
Net cash inflow/(outflow) before 516 (4,228) (6,790)
financing
Financing
- Proceeds of short-term credit - 5,000 5000
facility
Net cash inflow from financing - 5,000 5000
Increase/(decrease) in cash 4 516 772 (1,790)
Notes to the Financial Statements
as at 30 September 2011
1 Financial information
The financial information contained in this report does not constitute full
statutory accounts as defined in section 434 of the Companies Act 2006. The
comparative financial information for the year ended 31 March 2011 does not
constitute statutory accounts within the meaning of Section 434 of the
Companies Act 2006. The financial information for the six months ended 30
September 2011 and 30 September 2010 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 2011 has been extracted from the
latest published audited financial statements, 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.
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.
The financial statements are prepared on the basis of the accounting policies
set out in note 1 of the annual report and accounts for the year ended 31 March
2011.
2 Tax credit/charge on ordinary activities
The tax charge for the half-year is nil (30 September 2010: nil; year to 31
March 2011: nil) based on an estimated effective tax rate of 0% for the year
ending 31 March 2012. The estimated effective tax rate is 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.
3 Reconciliation of net return before finance costs and taxation to net cash
inflow from operating activities
6 months to 6 months to Year to
30 September 30 September 31 March
2011 2010 2011
£'000 £'000 £'000
Net return before finance costs (8,131) 21,633 41,167
and taxation
Losses/(gains) on investments 9,106 (20,804) (40,006)
designated at fair value through
profit or loss
(Decrease)/increase in creditors (638) 28 825
Decrease/(increase) in 60 (145) (91)
prepayments and accrued income
Net cash inflow from operating 397 712 1,895
activities
4 Reconciliation of net cash flows to movements in net debt
6 months to 6 months to Year to
30 September 30 September 31 March
2011 2010 2011
£'000 £'000 £'000
Increase/(decrease) in cash in 516 772 (1,790)
the period
Proceeds of credit facility - (5,000) (5,000)
Movement in net debt 516 (4,228) (6,790)
Net debt at beginning of period (14,594) (7,804) (7,804)
Net debt at end of period (14,078) (12,032) (14,594)
5 Analysis of net debt
As at As at
1 April 30 September
2011 Cash flows 2011
£'000 £'000 £'000
Cash at bank 406 516 922
Debt due in less than one year (15,000) - (15,000)
(14,594) 516 (14,078)
Directors
David Gamble (Chairman)
Roger Cuming
Kathryn Matthews
Michael Moule
Advisers
Manager Bankers
Montanaro Asset Management Limited HSBC International
53 Threadneedle Street PO Box 181
London EC2R 8AR 27-32 Poultry
London EC2P 2BX
Tel: 020 7448 8600
Fax: 020 7448 8601 ING Bank N.V.
www.montanaro.co.uk London Branch
info@montanaro.co.uk 60 London Wall
London EC2M 5TQ
Company Secretary, Administrator and Registered Auditor
Office
Capita Sinclair Henderson Limited KPMG Audit Plc
(Trading as Capita Financial Group - Specialist 100 Temple Street
Fund Services)
Beaufort House Bristol BS1 6AG
51 New North Road
Exeter EX4 4EP Solicitors
Tel: 01392 412 122 Norton Rose LLP
Fax: 01392 253 282 3 More London Riverside
London SE1 2AQ
Registrars Brokers
Capita Registrars Canaccord Genuity Limited
Shareholder Services Department Cardinal Place
The Registry 7th Floor
34 Beckenham Road 80 Victoria Street
Beckenham London SW1E 5JL
Kent BR3 4TU Tel: 020 7050 6500
Tel: 0871 664 0300 Fax: 020 7050 6501
(calls cost 10p per minute plus network charges) www.canaccordgenuity.com
Fax: 020 639 2342
ssd@capitaregistrars.com
www.capitaregistrars.com
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
Website: www.montanarouksmaller.co.uk
National Storage Mechanism
A copy of the Half-yearly Report 2011 will be submitted shortly to the National
Storage Mechanism ("NSM") and will be available for inspection at the NSM,
which is situated at: www.hemscott.com/nsm.do.
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
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