Annual Financial Report
Strategic Equity Capital PLC
Annual Financial Report for the year ended 30 June 2012
The full Annual Report and Accounts can be accessed via the
Company's website at: www.strategicequitycapital.com or by contacting the
Company Secretary by telephone on 01392 412122.
Investment objective
The investment objective of the Company is to achieve absolute
returns (i.e. growth in the value of investments) rather than relative returns
(i.e. attempting to outperform selected indices) over a medium-term period,
principally through capital growth.
The Company's investment policy can be found in the Report of the
Directors in the full Annual Report for the year ended 30 June 2012.
Investment Manager's strategy
The Investment Manager, SVG Investment Managers Limited ("SVGIM"),
employs a strategy to invest in publicly quoted companies which create value
through strategic, operational and management change. SVGIM follows a practice
of constructive corporate engagement and aims to work with management teams in
order to enhance shareholder value.
A more detailed explanation can be found in the Investment
Manager's Report below.
Shareholder information
Financial calendar
Company's year-end 30 June
Annual results announced September
Annual General Meeting November
Company's half-year 31 December
Half yearly results February
announced
Share price
The Company's Ordinary shares are listed on the London Stock
Exchange. The mid-market price is quoted daily in the Financial Times under
`Investment Companies'.
Share dealing
Shares can be traded through your usual stockbroker.
Share register enquiries
The register for the Ordinary shares is maintained by Computershare
Investor Services plc ("Registrar"). In the event of queries regarding your
holding, please contact the Registrar on 0870 707 1285. Changes of name and/or
address must be notified in writing to the Registrar.
NAV
The Company's net asset value is announced weekly to the London
Stock Exchange.
Website
Further information on the Company can be accessed via the
Company's website
www.strategicequitycapital.com
Capital structure
Issued share capital
67,317,324 Ordinary shares of 10p each: £6,731,732.
At 30 June 2012 the issued share capital of the Company was
67,317,324 Ordinary shares. All shares have equal voting rights.
Financial summary
At 30 June
%
2012 2011 change
Performance
Total return¹ (0.92%)
Capital return
Net as set value (statutory) per Ordinary 101.96p 103.35p (1.34%)
share
Ordinary share price (mid-market) 82.00p 93.00p (11.83%)
Discount of Ordinary share price to net asset 19.58% 10.01%
value
Average discount of Ordinary share price to 17.65% 19.14%
net asset value for year ended
Total assets (£'000) 69,074 73,877 (6.50%)
Equity shareholders' funds (£'000) 68,639 72,470 (5.29%)
Ongoing charges² 1.15% 1.20%
Revenue return per Ordinary share 1.61p 0.40p
Dividend yield 0.63% 0.44%
Proposed final dividend for year 1.50p 0.44p 240.91%
Ordinary shares in issue with voting rights³ 67,317,324 70,122,203 (4.00%)
Year's Highs/Lows High Low
Net asset value per Ordinary share 106.48p 84.89p
Ordinary share price 92.38p 68.75p
¹ Total return is the increase/decrease per share in net asset
value plus dividends paid.
² The ongoing charges figure has been calculated using the
Association of Investment Companies' ("AIC's") recommended methodology and
relates to the ongoing costs of running the Company. Non-recurring fees are
therefore excluded from the calculation.
³ The first semi-annual tender offer took place in May 2012.
2,804,879 shares were bought back for cancellation at a cost of £2,700,795.
Further information on the tender offer process can be found in the extracts
from the Report of the Directors below.
Chairman's report
Introduction
I am pleased to report that over the financial year the Company was
able to defend value for shareholders in difficult market conditions. In
addition it reduced its undrawn commitments to unlisted investments and saw an
improvement in the liquidity in its shares.
The Manager's focus on high quality smaller companies with strong
competitive positions in growing niche markets worked well. The portfolio also
benefited from its bias towards companies with a high proportion of overseas
earnings and also the ability to generate high levels of free cash flow
through operations and the sale of non-core assets.
Performance
As at 30 June 2012 the Company had net assets of £68.6 million
(102.0p per share). This represented a decrease of 1.3% over the previous
year. Including dividends the Company delivered a total return to shareholders
of -0.9% over the 12 months. The Company's performance was better than that of
comparable markets; it outperformed the FTSE SmallCap ex Investment Companies
Index by 5.5%.
The result was driven by a combination of factors: The vast
majority of investee companies delivered ahead of plan, and most benefited
from some form of corporate activity and outperformed the market. This success
was partially offset by a marked decrease in the value of a single holding in
the second half of the year.
The Company's NAV per share has cumulatively outperformed the comparable index
over 5 years by 16.7%, and over 3 years by 66.5%. This increasingly consistent
performance partially reflects the refinements made to the investment process
following the financial crisis, and has confirmed my confidence in the
Company's investment strategy.
Discount Management
The discount to NAV at which the Company's shares trade narrowed again to an
average of 17.7% over the year. This was achieved through the implementation
of the Company's new semi-annual tender process. It is worth noting that the
level of the discount has been narrowing consistently since the end of 2009,
and is now in line with other smaller company focused investment trusts. The
Board is hopeful that the combination of the tender programme and a
continually improving track record should continue to narrow the discount on
an on-going basis.
Board Composition
The Board regularly evaluates itself in compliance with best corporate
governance practice. Having been Chairman of SEC since its incorporation, I
will be in my ninth year of service after the 2013 AGM and have, as a result,
informed my colleagues that I do not intend to seek re-election at the 2013
AGM. This will allow the Board plenty of time to identify my successor and
ensure a smooth transition.
Investment Manager
The various improvements made to the investment process since the financial
crisis have led to a clear improvement in the Company's performance and
consistency of returns. Since the end of March 2009 the Company's NAV has
outperformed the Smaller Companies index in three months out of every four. I
am increasingly confident that the Manager's approach to investment should
create value for shareholders over the long term.
Banking Arrangements
The Company had a £5 million revolving facility with RBS which expired on 14
July 2012. This facility has been utilised rarely since the launch of the
Company in 2005. Gearing at a portfolio level has not been, nor is likely to
be, a major driver in the Company's NAV performance going forward. In order to
avoid the expense of maintaining such a facility to no obvious end, the Board
and Manager have agreed not to seek a replacement facility.
Dividend
The Directors continue to expect that returns for shareholders will derive
primarily from the capital appreciation of the shares rather than from
dividends. The Board is proposing a final dividend of 1.50p per Ordinary share
for the year ended 30 June 2012, payable on 16 November 2012 to holders on the
register as at 19 October 2012.
AGM
The AGM of the Company will be held at 11.30am on Thursday, 1 November 2012 at
the offices of SVG Investment Managers Limited.
Continuation Vote
At each Annual General Meeting of the Company, shareholders have the
opportunity to vote on an ordinary resolution that the Company continue as an
investment trust. The Company's net asset value performance has been strong,
outperforming the FTSE SmallCap ex Investment Companies Index, on a total
return basis, over one, three and five years. Additionally, your Directors are
of the opinion that, despite the current macro-economic problems, there remain
attractive investment opportunities in selected companies. Accordingly, the
Board is recommending that shareholders should vote in favour of the
continuation resolution.
Marketing Activities
The Manager and the Company's broker continue to work together to broaden the
shareholder base. I am optimistic that the Company's narrowing discount,
improving long-term track record and SVGIM's increased marketing resource
should all combine to achieve this goal over the coming year.
Outlook
The Board shares the Manager's belief that the prospects for the Company are
good. The valuation of the portfolio remains very attractive by historical
standards and the underlying companies are performing well. The efficacy of
the Manager's improved investment process has become increasingly visible in
the Company's track record, which has led to favourable media coverage, awards
and interest from potential new shareholders.
J Hodson
26 September 2012
Directors
John Hodson (Chairman)
Sir Clive Thompson (Deputy Chairman)
John Cornish
Ian Dighé
Michael Phillips
Investment Manager's report
Investment Strategy
Our strategy is to invest in publicly quoted companies which will create value
through strategic, operational and management change. We follow a practice of
constructive corporate engagement and aim to work with management teams in
order to enhance shareholder value. We aim to build a consensus with other
stakeholders, and prefer to work alongside like-minded co-investors as
leaders, followers or supporters. We try to avoid confrontation with investee
companies as we believe that there is strong evidence that overtly hostile
activism generally generates poor returns for investors.
We are long-term investors; we typically aim to hold companies for the
duration of three-year investment plans that include an entry and exit
strategy and a clearly identified route to value creation. The duration of
these plans can be shortened by transactional activity or lengthened by
adverse economic conditions. Before investing we undertake an extensive due
diligence process, assessing market conditions, management and stakeholders.
Our investments are underpinned by valuations, which we derive using private
equity-based techniques. These include a focus on cash flows, the potential
value of the company to trade or financial buyers and potentially beneficial
changes in capital structure over the investment period.
Our typical investee company has a market capitalisation of under £150 million
at the time of initial investment. We believe that smaller companies provide
the greatest opportunity for our investment style as they are relatively
under-researched, often have more limited resources, and frequently can be
more attractively valued.
We believe that this approach, if properly executed, will generate favourable
risk-adjusted returns for shareholders over the long term.
Market Background
Stock markets were turbulent over the financial period as investors views
oscillated between expectations of a rapid economic recovery led by the United
States, and a disorderly collapse of the Eurozone and the global economy.
The period began with a violent sell off of major stock markets during the
late summer months accompanied with exceptional intra-day volatility often
exceeding swings of over 2% per day. Indiscriminate selling led to 15% falls
in the FTSE 250 and FTSE Smaller Companies indices. Markets then rebounded
from the end of 2011 to the end of the first quarter of 2012 in a response to
quantitative easing, or the prospect of it. During this period highly risky
assets benefited the most as investors decided to go "risk on". Extreme relief
rallies were experienced by the highly indebted "zombie" small caps, with
ratios of debt to EBITDA well in excess of market average and high refinancing
risk. Some of these saw share price increases of up to 200% in little over six
weeks.
After March, markets gave back much of their gains from the first part of the
year, as Greek elections, the lack of a political consensus in Europe, a
slowdown in China, and declining growth forecasts for the UK economy weighed
on sentiment. With inflows into equity funds at best static, it was noticeable
that the market continued to de-rate, with sentiment typically driving shifts
from defensive to cyclical stocks and back again, depending on the mood music
of the market.
Over the twelve months, the FTSE SmallCap ex Investment Companies Index
underperformed the FTSE 100 Index by 3.3%, falling by 6.4%. Smaller Companies
only marginally underperformed the FTSE 250 Index, which fell by 5.2%.
In 2011 the value of public companies acquired was at a historically depressed
level, and was represented almost entirely by the strategic purchase of
Autonomy by HP in August. Changes in the Takeover Code enacted at the end of
last summer were anticipated to make public to private transactions much more
difficult for financial buyers. However, we witnessed a clear acceleration of
public to private ("P2P") activity in the market and the Company's portfolio
in 2012. Many corporate deals involved UK quoted companies with global
operations being acquired by overseas purchasers, often taking advantage of
the depressed ratings of UK equities. Examples included CGI's bid for Logica,
Dentsu's bid for Aegis and Motorola's bid for Psion.
Performance Review
Performance over the period continued to be driven by stock specific factors,
with many of the self-help and recovery situations continuing to play out.
Within the context of our corporate engagement strategy, the tactic of
investing in highly cash generative, niche market leaders, with a high
proportion of overseas earnings and avoiding companies with exposure to UK
public or consumer spending has worked well, helping the NAV to demonstrate
both out-performance with relatively low beta.
Top 5 contributors to performance
Period
Company Valuation attribution
at period end (basis points)
£'000 %
Lupus Capital 8,146 +194
E2V Technologies 6,705 +124
RPC Group 4,207 +108
4imprint 5,607 +96
CVS Group 2,842 +55
Outperforming stocks outnumbered underperforming stocks significantly, with
two-thirds of holdings making a positive contribution, despite the market
falling by 6.4%. Large holdings, Lupus, E2V, RPC, 4imprint and CVS delivered
market beating returns of 16.3%, 10.2%, 10.8%, 14.0% and 16.4% over the year,
materially outperforming the 6.4% fall in the small cap index. The Lupus team
navigated tough end markets in the building products sector well, sold its
non-core marine couplings business and made a bolt on acquisition in North
America. The balance sheet is strong and the dividend was raised by 75% in
March. The management team at E2V completed its restructuring flawlessly,
rounding off with the disposal of the non-core sensors assets for a
consideration of £14.7m, representing 11x operating profits, in May 2012. The
group continues to trade at a significant discount to this rating, despite the
remaining businesses being of higher quality and having better growth
prospects.
RPC's integration of Superfos has been executed well. RPC's results exceeded
our expectations, largely due to better than anticipated organic growth and
despite unfavourable raw material trends in early 2012. Cash generation was
also better than anticipated, despite significantly increased capex.
4imprint's US business continued to grow strongly over the year. Since 2006,
it has grown sales at 15% per annum, during which time its end markets have
been flat. Despite only having 1% market share in a $22bn market, it is the
clear market leader and we believe offers continued strong growth potential.
The disposal of Brand Addition in February was at the bottom end of our
pricing expectations, but was strategically the right course of action. CVS,
the UK's leading operator of vet practices, released positive trading
statements and results through the year, generating strong cash flow. The
online part of the group is trading particularly well.
Although there has been much commentary over the past year on the depressed
level of M&A activity, 15 out of the 21 portfolio holdings of the Company were
involved in M&A - as an acquirer, disposer or a target themselves. There was a
notable pick-up in activity from December onwards. Six portfolio companies
shed non-core assets or divisions, often following on-off discussions lasting
a year or more in some cases. The prices achieved were, apart from one
exception, at the top end of our expectations. In addition, six portfolio
companies made acquisitions.
More notably, the Company benefited from bid approaches for three holdings,
Goals Soccer, Kewill and Psion. In the case of Psion and Goals Soccer,
unfortunately these were small positions. Due diligence had been on-going at
Goals Soccer for some time, and the day after the fund started trying to build
a major position, a bid was announced. Kewill was a medium-sized position,
initially purchased around a year ago.
Three things about these bids have struck us as interesting. Firstly, they
attracted a mix of trade and financial buyers. Secondly, four out of five of
the bidders are from overseas. Thirdly, in the case of Goals Soccer and
Kewill, financial buyers have entered into a competitive situation against one
another, which is unusual. In the case of Kewill, a competing bid was
submitted the day before the Scheme of Arrangement hearing for the initial
bid, some 41 days after the initial bid had been recommended by the board. We
understand from the corporate advisers that such a last minute counter offer
is a unique occurrence.
Most other major holdings also outperformed the market, and we believe are
well positioned to deliver further upside.
Bottom 5 contributors to performance
Period
Company Valuation attribution
at period end (basis points)
£'000 %
Mecom 1,813 (496)
Strategic Recovery Fund II 11,447 (98)
Wilmington 1,237 (68)
Thorntons Sold (48)
Optos 968 (41)
On the negative side Mecom has proven to be both a major disappointment since
December, as well as a large drag on the Company's NAV per share, with the
shares falling 65% over the last year. We have long believed that the group
trades at a significant discount to the sum of parts. Indeed, it has never
sold an asset for less than 7x EV/EBITDA, even in the depths of the financial
crisis. In comparison, the shares have typically traded in the range of 3x to
5x EV/EBITDA. The disposals of the Edda Media and the Polish national titles
in the latter part of 2011 were priced at 7x EBITDA, and reduced the group's
borrowings materially. However, a deteriorating macro environment in the
Netherlands led to a significant profit warning in May. This has been an
exceptionally disappointing result. We believe that there is increasing
impetus on the company's board to execute a swift and orderly break up. If
properly executed this should lead to a material uplift to carrying value.
Strategic Recovery Fund II ("SRF II") fell by 2.8% over the year, marginally
underperforming the Company's NAV, but outperforming the FTSE SmallCap ex
Investment Companies Index.
Despite generating strong cash flow and achieving its profit forecasts through
the year, Wilmington was de-rated and delivered a -20.4% return over the
period. We believe that its current level of profitability and dividend are
sustainable and the rating is undemanding, but that the situation lacks
catalysts. Thorntons was completely exited following an exceptionally poor
trading performance in the autumn. Optos also disappointed. Soon after an
initial toehold position was purchased, the company released its interim
results. Although sales exceeded expectations, poor guidance on the timing of
an increase in costs left the market disappointed on the profit performance.
Our concerns centred mainly around significantly worse cash conversion than
anticipated. With increased dependence on a successful final quarter to the
year, and a flawless ramp up of volume production of the new Daytona product,
the risk/reward ratio appeared less attractive than at the time of purchase.
Dealing Activity
The level of portfolio activity was significantly lower than previous periods,
with disposals of £9.0m (excluding distributions from unlisted investments) in
the period representing around 13% of the weighted average NAV. In addition
£587k of net distributions were received from unlisted investments. £6.7m of
purchases were made with the vast majority of purchases representing
additional investment into existing holdings.
The primary source of proceeds over the period came from top slicing strong
performers. Strong performances from RPC, E2V, KCOM and Lavendon necessitated
some top slicing, raising £2.5m, £2.1m, £0.7m and £0.7m respectively. In
addition, funds were raised from investments which had disappointed, and if
better risk adjusted returns existed elsewhere.
We deployed the proceeds into enlarging existing holdings and establishing
small to medium weights in three new investments. Existing positions in Lupus
and Mecom were increased, accounting for purchases of £0.6m and £1.1m
respectively. Significant top ups were made in CVS, Allocate and Kewill of
£1.0m, £0.6m and £0.6m respectively. The background to these investments has
been detailed in prior reporting periods. £2.8m was deployed in new
investments, mainly Optos (£1.5m), a re-investment into Gooch & Housego
(£1.2m) and two small positions in Psion and Goals Soccer. All were made
through market purchases, largely due to a paucity of attractive secondary
equity issuance during the year.
Optos is a leading designer and manufacturer of devices and solutions to eye
care professionals. The core product line is retinal scanning equipment. The
company is based in Scotland, although derives virtually all of its sales from
overseas markets. Its wide-field retinal scanning technology is, we believe,
unique and superior to its competitors' products and a key asset of the group.
An operational and strategic turnaround was initiated some years ago, which we
believe is starting to bear fruit. A full new product pipeline could see
significantly higher returns to shareholders from the core technology base.
Gooch & Housego is a global designer and manufacturer of precision optical
components and sub-systems, and light measurement instrumentation products. It
has particular expertise in acousto optics and crystal growth technologies.
Products are typically in high value, low volume applications in demanding
industry verticals such as aerospace and defence, healthcare and high
reliability industrials. The share price has de-rated significantly since the
Company exited its position in Autumn 2010, largely due to fears over the
earnings of the cyclical sales of a key product, the Q Switch. We believe that
the share price fall has been overdone, and the company is very modestly rated
compared with its long-term growth potential and strategic value. The balance
sheet has been significantly strengthened and there is negligible debt.
Psion is a developer and provider of ruggedized mobile computing solutions.
The company is nearing the end of a significant three year operational and
strategic change programme, and it is now well placed to capitalise from a
recovery in end markets. There is significant net cash on the balance sheet.
The company has been rated at a significant discount to its strategic value to
trade buyers, in a consolidating sector.
Goals Soccer is a developer and operator of 5-a-side soccer centres in the UK,
trading from 42 centres. In early 2012, the company announced that it would
significantly reduce the speed of rolling out new sites for 12-18 months.
Given that the roll out of sites requires significant capital, the impact of
this change was to increase the free cash generation of the business and drive
a large degearing of its balance sheet. The entry valuation was a significant
discount to precedent M&A - specifically the acquisition of its only major
competitor, Powerleague, by Patron Capital in 2009.
We remain highly selective when making new investments. The nature of the
pipeline has changed of late, with a higher proportion of "fallen growth star"
businesses entering the portfolio. A number of these companies are global
leaders in niche markets, but have suffered from a cocktail of unrealistic
growth expectations, some growing pains and a rating that priced in flawless
execution. Disappointment has led to growth and momentum investors running for
the exit door, often pushing prices way below fair value based on fundamental
analysis. These companies often have strong balance sheets and multiple
capital growth drivers. A failure to re-rate often leads to interest from
trade acquirers. In the short term, these situations are likely to be the main
source of new investments.
Secondary fundraisings remain scarce. Balance sheet repairs of quality smaller
companies have been completed; any rescue rights issues we come across in the
market now tend to be for companies with low quality business models, which we
actively avoid. Fundraisings for M&A purposes are rare; the starting low
ratings of acquirers tend to make all but the most compelling opportunities
challenging to execute.
Portfolio Review
The portfolio remained highly focused, with a total of 20 holdings and with
the top 10 holdings accounting for 82.4% of the portfolio at the end of the
financial period. The portfolio remains predominantly invested in quoted
equities, however the percentage of the portfolio invested in unlisted
securities (including SRF II) changed from 19.0% to 19.3% at the end of the
period due to their strong performance. 2.9% of the portfolio was invested in
cash at the period end.
Portfolio Characteristics
Strategic Equity Smaller
Capital Companies
Consensus Median portfolio
characteristics
Price/Earnings ratio FY1 11.3x 9.6x
Dividend yield 3.3% 3.8%
Price/Book ratio 2.5x 1.0x
Price/Sales ratio 0.9x 0.4x
Price/Cash flow ratio 7.5x n/a
SVG Cash flow yield 14.2% n/a
Forecast earnings growth (FY1) 8.6% 7.8%
Forecast net debt to EBITDA 0.5x 1.7x
Source: Factset Portfolio Analysis System, Investec
Operationally the portfolio has continued to perform well, retaining
attractive valuation characteristics despite the macro uncertainty of the past
year. The one exception is Mecom, which has suffered from deteriorating
markets in the Netherlands and Denmark, leading to downgraded earnings
expectations. The low absolute valuation of the portfolio, along with its
strong expected earnings growth, makes us optimistic about the potential for
further NAV uplift in the medium term. We believe that the majority of
portfolio holdings continue to trade at significant discounts to comparable
trade multiples.
The aggregate net debt/EBITDA for the FTSE UK Smaller Companies Index rose
over the last year from 1.6x to 1.7x. In comparison, the underlying
indebtedness of the portfolio has fallen significantly over the past year from
1.3x net debt/EBITDA to 0.5x, through a mix of free cash flow degearing
balance sheets and non-core asset disposals. Therefore, although the portfolio
trades on a similar p/e ratio, the lower level of gearing indicates that it is
cheaper on a balance sheet adjusted basis.
The dividend yield on the portfolio has increased from 2.9% at the end of June
2011 to 3.3%, consistent with dividends growing materially ahead of earnings
growth and increased corporate health.
Top 10 holdings
A summary of the top 10 investments at 30 June 2012, which
represented approximately 82.3% of net assets (2011: 85.4%), is given below:
2012 2011
Date of % of % of % of
Sector first Cost Valuation invested invested net
Company classification investment £'000 £'000 portfolio portfolio assets
Strategic Recovery Fund II Unquoted
investment Jul 2009 4,255 11,447 17.2 16.6 16.7
Lupus Capital Manufacturing Apr 2007 5,652 8,146 12.2 9.2 11.9
E2V Technologies Technology Oct 2009 2,301 6,705 10.1 11.8 9.8
Lavendon Group Support Nov 2009 3,603 5,640 8.5 8.4 8.2
services
4imprint Group Support Feb 2006 4,885 5,607 8.4 7.3 8.2
services
KCOM Group Telecoms May 2007 2,653 5,226 7.8 8.9 7.6
RPC Group Manufacturing Feb 2007 2,164 4,207 6.3 8.9 6.1
Allocate Software Technology Dec 2009 3,094 3,807 5.7 4.3 5.5
Kewill Technology Mar 2011 2,592 2,898 4.4 3.6 4.2
CVS Group Support services Oct 2010 2,320 2,842 4.3 2.1 4.1
Sector spilt %
Technology 24.9
Unquoted investments 19.3
Manufacturing 18.3
Support services 18.3
Telecoms 7.6
Media 4.5
Retail 4.2
Net cash 2.9
Size split (by market %
capitalisation)
< £100m 32.5
£100m - £300m 21.8
Unquoted investments 19.3
£300m - £500m 17.4
>£500m 6.1
Net cash 2.9
Unlisted Investments
At the time of the interim report the Board was pleased to note that the
progress of SRF II in terms of distributions received and the likely lifespan
of the fund was better than expected at the time of its acquisition. Over the
financial year the Company received a total of £0.4m from SRF II and £0.2m
from Vintage Mizuho I ("Vintage"), bringing the total distributions from
unlisted investments to £0.6m for the year. The SRF II investment period ended
in June 2011 and the fund is now a distributing vehicle. The manager continues
to anticipate the fund will be fully returned by the end of the financial year
ending June 2013. The outstanding commitment relating to Vintage is £1.3m and
its manager has communicated that it does not expect to make any further net
draw downs.
Outlook
We are of the view that the outlook for UK smaller companies is positive. The
broader market remains obsessed with European politics, economic data and the
level of quantitative easing despite the fact that none of these sorts of
macro impacts have historically been correlated to returns from public
equities. Conversely we see low valuations, robust earnings, strong balance
sheets and clear signs of a recovery in corporate M&A activity as clear
drivers of above trend returns from public equities.
It is clear that equity markets remain at highly attractive ratings, compared
with both history and other asset classes. Many equity investors tend to
regard 12-14x p/e as a sensible long-term valuation range for quoted equities.
Markets are trading at a 25-30% discount to this level. As has been pointed
out by many market commentators, there has never been a year since 1970 when
buying the market on a P/E of less than 10 delivered real returns below 10%
per annum over the subsequent decade. Both large and smaller companies are
currently trading well below this level.
Unlike the FTSE 100, the forward earnings growth of the FTSE 250 and FTSE
Smaller Companies indices have remained consistently high single digit/low
double digit. Top line growth has become more difficult over the past year,
and many companies have guided conservatively. We believe that cyclical
companies have managed their cost bases astutely, increasing the proportion of
variable costs to fixed costs. This should enable them to defend earnings more
quickly if sales growth disappoints. In addition, we see no evidence that
companies and their supply chains have anything like the level of surplus
inventory that was present in 2007. Feedback suggests that customer behaviour
is to order "little, often and on short lead times". Therefore, the risk of
widespread destocking leading to collapsing turnover and decimated profits
over a 3-6 month period as experienced in late 2008 and early 2009 appears
unlikely. In addition, many smaller companies tend to supply growing niches
and/or are sufficiently small to seek out growth even in tough markets. The
lower financial gearing of companies mathematically makes the scale of a post
interest and tax earnings collapse significantly lower than four years ago.
Therefore, we do not anticipate any sort of earnings collapse as priced in by
the market, but remain wary that estimates may be optimistic for some
companies.
The corporate sector has decisively and quickly reduced its levels of
borrowings. The average FTSE All-Share constituent plc now has a net
debt/EBITDA ratio of 1x, and this is forecast to continue to fall. There are
three reasons why this is positive for equity investors. Firstly, the
financial risk on equity is much lower. Secondly, corporates are generating
free cash flow even after payment of dividends, which makes existing dividends
not just sustainable, but also potentially growing ahead of expectations.
Thirdly, in an environment of slowing organic sales growth, well capitalised
companies are likely to acquire to drive earnings growth, which normally
disproportionately benefits smaller companies. Therefore, we anticipate both
further degearing, and more importantly M&A to be a significant driver of
returns in the next year.
From a macro perspective, positive news flow, particularly regarding improving
consumer and housing data in North America, continues to be largely ignored.
With UK gilt yields at record lows, and below the rate of inflation, the dash
to "low risk" assets has created a bubble and made them unsafe. With interest
rates at record lows, experience suggests a rotation back into equities cannot
be far away. Financial buyers continue to have record levels of dry powder.
The low rating of quoted companies is proving to be an attractive alternative
to participating in well managed, competitive private auctions. Where the data
is available, it is also clear that private M&A transactions continue to be
completed at significantly higher multiples than the ratings given by public
markets to their quoted equivalents.
On the trading side, volumes remain low, although in our experience liquidity
is better on the ground than the statistics imply. We have often spoken of the
contraction in the sell side broker capacity, driven by poor trading volumes
and a lack of primary and secondary equity issuance. Until recently, the lack
of M&A has also weighed heavily on brokers. Two firms, Collins Stewart and
Evolution, were subject to consolidation over the year, leading to significant
headcount reduction. A poorly functioning sell side is neither in the
interests of investors nor quoted companies. A mix of capacity reduction,
gradually improving volumes and M&A may signal that the worst is over.
To conclude, in our opinion there are far more reasons to expect investment in
public equities to deliver above average returns over the next decade than to
be fearful.
Top 10 Investee Company Review
4imprint Group is the fourth largest distributor of promotional products in
the world with an international network of companies in the UK, USA, Hong Kong
and Europe. We have been involved with the company since a change of
management in 2003. The company has benefited recently from material upgrades
to forecast earnings. Following the disposal of Brand Addition, the fast
growing US business accounts for virtually all of the profits of the group and
the company has significant net cash balances. The rating reflects neither the
growth prospects, nor the quality of the business. Funds managed by SVGIM
currently hold approximately 13% of the company's equity.
Allocate Software is the leading workforce optimisation software applications
provider for global organisations with large, multi-skilled workforces. It is
the clear European market leader in the healthcare vertical market, where the
compelling return on investment for clients is driving significant growth. It
is also the clear lead provider of optimisation software for the global
offshore and defence markets. A strong management team is focused on
delivering continued profitable growth, maximising the commercial potential of
the product suite. SVG became a major shareholder as part of a placing to fund
the acquisition of its Nordic equivalent, Timecare AB, in December 2009. The
company has subsequently made three further acquisitions of complimentary
businesses - Dynamic Change and Zircadian in the UK and RosterOn in Australia.
The quality and visability of earnings is set to improve significantly as
early contracts renew. Funds managed by SVGIM currently hold approximately 8%
of the company's equity.
CVS Group is the UK's leading operator of veterinary practices, with a market
share of c.12%, several times the size of its nearest competitor. CVS has
followed a strategy of consolidating the market through the acquisition of
single and small chains of practices, largely funded by debt. Given the
economics of scale in veterinary drug and products purchasing, the roll up
economics are compelling. SVG became a shareholder following a period of
disappointing trading. The shares de-rated significantly as disappointed
growth investors exited and other investors concerned about the level of
borrowings reduced their holdings. With limited ongoing capex requirement, we
believed that the company could degear rapidly and still continue its roll up
strategy. The entry valuation was undemanding on a cash flow basis and demand
for its services is less discretionary than for many other retailers. Funds
managed by SVGIM currently hold approximately 4% of the company's equity.
E2V Technologies is a global market leader in the design and manufacture of
specialist electronic components and low volume, high value, high reliability
semi-conductors, predominately for the medical, aerospace, defence and
industrial markets. An ill-timed acquisition in September 2008 funded by debt
left the balance sheet of the business over-stretched as the economic downturn
began. A new Finance Director, well known to SVGIM, was appointed in May 2009.
The management team acted, raising new equity to pay down debt as well as
restructure the UK and French cost base, a process which is now largely
complete. The Company made its initial investment during December 2009 via a
placing and a deeply discounted rights issue to refinance the balance sheet.
The restructuring has been executed flawlessly. The final phase was disposal
of non-core assets earlier this year, which has virtually eliminated debt. The
group remains materially undervalued compared to precedent M&A multiples in
its sector. Funds managed by SVGIM currently hold approximately 8% of the
company's equity.
KCOM Group is a provider of communications solutions to businesses in the
public sector in the UK. It also has a very strong regional consumer-based
business based around Hull in East Yorkshire. Following discussions instigated
by shareholders the company announced major changes to its management team in
November 2008. Following further consultation with shareholders the company
has implemented an innovative remuneration package that closely aligns
shareholders and management. Since then, the company has undergone a strategic
review and announced an important network sharing deal with BT Group. The
positive impact of these changes and the company's growth potential has taken
time to be translated into headline sales growth and many potential
shareholders are sceptical that the growth will emerge. However, the
proportion of recurring revenues, and therefore quality of earnings continue
to increase, the cash and dividend returns remain strong and in our view, the
Company has been under broked for some time. Funds managed by SVGIM currently
hold approximately 5% of the company's equity.
Kewill is a leading global provider of software and services to simplify
global trade and logistics. Its applications are used to reduce complexity and
automate manual processes across supply chains, in areas such as sourcing,
customs, compliance, transportation, storage, finance, visibility and
connectivity. The company was founded in 1972 and has sales activities in the
UK, Europe, North America and Asia. We highlighted in the interim report that
M&A activity is a recurrent feature in its sector and believed it unlikely
that Kewill would remain independent in the long term. Following a bid
approach in May and counter bids in June, shareholders have agreed to a final
recommended bid by Francisco Partners. Funds managed by SVGIM currently hold
approximately 3% of the company's equity.
Lavendon Group is the market leader in the rental of powered aerial work
platforms in both Western Europe and the Gulf States. The group entered the
current downturn having over-spent on equipment, and with an overstretched
balance sheet. The nature of powered access equipment is such that capital
expenditures can be reduced materially for a significant amount of time
without detriment to the fleet. We believed that the company would generate
significant surplus cash flow over the two years following investment which
would be used to pay down debt and thus create value for equity shareholders.
We invested in the company via a fundraising in late 2009 which brought the
company's debt down to high but manageable levels, and have been actively
engaged with the board to help drive improved returns. Since 2009, the company
has met its debt reduction targets, announced an operational and strategy
review and executive board changes. A new group CEO was appointed in Q4 2011.
Trading has been stronger in 2012 than many anticipated, with a notable
recovery in the highly profitable Middle Eastern business unit. Funds managed
by SVGIM currently hold approximately 10% of the company's equity.
Lupus Capital is a leading international supplier of building products to the
door and window industry, and was the world's leading manufacturer of marine
breakaway couplings. The company has significant operations in nine separate
countries across Europe, the Americas, Asia and Australasia. The building
products division enjoys clear market leadership in a number of niches, with a
highly diversified customer base, serving both the new build and RMI (repair
and maintenance) markets. The building products division has been adversely
impacted by the significant fall in residential construction activity
experienced since 2007, which, combined with a geared balance sheet, led to a
material fall in the share price through 2008. We began building our stake in
the company in late 2009 following the appointment of a new chairman, who has
subsequently reconstituted the executive management and non-executive board.
Since then, strong cash flows and a disposal of the non-core marine couplings
business have reduced the debt burden substantially. We believe the company
trades at a material discount to its sum of parts valuation and that there is
substantial upside from a medium term recovery in the end markets of the
building products division. In addition, it has management capability and
balance sheet capacity to act as a consolidator which should enhance returns
further. Funds managed by SVGIM currently hold approximately 7% of the
company's equity.
Mecom Group is a European media business. The group owns over 300 printed
titles and over 200 websites in its four divisions, with substantial
operations in the Netherlands, Denmark, Norway and Poland, generating
readership of 23 million per week and attracting 32 million unique website
users per month. The company has undergone substantial corporate restructuring
in the last two years having over-extended its balance sheet through
acquisitions in the run up to the recession. We have engaged extensively with
the company, investigating the progress of its turn around, assisting it with
investor relations and lobbying on its behalf for greater coverage by the
analyst community. Having originally invested in 2005 and fully realised the
cost of that investment before the recession struck, we revisited the
investment case in 2010 and rebuilt a holding. We believe that the company is
worth significantly in excess of its current share price based on precedent
transactions, as evidenced by its own disposals since early 2009, and the
disposal of its Norwegian assets during 2012. Macro headwinds in the
Netherlands have reduced this potential value. Funds managed by SVGIM
currently hold approximately 6% of the company's equity.
RPC Group is Europe's leading manufacturer of rigid plastic packaging.
Following lobbying from SVGIM and another shareholder acting in concert, the
group has initiated a strategic and operational review and made substantial
changes to its board. The management team has performed well against RPC's new
objectives, leading to a significant reduction in group debt and ongoing focus
on improving return on invested capital. As the restructuring ended, RPC
acquired its smaller Scandinavian competitor, Superfos, funded by a mixture of
debt and new equity. It is clear that this acquisition has created value
through substantial cost synergies, although it is too early to judge whether
sales synergies will be delivered. Although the Company has been an investor
for some five years, we believe that good upside still exists as the market
continues to digest the improved focus on shareholder returns. Funds managed
by SVGIM currently hold approximately 3% of the company's equity.
SVG Investment Managers Limited
26 September 2012
All statements of opinion and/or belief contained in this Investment Manager's
report and all views expressed and all projections, forecasts or statements
relating to expectations regarding future events or the possible future
performance of the Company represent SVG Investment Managers Limited's own
assessment and interpretation of information available to it at the date of
this report. As a result of various risks and uncertainties, actual events or
results may differ materially from such statements, views, projections or
forecasts. No representation is made or assurance given that such statements,
views, projections or forecasts are correct or that the objectives of the
Company will be achieved.
Extracts from the Report of the Directors
The Directors present their report and financial statements for the
year ended 30 June 2012.
The Company has been incorporated with an indefinite life. The
Company is registered in England with number 5448627.
Business Review
The Business Review should be read in conjunction with the
Chairman's report and the Investment Manager's report above.
The purpose of the Business Review is to provide an overview of the
business of the Company by:
- Analysing development and performance using appropriate key
performance indicators ("KPIs").
- Outlining the principal risks and uncertainties affecting the
Company.
- Describing how the Company manages these risks.
- Explaining the future business plans of the Company.
- Setting out the Company's environmental, social and ethical
policies.
- Providing information about persons with whom the Company has
contractual or other arrangements which are essential to the business of the
Company.
- Outlining the main trends and factors likely to affect the future
development, performance and position of the Company's business.
Review of the Business of the Company
The principal activity of the Company is to conduct business as an
investment trust. The Company is currently an investment company in accordance
with the provisions of Section 833 of the Companies Act 2006. The Directors do
not envisage any change in the Company's activity in the future.
The Company has received approval from HM Revenue & Customs as an
investment trust under Sections 1158/1159 of the Corporation Tax Act 2010 for
the year ended 30 June 2011 ("Sections 1158/1159"). This approval is subject
to there being no subsequent enquiry under corporation tax self assessment.
Under Sections 1158/1159 companies can obtain `approved' status for tax
purposes, meaning that such companies do not pay capital gains tax on any
profits arising on disposals of their investments and in turn shareholders are
only subject to capital gains tax on the disposal of their shares in the
investment trust. One of the principal requirements for retaining `approved'
status is that the business of the company consists of investing in shares or
other assets with the aim of spreading investment risk.
It is the opinion of the Directors that the Company has directed
its affairs so as to enable it to continue to qualify for approval as an
investment trust for the year ended 30 June 2012.
New regulations for obtaining and retaining investment trust status
have been published by HM Revenue & Customs and are effective for all
accounting periods commencing on or after 1 January 2012. An application for
approval as an investment trust must be made within 90 days after the end of
the first accounting period of the Company following implementation of the new
regime. The first accounting period affected by the new regulations is the
year ended 30 June 2013 and therefore the application must be made by 28
September 2013. If the application is accepted, the Company will be treated as
an investment trust company for that period and for each subsequent accounting
period, subject to there being no subsequent serious breach of the
regulations.
Investment objective
The investment objective of the Company is to achieve absolute
returns (i.e. growth in the value of investments) rather than relative returns
(i.e. attempting to out-perform selected indices) over a medium-term period,
principally through capital growth.
Investment policy
The Company invests primarily in equity and equity-linked securities quoted on
markets operated by the London Stock Exchange where the Investment Manager
believes the securities are undervalued and could benefit from strategic,
operational or management initiatives. The Company also has the flexibility to
invest up to 20% of the Company's gross assets at the time of investment in
securities quoted on other recognised exchanges.
The Company may invest up to 20% of its gross assets at the time of investment
in unquoted securities, provided that, for the purpose of calculating this
limit, any undrawn commitments which may still be called shall be deemed to be
an unquoted security.
The maximum investment in any single investee company will be no more than 15%
of the Company's investments at the time of investment.
The Company will not invest more than 10%, in aggregate, of the value of its
total assets at the time the investment is made in other listed closed-end
investment funds provided that this restriction does not apply to investments
in any such funds which themselves have published investment policies to
invest no more than 15% of their total assets in other listed closed-end
investment funds.
Other than as set out above, there are no specific restrictions on
concentration and diversification. The Board does expect the portfolio to be
relatively concentrated, with the majority of the value of investments
typically concentrated in the securities of 10 to 15 issuers across a range of
industries. There is also no specific restriction on the market capitalisation
of issues into which the Company will invest, although it is expected that the
majority of the investments by value will be invested in companies with a
market capitalisation of less than £300 million.
The Company's Articles of Association permit the Board to take on borrowings
of up to 25% of the net asset value at the time the borrowings are incurred
for investment purposes.
Investment Manager
The Investment Manager appointed by the Company is SVGIM.
Established in 2002, the Public Equity Team of SVGIM was one of the first in
the UK to invest in publicly traded equities using private equity techniques.
The team now consists of five investment professionals who combine a number of
complimentary skill sets, including corporate finance, traditional fund
management, research and private equity disciplines. SVGIM currently has funds
under management of over £200m.
Performance
Over the year to 30 June 2012, net assets have decreased by 5.3% to
£68.6 million (1.3% on a per share basis). Further information on the
performance of the Company's portfolio is contained in the Investment
Manager's report above.
The Company's investment objective is one of capital growth and it
is anticipated that returns for shareholders will derive primarily from
capital gains. The Board intends to declare final dividends only where
necessary to comply with investment trust rules. The Board recommends a final
dividend of 1.50p (2011: 0.44p) per Ordinary share, amounting to £1,010,000
(2011: £309,000).
Share capital
At the year end the Company's issued share capital comprised
67,317,324 Ordinary shares, representing £6,731,732 nominal value and 100% of
the Company's issued share capital. No shares were held in treasury during the
year and at the year end (2011: 70,122,203 shares in issue and no shares in
treasury). At General Meetings of the Company, the holders of Ordinary shares
are entitled to one vote for every share held. At the AGM held on 8 November
2011 the Company was authorised to make market purchases of its own shares up
to a limit of 10,511,318 Ordinary shares.
Performance Analysis using KPIs
At quarterly Board meetings the Directors consider a number of key
performance indicators to assess the Company's success in achieving its
objective, principally: the NAV per Ordinary share, the movement in the
Company's share price, the discount of the share price in relation to the NAV
and the ongoing charges.
- The Company's Statement of comprehensive income is set out below.
- The NAV per Ordinary share at 30 June 2012 was 101.96p (2011:
103.35p).
- The mid market share price at 30 June 2012 was 82.00p (2011:
93.00p).
- The average discount to NAV at 30 June 2012 was 17.65% (2011:
19.14%).
- Ongoing charges at 30 June 2012 were 1.15% (2011: 1.20%).
Tender Offer
On 28 February 2012 the Board announced that it was proposing to
replace the Company's annual relative investment performance and discount
tests, measured as at 30 June each year, with semi-annual periodic tender
offers for up to 4% of the Ordinary shares in issue at a tender price equal to
the NAV (including undistributed current period financial income and the
estimated tender offer costs) per share at the time of the relevant tender
offer less a 10% discount.
A circular setting out the terms and conditions of the first
periodic tender offer was sent to shareholders on 30 March 2012. At a General
Meeting held on 3 May 2012 shareholders passed a special resolution approving
the periodic tender offer which closed on 4 May 2012.
A total of 2,804,879 Ordinary shares, representing £280,488 nominal
value and 4% of the Company's current issued share capital, were purchased by
Canaccord Genuity Limited at 95.81p per share, pursuant to the tender offer
which the Company then bought back for cancellation.
Shareholder Composition
Following a review of the Company's shareholder register, the
Directors have recently become aware that, as a result of certain secondary
market trades, the Company does not currently meet the continuing obligation
under the FSA's Listing Rules for a company to maintain its Main Market
listing that 25% of the issued share capital must be in public hands. For the
purposes of the public hands test, shareholders who hold 5% or more of the
Company's issued share capital are disregarded (unless, for corporate
shareholders, the underlying holdings are separately managed funds and
accordingly may be disaggregated), as well as, inter alia, the Directors'
shareholdings. At present, approximately 22% of the Company's issued share
capital is held in public hands.
The Board hopes that the Company will meet the 25% public hands
requirement in the near term following a renewed marketing effort on the part
of the Company's Investment Manager. Should the Company not be able to improve
the number of shares deemed to be in public hands, it may not be possible to
continue its listing on the Main Market of the London Stock Exchange. In such
circumstances, the Company would look to move trading in the Company's shares
to the London Stock Exchange's Specialist Fund Market which would, being a
regulated market, continue to preserve the Company's tax beneficial investment
trust status.
Principal Risks and Uncertainties Associated with the Business
General
Changes in economic conditions (including, for example, interest
rates, foreign exchange rates and rates of inflation), industry conditions,
competition, changes in the law, political and diplomatic events and trends,
tax laws and other factors can substantially affect the value, adversely or
positively, of investments made by the Company and, therefore, the Company's
performance and prospects, in addition to the value of the shares.
Market risk
The Company's investments are subject to normal market fluctuations
and the risks inherent in the purchase, holding or selling of equity
securities and related instruments, and there can be no guarantee that the
quoted value of the Company's investments will be realisable in the event of a
sale.
Market price and discount volatility
The market price of the shares, as well as being affected by the
Company's net asset value, also takes into account prevailing interest rates,
supply and demand for the shares, market conditions and general investor
sentiment. As a result, the total market value of the shares in the Company
may vary considerably from the net asset value per share of the Company. In
addition, other factors such as a concentrated shareholder base may contribute
to infrequent trading or volatile share price movements.
Reliance on the Investment Manager
The Investment Manager has the right to resign as the Investment
Manager under the Investment Management Agreement. The Investment Manager must
give 12 months' written notice to the Company. Such a resignation could have
an adverse effect on the Company's performance and prospects.
Nature of investee companies
The investment portfolio is focused towards small and mid-sized
companies. These companies may involve a higher degree of risk than larger
sized companies. In addition, while the investment policy of the Company is to
identify and invest in companies that the Investment Manager believes are
undervalued, there is a risk that the Investment Manager may be unable to
deliver on the strategic, management and operational initiatives identified at
the time of initial investment and, as such, companies may not prove to be
capable of generating additional value for shareholders and so would not
assist in achieving the Company's investment objective.
Concentrated portfolio
The majority of the Company's portfolio is invested in 10 to 15
companies operating in a number of industries, as was the initial intention.
As a result the portfolio could carry a higher degree of risk than a more
diversified portfolio.
As the Company's objective is to achieve absolute returns rather
than returns relative to a particular index or benchmark over a medium-term
period, the portfolio is managed without comparison to any stock market index.
As a result there will be periods when the Company's performance will not
correlate with such indices.
Borrowing and gearing
At 30 June 2012, the Company had not drawn down under a revolving
credit facility of £5 million with The Royal Bank of Scotland. This facility
expired on 14 July 2012 and has not been replaced. The use of gearing can
magnify both gains and losses in the asset value of the Company, dependent on
the value of the portfolio at the time.
The Company's Articles of Association permit borrowings of up to
25% of the net asset value at the time the borrowings are incurred.
Debt investments
Any debt securities that may be held by the Company will be
affected by any changes to interest rates.
Unlisted investments
The Company may invest a proportion of its gross assets in
companies that are not listed or admitted to trading upon any recognised stock
exchange. These investments may be illiquid and difficult to realise and more
volatile than investments of larger, longer-established businesses. The SRF II
valuation is updated monthly and other unlisted investments are updated at
least once every six months.
Overseas investments
The Company may invest up to 20% of its gross assets in companies
listed or traded on recognised stock exchanges other than the London Stock
Exchange. In any instances where the Company does not hedge its currency
exposure, the movement of exchange rates between sterling and any other
currencies in which the Company's investments are denominated may have a
material effect, unfavourable as well as favourable, on the return otherwise
experienced on the investments made by the Company. Although the Investment
Manager will seek to manage any foreign exchange exposure in relation to the
Company, there is no assurance that this can be performed effectively.
Currency hedging may force the Investment Manager to realise underlying
investments as well as affecting the overall value of the portfolio and the
net asset value per share.
Movements in the foreign exchange rate between sterling and the
currency applicable to a particular shareholder may have an impact upon that
shareholder's returns in its own currency of account.
Future trends
Both the Chairman's report and the Investment Manager's report
above contain `Outlook' sections setting out their view of the future.
Charges against capital
The Company's current accounting policy is to charge its
operational costs to revenue, with the exception of any performance fee, which
will be charged wholly to capital. In the event of the Company making a
revenue loss or becoming liable to a performance fee, it may need to liquidate
some of its investments to pay operational costs or the performance fee or
both.
Regulatory risks
A breach of Companies Act regulations and FSA/London Stock Exchange
rules may result in the Company being liable to fines or the suspension of the
Company from listing on the London Stock Exchange.
The Board, with its advisers, monitors the Company's regulatory
obligations both on an ongoing basis and at quarterly Board meetings.
If the Company did not comply with the provisions of Sections
1158/1159, it would lose investment trust status and become subject to
corporation tax on realised capital gains. In order to minimise this risk, the
Directors, the Investment Manager and the Company Secretary monitor the
Company's compliance with the key criteria of Sections 1158/1159 on a monthly
basis. At quarterly Board Meetings, compliance with these provisions is
discussed in detail between the Board, the Investment Manager and the Company
Secretary.
New regulations for obtaining and retaining investment trust status
came into force on 1 January 2012.
Financial risks
The financial situation of the Company is reviewed in detail at
each Board meeting, monitored and approved by the Board and the Audit
Committee. The risks are expanded further in Note 17.
Financial instruments
As part of its normal operations, the Company holds financial
assets and financial liabilities. Full details of the role of financial
instruments in the Company's operations are set out in Note 17.
Social, Environmental, Community and Employee Issues
The Company has no employees and the Board consists entirely of
non-executive Directors. As an investment trust, the Company has no direct
impact on the community or the environment and as such has no policies in this
area. In carrying out its activities and in relationships with suppliers, the
Company aims to conduct itself responsibly, ethically and fairly.
Investment Management Agreement
The Company's investments are managed by SVG Investment Managers
Limited under an agreement dated 12 July 2005.
The Investment Manager's appointment is subject to termination on
12 months' notice given at any time by either party.
There are no specific provisions contained within the Investment
Management Agreement relating to compensation payable in the event of
termination of the agreement other than entitlement to fees, including
performance fees, which would be payable within any notice period.
However, the Investment Management Agreement expressly permits, in
the event that a continuation resolution proposed at any Annual General
Meeting is not passed, the Company to give notice terminating the Investment
Manager's appointment without any compensation being payable to the Investment
Manager in lieu of any period of notice otherwise required under the
Investment Management Agreement.
At regular Board meetings the Directors keep under review the
performance of the Investment Manager. In the opinion of the Directors the
continuing appointment of SVG Investment Managers Limited as Investment
Manager is in the best interests of shareholders as a whole.
Investment Manager's fees
The Investment Manager is entitled to receive from the Company a basic fee
together, where applicable, with a performance fee.
Basic fee
The basic management fee accrues weekly and is payable quarterly in arrears.
Following shareholder approval at a General Meeting held on 9 November 2010,
the basic fee is the lower of (i) 1.0% of the adjusted NAV of the Company and
(ii) 1.0% per annum of the Company's market capitalisation. In order to avoid
double charging of basic management fees payable to the Investment Manager by
the Company, the NAV of the Company is reduced by the value of the Company's
limited partnership interest in SRF II.
Performance fee arrangements
The Company's performance is measured by comparing the NAV total return per
share over a performance period against the total return performance of the
FTSE SmallCap ex Investment Companies Index (calculated before any accrual for
any performance fee to be paid in respect of the relevant performance period)
at the end of the relevant performance period exceeds both:
(i) the NAV per share at the beginning of the relevant performance period as
adjusted by the aggregate amount of (a) the total return on the FTSE SmallCap
ex Investment Companies Index (expressed as a percentage) and (b) 2.0% per
annum over the relevant performance period ("Benchmark NAV"); and
(ii) the high watermark (which is the highest NAV per share by reference to
which a performance fee was paid previously).
Currently, the Investment Manager will be entitled to 15% of the excess over
the higher of the Benchmark NAV per share and the high watermark.
Payment of a performance fee that has been earned will be deferred to the
extent that
the amount payable exceeds 1.75% per annum of the Company's NAV at the end of
the relevant performance period (amounts deferred will be payable when, and to
the extent that, following any later performance period(s) with respect to
which a performance fee is payable, it is possible to
pay the deferred amounts without causing that cap to be exceeded or the
relevant NAV total return per share to fall below the relevant Benchmark NAV
per share and the relevant high watermark).
Administration Agreement
Under an agreement dated 12 July 2005, company secretarial services and the
general administration of the Company are undertaken by Capita Sinclair
Henderson Limited ("CSH"). The fee charged in the year was £77,000 of which
£27,000 was refunded for VAT giving a net figure of £50,000. The fee is
subject to annual review based on the UK Retail Price Index. In the event that
there is an increase in the issued share capital of the Company, the fee will
be adjusted upwards by agreement between the Company and CSH. The agreement
may be terminated by either party giving notice of not less than six months.
Payment of Suppliers
It is the Company's policy to obtain the best possible terms for all business
and therefore there is no consistent policy as to the terms used. The Company
agrees with its suppliers the terms on which business will take place and it
is our policy to abide by those terms. Trade creditors at 30 June 2012 were
£Nil (2011: £Nil).
General Meetings
At a General Meeting held on 3 May 2012, shareholders passed a special
resolution approving the first semi-annual periodic tender offer for up to 4%
of the Ordinary shares in issue. The tender price was equal to the NAV
(including undistributed current period financial income and the estimated
tender offer costs) per share at the time of the relevant tender offer less a
10% discount. The periodic tenders replace the Company's annual relative
investment performance and discount tests which were measured as at 30 June
each year.
Going Concern
The Company's investment objective and investment policy, which are described
above and which are subject to regular Board monitoring processes, are
designed to ensure that the Company is invested mainly in liquid, listed
securities. Cash is held only with banks approved and regularly reviewed by
the Investment Manager. Note 17 sets out the financial risk profile of the
Company and indicates the effect on the assets and liabilities of falls (and
rises) in the value of securities and market rates of interest.
The Board announced on 28 February 2012 that it was proposing to replace the
Company's annual relative performance and discount tests, which were measured
as at 30 June each year, with semi-annual periodic tender offers for up to 4%
of the Ordinary shares in issue at a tender price equal to NAV (including
undistributed current period financial income and the estimated tender offer
costs) per share at the time of the relevant tender offer less a 10% discount,
which was subsequently passed by shareholders at a General Meeting held on 3
May 2012.
Having reviewed the operation of the annual relative discount test and
consulted investors representing a substantial majority of the Company's
issued share capital, the Board concluded that replacing the annual relative
performance and discount tests with small periodic tender offers priced at a
10% discount to NAV per share should:
- permit more orderly management of the Company's portfolio, which is
typically more concentrated than those of its peers - the Company should be
able to fund the regular and pre-planned buying back of shares pursuant to the
periodic tender offers through existing liquid resources, such as available
cash and thereby avoid placing pressure on the Investment Manager to realise
investments solely for the purpose of funding share buy-backs or to finance
larger or higher-priced tender offers; and
- ensure equality of treatment for all shareholders - periodic tender offers
will provide all shareholders who wish to realise any of their investment in
the Company access to regular and visible liquidity for at least a proportion
of their investment (but without limiting their ability to trade their shares
in the secondary market); and
- maintain the Company as a viable investment fund, thereby minimising any
adverse impact over time on the liquidity in the shares and the Company's
ongoing charges.
In addition, the terms of the periodic tender offers were such that they
should be NAV enhancing for the remaining shares and, in any event, they would
not be NAV dilutive for such shares.
Shareholders continue to have the opportunity, at each Annual General Meeting
of the Company, to vote on the continuation of the Company. The Investment
Manager has agreed that, if any such resolution is not passed, the Company
will be entitled to give notice terminating the Investment Manager's
appointment without any compensation being payable to the Investment Manager
in lieu of any period of notice otherwise required under the Investment
Management Agreement.
The Directors believe, in the light of this and the controls and review
processes noted above and bearing in mind the nature of the Company's business
and assets, that the Company has adequate resources to continue in operational
existence for the foreseeable future.
For this reason, the Board continues to adopt the going concern basis in
preparing the financial statements.
On behalf of the Board
John Hodson
Chairman
26 September 2012
The annual report contains the following statements:
Statement of Directors' responsibilities in respect of the
financial statements
The Directors are responsible for preparing the Annual Report and the
financial statements in accordance with applicable United Kingdom law and
those International Financial Reporting Standards ("IFRS") adopted by the
European Union ("EU").
Under Company law the Directors must not approve the financial statements
unless they are satisfied that they present fairly the financial position, the
financial performance and cash flows of the Company for that period. In
preparing these financial statements, the Directors are required to:
- select suitable accounting policies in accordance with IAS 8: Accounting
Policies, Change in Accounting Estimates and Errors, and then apply them
consistently;
- present information, including accounting policies, in a manner that
provides relevant, reliable, comparable and understandable information;
- provide additional disclosures when compliance with the specific
requirements in IFRS is insufficient to enable users to understand the impact
of particular transactions, other events and conditions on the Company's
financial position and financial performance;
- state that the Company has complied with IFRS, subject to any material
departures disclosed and explained in the financial statements; and
- make judgements and estimates that are reasonable and prudent.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and 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, to the best of their knowledge, state that:
- the financial statements, prepared in accordance with IFRS as adopted by the
EU, give a true and fair view of the assets, liabilities, financial position
and loss of the Company; and
- the Chairman's report, Investment Manager's report and Report of the
Directors include a fair review of the development and performance of the
business and the position of the Company together with a description of the
principal risks and uncertainties that it faces.
The Directors confirm that, so far as they are each aware, there is no
relevant audit information of which the Company's Auditor is unaware, and each
Director has taken all the steps that ought to have been taken as a Director
to make himself aware of any relevant audit information and to establish that
the Company's Auditor is aware of that information.
The Directors are responsible 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 financial statements may differ from legislation in other jurisdictions.
On behalf of the Board
John Hodson
Chairman
26 September 2012
Non-Statutory Accounts
The financial information set out below does not constitute the Company's
statutory accounts for the year ended 30 June 2012 and 30 June 2011 but is
derived from those accounts. Statutory accounts for 2012 will be delivered to
the Registrar of Companies in due course. The Auditor has reported on those
accounts; their report was (i) unqualified, (ii) did not include a reference
to any matters to which the Auditor drew attention by way of emphasis without
qualifying their report and (ii) did not contain a statement under Section 498
(2) or (3) of the Companies Act 2006. The text of the Auditor's report can be
found in the Company's full Annual Report and Accounts at
www.strategicequitycapital.com.
Statement of comprehensive income
for the year ended 30 June 2012
Year ended 30 June 2012 Year ended 30 June 2011
Revenue Capital Revenue Capital
return return Total return return Total
Note £'000 £'000 £'000 £'000 £'000 £'000
Investments
(Losses)/gains on
investments held at fair
value through profit or
loss - (1,818) (1,818) - 27,131 27,131
8 - (1,818) (1,818) - 27,131 27,131
Income
Dividends 2 1,905 - 1,905 1,253 - 1,253
Interest 2 16 - 16 26 - 26
Underwriting commission 2 - - - 23 - 23
1,921 - 1,921 1,302 - 1,302
Expenses
Investment Manager's fee 3 (442) - (442) (473) - (473)
Other expenses 4 (305) (129) (434) (469) - (469)
Total expenses (747) (129) (876) (942) - (942)
Net return/(loss)
before finance costs
and taxation 1,174 (1,947) (773) 360 27,131 27,491
Finance costs
Interest payable (48) - (48) (50) - (50)
Total finance costs (48) - (48) (50) - (50)
Net return/(loss)
before taxation 1,126 (1,947) (821) 310 27,131 27,441
Taxation 5 - - - - - -
Net return/(loss) and
total comprehensive
income for the year 1,126 (1,947) (821) 310 27,131 27,441
pence pence pence pence pence pence
Return/(loss) per
Ordinary share
Basic 7 1.61 (2.79) (1.18) 0.40 35.60 36.00
The total column of this statement represents the Company's profit
and loss account. The supplementary revenue and capital return columns are
both prepared under guidance published by the AIC. All items in the above
statement derive from continuing operations. No operations were acquired or
discontinued during the year.
The notes form part of these financial statements.
Statement of changes in equity
for the year ended 30 June 2012
Share Capital
Note Share premium Special Capital redemption Revenue
capital account reserve reserve reserve reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
For the year ended
30 June 2012
1 July 2011 7,011 5,246 54,435 4,117 970 691 72,470
Net return/(loss) and
total comprehensive
income for the year - - - (1,818) - 1,126 (692)
Dividends paid 6 - - - - - (309) (309)
Share buy back
expenses - - - (129) - - (129)
Shares bought
back for cancellation (280) - (2,701) - 280 - (2,701)
30 June 2012 6,731 5,246 51,734 2,170 1,250 1,508 68,639
For the year ended
30 June 2011
1 July 2010 7,981 5,246 60,398 (23,014) - 611 51,222
Net return and total
comprehensive income
for the year - - - 27,131 - 310 27,441
Dividends paid 6 - - - - - (230) (230)
Treasury shares
cancelled (305) - - - 305 - -
Shares bought
back for cancellation (665) - (5,963) - 665 - (5,963)
30 June 2011 7,011 5,246 54,435 4,117 970 691 72,470
The notes form part of these financial statements.
Balance sheet as at 30 June 2012
30 June 30 June
2012 2011
Note £'000 £'000
Non-current assets
Investments held at fair value through profit or loss 8 66,648 71,336
Current assets
Other receivables 10 222 217
Cash and cash equivalents 14 2,204 2,324
2,426 2,541
Total assets 69,074 73,877
Current liabilities
Other payables 11 435 1,407
435 1,407
Total assets less current liabilities 68,639 72,470
Net assets 68,639 72,470
Capital and reserves:
Share capital 12 6,731 7,011
Share premium account 13 5,246 5,246
Special reserve 13 51,734 54,435
Capital reserve 13 2,170 4,117
Capital redemption reserve 13 1,250 970
Revenue reserve 13 1,508 691
Total shareholders' equity 68,639 72,470
pence pence
Net asset value per share
Basic 15 101.96 103.35
The financial statements were approved by the Board of Directors
and authorised for issue on 26 September 2012. They were signed on its behalf
by
J Hodson
Chairman
26 September 2012
The notes form part of these financial statements.
Statement of cash flows
for the year ended 30 June 2012
Year ended Year ended
30 June 2012 30 June 2011
Note £'000 £'000
Operating activities
Net return/(loss) before finance
costs and taxation (773) 27,491
Adjustment for losses/(gains) 1,818 (27,131)
on investments and foreign exchange
Share buy back expenses 129 -
Interest paid (48) (50)
Operating cash flows before
movements in working capital 1,126 310
Increase in receivables (5) (39)
(Decrease)/increase in payables (9) 22
Purchases of portfolio investments (6,932) (17,367)
Sales of portfolio investments 9,612 23,451
Net cash flow from
operating activities 3,792 6,377
Financing activities
Equity dividends paid 6 (309) (230)
Shares bought back in the year 14 (3,474) (5,190)
Share buy back expenses (129) -
Net cash flow from
financing activities (3,912) (5,420)
(Decrease)/increase in
cash and cash equivalents
for the year (120) 957
Cash and cash equivalents
at start of the year 2,324 1,367
Cash and cash equivalents
at 30 June 2012 14 2,204 2,324
The notes form part of these financial statements.
Notes to the financial statements for the year ended 30 June 2012
1.1 Corporate information
Strategic Equity Capital plc is a public limited company
incorporated and domiciled in the United Kingdom and registered in England and
Wales under the Companies Act 2006 whose shares are publicly traded. The
Company is an investment company as defined by Section 833 of the Companies
Act 2006.
The Company carries on business as an investment trust within the
meaning of Sections 1158/1159 of the Corporation Tax Act 2010.
The financial statements of Strategic Equity Capital plc for the
year ended 30 June 2012 were authorised for issue in accordance with a
resolution of the Directors on 26 September 2012.
1.2 Basis of preparation and statement of compliance
The financial statements of the Company have been prepared in
accordance with IFRS issued by the International Accounting Standards Board
(as adopted by the EU), interpretations issued by the International Financial
Reporting Interpretations Committee, and applicable requirements of United
Kingdom company law, and reflect the following policies which have been
adopted and applied consistently. Where presentational guidance set out in the
Statement of Recommended Practice ("SORP") for investment trusts issued by the
AIC (as revised in 2009) is consistent with the requirements of IFRS the
Directors have sought to prepare financial statements on a basis compliant
with the recommendations of the SORP.
The financial statements of the Company have been prepared on a
going concern basis.
Convention
The financial statements are presented in Sterling, being the
currency of the Primary Economic Environment in which the Company operates,
rounded to the nearest thousand.
Segmental reporting
The Directors are of the opinion that the Company is engaged in a
single segment of business, being investment business.
1.3 Accounting policies
Investments
All investments in the scope of IAS 39 held by the Company are
classified as "fair value through profit or loss". As the Company's business
is investing in financial assets with a view to profiting from their total
return in the form of interest, dividends or increase in fair value, listed
equities and fixed income securities are designated as fair value through
profit or loss on initial recognition. The Company manages and evaluates the
performance of these investments on a fair value basis in accordance with its
investment strategy. Investments are initially recognised at cost, being the
fair value of the consideration.
After initial recognition, investments are measured at fair value,
with movements in fair value of investments and impairment of investments
recognised in the Statement of comprehensive income and allocated to capital.
Gains and losses on investments sold are calculated as the difference between
sales proceeds and cost.
Capital distributions from SRF II are accounted for on a reducing
cost basis; cash received is first applied to reducing the historical cost of
an investment; a realised gain will be recognised only when the cost has been
reduced to nil.
For investments actively traded in organised financial markets,
fair value is generally determined by reference to Stock Exchange quoted
market bid prices at the close of business on the Balance sheet date, without
adjustment for transaction costs necessary to realise the asset.
In respect of unquoted instruments, or where the market for a
financial instrument is not active, fair value is established by using
recognised valuation methodologies, in accordance with International Private
Equity and Venture Capital ("IPEVC") Valuation Guidelines. New investments are
initially carried at cost, for a limited period, being the price of the most
recent investment in the investee company. This is in accordance with IPEVC
Guidelines as the cost of recent investments will generally provide a good
indication of fair value. Fair value is the amount for which an asset could be
exchanged between knowledgeable, willing parties in an arm's length
transaction.
Trade date accounting
All "regular way" purchases and sales of financial assets are
recognised on the "trade date" i.e. the day that the entity commits to
purchase or sell the asset. Regular way purchases, or sales, are purchases or
sales of financial assets that require delivery of the asset within a time
frame generally established by regulation or convention in the market place.
Income
Dividends receivable on quoted equity shares are taken into account
on the ex-dividend date. Where no ex-dividend date is quoted, they are brought
into account when the Company's right to receive payment is established. Other
investment income and interest receivable are included in the financial
statements on an accruals basis. Dividends receivable from UK registered
companies are accounted for net of imputed tax credits. Income on fixed income
securities is recognised on a time apportionment basis from the date of
purchase.
Expenses
All expenses are accounted for on an accruals basis. The Company's
investment management and administration fees, finance costs and all other
expenses are charged through the Statement of comprehensive income. These
expenses are allocated 100% to the revenue column of the Statement of
comprehensive income. The Investment Manager's performance fee is allocated
100% to the capital column of the Statement of comprehensive income. In the
opinion of the Directors the fee is awarded entirely for the capital
performance of the portfolio. Costs incurred in relation to the tender offer
process have been allocated to the capital column in the Statement of
comprehensive income.
Cash and cash equivalents
Cash in hand and at bank and short-term deposits which are held to
maturity are carried at fair value. Cash and cash equivalents are defined as
cash in hand, demand deposits and short-term, highly liquid investments
readily convertible to known amounts of cash and subject to insignificant risk
of changes in value. Bank overdrafts that are repayable on demand which form
an integral part of the Company's cash management are included as a component
of cash and cash equivalents for the purpose of the Statement of cash flows
and Balance sheet.
Bank loans and borrowings
All bank loans and borrowings are initially recognised at cost,
being the fair value of the consideration received, less issue costs where
applicable. After initial recognition, all interest-bearing loans and
borrowings are subsequently measured at amortised cost, any difference between
cost and redemption value being recognised in the Statement of comprehensive
income over the period of the borrowings on an effective interest rate basis.
Taxation
Income tax on the profit or loss for the year comprises current and
deferred tax. Income tax is recognised in the Statement of comprehensive
income except to the extent that it relates to items recognised directly in
equity, in which case it is recognised in equity.
Current tax is the expected tax payable on the taxable income for
the year, using tax rates enacted or substantively enacted at the Balance
sheet date, and any adjustment to tax payable in respect of previous years.
The tax effect of different items of expenditure is allocated between the
revenue and capital columns of the Statement of comprehensive income on the
same basis as the particular item to which it relates, using the Company's
effective rate of tax, as applied to those items allocated to revenue, for the
accounting year.
Deferred income tax is provided on all temporary differences at the
Balance sheet date between the tax basis of assets and liabilities and their
carrying amount for financial reporting purposes. Deferred income tax
liabilities are measured on an undiscounted basis at the tax rates that are
expected to apply to the year when the liability is settled, based on tax
rates (and tax laws) that have been enacted or substantively enacted at the
Balance sheet date. Deferred tax assets are recognised to the extent that it
is probable that taxable profits will be available against which deductible
temporary differences can be utilised.
Dividends payable to shareholders
Interim dividends to shareholders are recognised as a deduction
from equity in the period in which they are paid. Final dividends to
shareholders are recognised as a deduction from equity in the year in which
they have been declared and approved by the shareholders. The final dividend
is proposed by the Board and is not declared until approved by the
shareholders at the Annual General Meeting following the year end. Dividends
are charged to the Statement of changes in equity.
Share capital transactions
Incremental costs directly attributable to the issuance of shares
are recognised as a deduction from equity. When share capital recognised as
equity is repurchased, the amount of the consideration paid, including
directly attributed costs, is recognised as a deduction from equity.
Repurchased shares are either classified as treasury shares and are presented
as a deduction from stockholders' equity, or are cancelled.
Foreign currency transactions
The currency of the Primary Economic Environment in which the
Company operates is Sterling which is also the presentational currency.
Transactions denominated in foreign currencies are translated into Sterling at
the rates of exchange ruling at the date of the transaction.
Investments and other monetary assets and liabilities are converted
to Sterling at the rates of exchange ruling at the Balance sheet date.
Exchange gains and losses relating to investments and other monetary assets
and liabilities are taken to the capital column of the Statement of
comprehensive income.
Use of estimates
The preparation of financial statements requires the Company to
make estimates and assumptions that affect items reported in the Balance sheet
and Statement of comprehensive income at the date of the financial statements.
Although the estimates are based on best knowledge of current facts,
circumstances, and, to some extent, future events and actions, the Company's
actual results may ultimately differ from those estimates, possibly
significantly.
Use of significant estimates - in respect of unquoted instruments,
or where the market for a financial instrument is not active, fair value is
established by using recognised valuation methodologies, in accordance with
IPEVCValuation Guidelines. New investments are initially carried at cost, for
a limited period, being the price of the most recent investment in the
investee company. This is in accordance with IPEVC Guidelines as the cost of
recent investments will generally provide a good indication of fair value.
Fair value is the amount for which an asset could be exchanged between
knowledgeable, willing parties in an arm's length transaction.
1.4 New standards and interpretations not applied
IASB and IFRIC have issued the following standards and
interpretations which are not effective for the year ended 30 June 2012 and
have not been applied in preparing these financial statements.
International Accounting Standards (IAS/IFRS) Effective date
IFRS 9 Financial Instruments: 1 January 2015
Classification & Measurement
IFRS 10 Consolidated Financial Statements 1 January 2013
IFRS 12 Disclosure of Interests in Other Entities 1 January 2013
IFRS 13 Fair Value Measurement 1 January 2013
IAS 1 Amendments resulting
from annual improvements 1 January 2013
IAS 27 Reissued as IAS 27 Consolidated
and Separate Financial Statements
(as amended in 2011) 1 January 2013
The Directors do not anticipate that the initial adoption of theabove standards, amendments and interpretations will have a material impact on
the Company's financial statements in the period of initial application.
2 Income
30 June 2012 30 June 2011
£'000 £'000
Income from investments:
UK dividend income 1,905 1,253
Liquidity fund income 11 26
1,916 1,279
Other income:
Underwriting commission - 23
Other interest income 5 -
5 23
1,921 1,302
Total income comprises:
Dividends 1,905 1,253
Interest 16 26
Underwriting commission - 23
1,921 1,302
Income from investments:
Listed UK 1,905 1,253
Listed overseas 11 26
1,916 1,279
3 Investment Manager's fee
30 June 2012 30 June 2011
Revenue Capital Revenue Capital
return return Total return return Total
£'000 £'000 £'000 £'000 £'000 £'000
Management fee 442 - 442 473 - 473
A basic management fee is payable to the Investment Manager at the
lower of (i) the annual rate of 1.0% of the adjusted NAV of the Company or
(ii) 1.0% per annum of the market capitalisation of the Company. In order to
avoid double charging of basic management fees payable to the Investment
Manager by the Company, the NAV of the Company is reduced by the value of the
Company's Limited Partnership interest in SRF II. The basic management fee
accrues weekly and is payable quarterly in arrears.
The Investment Manager is also entitled to a performance fee,
details of which are given in the Report of the Directors in the full Annual
Report and Accounts. No performance fee has been payable in either year.
4 Other expenses
30 June 2012 30 June 2011
Revenue Capital Revenue Capital
return return Total return return Total
£'000 £'000 £'000 £'000 £'000 £'000
Secretarial services* 50 - 50 71 - 71
Auditors' remuneration for:
Audit services** 26 - 26 24 - 24
Directors' remuneration 95 - 95 95 - 95
Other expenses 134 129†263 279 - 279
305 129 434 469 - 469
* Included within this amount is a receipt of £27,000 (2011: £Nil)
representing a refund from HMRC of VAT on administration fees.
** No non-audit fees were incurred during the year.
†Expenses incurred in relation to the tender offer process.
5 Taxation
30 June 2012 30 June 2011
Revenue Capital Revenue Capital
return return Total return return Total
£'000 £'000 £'000 £'000 £'000 £'000
Corporation tax at 25.5%
(2011: 27.5%) - - - - - -
The Company is subject to corporation tax at 25.5%. As at 30 June
2012 the total current taxation charge in the Company's revenue account is
lower than the standard rate of corporation tax in the UK (25.5%). The
differences are explained below:
30 June 2012 30 June 2011
Revenue Capital Revenue Capital
return return Total return return Total
£'000 £'000 £'000 £'000 £'000 £'000
Net return/(loss) on
ordinary activities
before taxation 1,126 (1,947) (821) 310 27,131 27,441
Theoretical tax at
UK corporation tax rate
of 25.5% (2011: 27.5%) 287 (496) (209) 85 7,461 7,546
Effects of:
- UK dividends that
are not taxable (486) - (486) (345) - (345)
- (Losses)/gains on
investments and foreign
exchange - 463 463 - (7,461) (7,461)
- Unrelieved expenses 199 33 232 260 - 260
- - - - - -
Factors that may affect future tax charges
The Company has £6,713,000 management expenses (2011: £5,945,000)
that are available to offset future taxable revenue. It is considered too
uncertain that there will be sufficient future taxable profits against which
these expenses can be offset and therefore, in accordance with IAS 12, a
deferred tax asset of £1,712,000 (2011: £1,547,000) in respect of these
amounts has not been recognised.
Deferred tax is not provided on capital gains and losses arising on
the revaluation or disposal of investments because the Company meets (and
intends to continue for the foreseeable future to meet) the conditions for
approval as an investment trust company.
6 Dividends
Under the requirements of Sections 1158/1159 Corporation Tax Act
2010 no more than 15% of investment income generated from qualifying shares
and securities may be retained by the Company. These requirements are
considered on the basis of dividends declared in respect of the financial year
as shown below.
30 June 2012 30 June 2011
£'000 £'000
Net return after taxation per Company accounts 1,125 310
Final dividend proposed of 1.50p (2011: 0.44p) per share (1,010) (309)
Revenue retained for Section 1158 purposes 115 1
The following dividends were declared and paid by the Company:
30 June 2012 30 June 2011
£'000 £'000
Final dividend: 0.44p per share (2011: 0.30p) 309 230
7 Return/(loss) per Ordinary share
30 June 2012 30 June 2011
Weighted Weighted
average average
Net number of Per Net number of Per
return Ordinary share return Ordinary share
£'000 shares pence £'000 shares pence
Total
Return/(loss) per share (821) 69,723,696 (1.18) 27,441 76,214,492 36.00
Revenue
Return per share 1,126 69,723,696 1.61 310 76,214,492 0.40
Capital
Return/(loss) per share (1,947) 69,723,696 (2.79) 27,131 76,214,492 35.60
8 Investments
30 June 2012
£'000
Investment portfolio summary
Listed investments at fair value through profit or loss 53,374
Unlisted investments at fair value through profit or loss 13,274
66,648
30 June 2012
Listed Unlisted Total
£'000 £'000 £'000
Analysis of investment portfolio movements
Opening book cost 51,368 5,032 56,400
Opening investment holding gains 6,174 8,762 14,936
Opening valuation 57,542 13,794 71,336
Movements in the year:
Purchases at cost 6,742 - 6,742
Sales - proceeds (9,025) (587) (9,612)
- realised gains on sales 1,467 124 1,591
Decrease in unrealised appreciation (3,352) (57) (3,409)
Closing valuation 53,374 13,274 66,648
Closing book cost 50,552 4,569 55,121
Closing investment holding gains 2,822 8,705 11,527
53,374 13,274 66,648
A list of the top 10 portfolio holdings by their aggregate market
values is given in the Investment Manager's report above.
Transaction costs incidental to the acquisitions of investments
totalled £47,000 (2011: £99,000) and disposals of investments totalled £17,000
(2011: £44,000) for the year.
30 June 2012
Total
£'000
Analysis of capital gains/(losses)
Gains on sale of investments 1,584
Foreign exchange gains 7
Movement in investment holding gains (3,409)
(1,818)
The Company is required to classify fair value measurements using a
fair value hierarchy that reflects the subjectivity of the inputs used in
measuring the fair value of each asset. The fair value hierarchy has the
following levels:
â- Quoted bid prices (unadjusted) in active markets for identical
assets or liabilities ("level 1").
â- Inputs other than quoted prices included within level 1 that
are observable for the asset or liability, either directly (that is, as
prices) or indirectly (that is, derived from prices) ("level 2").
â- Inputs for the asset or liability that are not based on
observable market data (that is, unobservable inputs) ("level 3").
The level in the fair value hierarchy within which the fair value
measurement is categorised is determined on the basis of the lowest level
input that is significant to the fair value of the investment.
The following table analyses within the fair value hierarchy the
Company's financial assets and liabilities (by class) measured at fair value
at 30 June 2012.
Financial instruments at fair value through profit and loss
Level 1 Level 2 Level 3 Total
30 June 2012 £'000 £'000 £'000 £'000
Equity investments and limited 53,374 11,447 1,827 66,648
partnership interests
Liquidity funds - 1,800 - 1,800
Total 53,374 13,247 1,827 68,448
30 June 2011
Equity investments and limited 57,542 11,807 1,987 71,336
partnership interests
Liquidity funds - 2,150 - 2,150
Total 57,542 13,957 1,987 73,486
Investments whose values are based on quoted market prices in
active markets are classified within level 1 include active listed equities.
The Company does not adjust the quoted price for these instruments.
Financial instruments that trade in markets that are not considered
to be active but are valued based on quoted market prices, dealer quotations
or alternative pricing sources supported by observable inputs are classified
within level 2. As level 2 investments include positions that are not traded
in active markets and/or subject to transfer restrictions, valuations may be
adjusted to reflect illiquidity and/or non-transferability, which are
generally based on available market information.
Level 3 instruments include private equity, as observable prices
are not available for these securities, the Company has used valuation
techniques to derive the fair value. In respect of unquoted instruments, or
where the market for a financial instrument is not active, fair value is
established by using recognised valuation methodologies, in accordance with
IPEVC Valuation Guidelines.
There were no transfers between levels for the year ended 30 June
2012.
The following table presents movements in level 3 instruments for
the year ended 30 June 2012 by class of financial instrument.
Total
equity
investments
£'000
Opening balance 1,987
Disposals during the year (23)
Total loss for the year included in the Statement of (137)
comprehensive income
Closing balance 1,827
9 Significant interests
The Company had holdings of 3% or more in the following companies:
Name of Class of 30 June 2012
investment Share Percentage held
Journey Group Ordinary 10.5
Allocate Software Ordinary 8.2
4imprint Group Ordinary 7.3
Lupus Capital Ordinary 4.9
CVS Group Plc Ordinary 3.9
Lavendon Group Ordinary 3.1
Unlisted investments:
Strategic Recovery Fund II Partnership interest 33.3
10 Other receivables
30 June 2012 30 June 2011
£'000 £'000
Dividends receivable 202 204
Accrued income - 3
Other receivables and prepayments 20 10
222 217
11 Other payables
30 June 2012 30 June 2011
£'000 £'000
Amounts due to brokers for settlement of trades 240 430
Amounts due to broker regarding share buy backs - 773
Other payables and accruals 195 204
435 1,407
12 Called up share capital
Number £'000
Allotted, called up and fully paid Ordinary shares of 10p each:
At 1 July 2011 70,122,203 7,011
Share buy backs (2,804,879) (280)
At 30 June 2012 67,317,324 6,731
13 Reserves
Capital Capital
reserve reserve
arising on arising on Capital
Share Special investments investments redemption Revenue
premium reserve sold held reserve reserve
£'000 £'000 £'000 £'000 £'000 £'000
Opening balance 5,246 54,435 (10,819) 14,936 970 691
Net gains on realisation of investments - - 1,584 - - -
Foreign exchange gains - - 7 - - -
Decrease in unrealised appreciation - - - (3,409) - -
Share buy back expenses - - (129) - - -
Share buy backs - (2,701) - - 280 -
Retained net revenue for the period - - - - - 1,126
Dividends paid - - - - - (309)
As at
30 June 2012 5,246 51,734 (9,357) 11,527 1,250 1,508
14 Reconciliation of net cash flow to net funds
30 June 2012 30 June 2011
£'000 £'000
Opening net funds 2,324 1,367
(Decrease)/increase in cash and cash equivalents in year (120) 957
Closing net funds 2,204 2,324
At Net At
30 June 2011 cashflow 30 June 2012
£'000 £'000 £'000
Cash at bank 174 230 404
Liquidity funds 2,150 (350) 1,800
2,324 (120) 2,204
Note that in the cash flow statement, £773,000 relating to amounts
outstanding for share buy backs as at 30 June 2011 have been included under
the current year balance for "Shares bought back in the year". This is in
addition to £2,701,000 relating to shares bought back during the year as part
of the tender offer process. The £773,000 outstanding as at 30 June 2011 has
not been included in the movement in payables calculation as it does not
constitute an operating activity but rather a financing activity.
15 Net asset value per Ordinary share
The net asset value per Ordinary share is based on net assets of
£68,639,000 (2011: £72,470,000) and on 67,317,324 (2011: 70,122,203) Ordinary
shares, being the number of shares in issue at the year end.
16 Capital commitments and contingent liabilities
The Company has a commitment to invest €1,560,000 (2011:
€2,160,000) in Vintage.
17 Analysis of financial assets and liabilities
The Company's financial instruments comprise securities, cash
balances (including amounts held in liquidity funds) and debtors and creditors
that arise from its operations, for example, in respect of sales and purchases
awaiting settlement and debtors for accrued income.
The Company has little exposure to credit and cash flow risk.
Credit risk is due to uncertainty in a counterparty's ability to meet its
obligations. The Company has no exposure to debt purchases and ensures that
cash at bank is held only with reputable banks with high quality external
credit ratings. All the assets of the Company which are traded on listed
exchanges are held by HSBC Global Services, the Company's Custodian.
Bankruptcy or insolvency of the Custodian may cause the Company's rights with
respect to securities held by the Custodian to be delayed or limited. The
Board reviews the Custodian's annual controls report and the Investment
Manager's management of the relationship with the Custodian.
Due to timings of investment and distributions, at any one time the
Company may hold significant amounts of surplus cash. Any funds in excess of
those required to meet daily operation requirements are invested in
Institutional Liquidity Funds. These are highly liquid assets that are
redeemable on less than 24 hours notice. The Company only invests in funds
that have a AAA rating and the fund's performance is monitored by the
Investment Manager. As at 30 June 2012 the Company had £1.8 million (2011:
£2.2 million) invested in such funds. The maximum exposure to credit risk is
£2,426,000 (2011: £2,541,000). There are no assets past due or impaired.
The Company finances its operations through its issued capital and
existing reserves.
The principal risks the Company faces in its investment portfolio
management activities are:
â- market price risk, i.e. the movements in value of investment
holdings caused by factors other than interest rate movement;
â- interest rate risk;
â- liquidity risk; and
â- foreign currency risk.
The Investment Manager's policies for managing these risks are
summarised below and have been applied throughout the year:
Policy
(i) Market price risk
The Company's investment portfolio is exposed to market price
fluctuations which are monitored by the Investment Manager.
Adherence to the investment objectives and the limits on investment
set by the Company mitigates the risk of excessive exposure to any one
particular type of security or issuer.
If the investment portfolio valuation fell by 20% from the 30 June
2012 valuation (2011: 20%), with all other variables held constant, there
would have been a reduction of £13,330,000 (2011: £14,267,000) in the return
before taxation and equity. An increase of 20% in the investment portfolio
valuation would have had an equal and opposite effect on the return before
taxation and equity.
(ii) Cash flow interest rate risk exposure
No amounts were drawn on the loan facility during the year (2011:
£Nil)
The Company's bank accounts earn interest at a variable rate which
is subject to fluctuations in interest rates.
The Company holds cash in liquidity funds. Income from these funds
is dependent on the performance of the funds.
If interest rates had reduced by 1% from those obtained at 30 June
2012 (2011: 1%), it would have the effect, with all other variables held
constant, of reducing the net return before taxation and equity by £20,000
(2011: £17,000). If there had been an increase in interest rates of 1% there
would have been an equal and opposite effect in the net return before taxation
and equity. The calculations are based on cash at bank and liquidity funds as
at 30 June 2012 and these may not be representative of the year as a whole.
Non-interest rate risk exposure
The remainder of the Company's portfolio and current assets are not
subject directly to interest rate risk.
Details of the risk profile of the Company are shown in the
following tables.
The interest rate risk profile of the Company's financial assets at
30 June 2012 was:
Cash flow
No interest interest
rate risk rate risk
financial financial
Total assets assets
£'000 £'000 £'000
Sterling
Ordinary shares 53,374 53,374 -
Unlisted 11,447 11,447 -
investments
Liquidity funds 1,800 - 1,800
Cash 404 - 404
Receivables* 202 202 -
67,227 65,023 2,204
Euros
Unlisted 1,827 1,827 -
investments
1,827 1,827 -
Total 69,054 66,850 2,204
* Receivables exclude prepayments which under IAS 32 are not
classed as financial assets.
The interest rate risk profile of the Company's financial assets at
30 June 2011 was:
Cash flow
No interest interest
rate risk rate risk
financial financial
Total assets assets
£'000 £'000 £'000
Cash flow
Sterling
Ordinary shares 57,542 57,542 -
Unlisted investments 11,807 11,807 -
Liquidity funds 2,150 - 2,150
Cash 174 - 174
Receivables* 207 207 -
71,880 69,556 2,324
Euros
Unlisted investments 1,987 1,987 -
1,987 1,987 -
Total 73,867 71,543 2,324
* Receivables exclude prepayments which under IAS 32 are not
classed as financial assets.
The interest rate risk profile of the Company's financial
liabilities at 30 June 2012 was:
No interest
rate risk
financial
Total liabilities
£'000 £'000
Sterling
Creditors 435 435
All amounts were due in three months or less (2011: three months or
less) for a consideration equal to the carrying value of the creditors shown
above.
The interest rate risk profile of the Company's financial
liabilities at 30 June 2011 was:
No interest
rate risk
financial
Total liabilities
£'000 £'000
Sterling
Creditors 1,407 1,407
All amounts were due in three months or less for a consideration
equal to the carrying value of the creditors shown above.
(iii) Liquidity risk
The Investment Manager may invest on behalf of the Company in
securities which are not readily tradable, which can lead to volatile share
price movements. It may be difficult for the Company to sell such investments.
Although the Company's AIM quoted investments and unquoted investments are
less liquid than securities listed on the London Stock Exchange, the Board
seeks to ensure that an appropriate proportion of the Company's investment
portfolio is in invested in cash and readily realisable investments, which are
sufficient to meet any funding requirements that may arise.
(iv) Foreign currency risk
The Company invests in a private equity fund denominated in Euros.
The Company is, therefore, subject to foreign currency risk.
During the year the Sterling/Euro exchange rate fluctuated 13%
between a low of 1.1070 on 4 July 2011 and a high of 1.2555 on 15 May 2012,
before closing at 1.2359 on 29 June 2012 (2011: 1.1073).
If the Sterling/Euro exchange rate had decreased by 15% from that
obtained at 30 June 2012 (2011: 15%), it would have the effect, with all other
variables held constant, of increasing net profit and equity shareholders'
funds by £322,000 (2011: £351,0000). An increase of 15% (2011: 15%) would have
decreased net profit and equity shareholders' funds by £238,000 (2011:
£259,000). The calculations are based on the value of the investment in
Vintage as at 30 June 2012 and this may not be representative of the year as a
whole. The balance exposed to foreign currency risk is £1,827,000 (2011:
£1,987,000).
Fair values of financial assets and financial liabilities
The carrying value of the financial assets and liabilities of the
Company is equivalent to their fair value.
Managing Capital
Capital structure
The Company is funded through shareholders' equity and cash
reserves. The Company's Articles of Association permit the Board to borrow up
to 25% of the Company's net asset value at the time of borrowing. Capital is
managed so as to maximise the return to shareholders while maintaining an
appropriate capital base to allow the Company to operate effectively in the
marketplace and to sustain future development of the business. The Company
pays such dividends as are required to maintain its investment trust status,
and may also from time to time return capital to shareholders through the
purchase of its own shares at a discount to net asset value.
Capital constraints
The Company operates so as to qualify as a UK investment trust for
UK tax purposes. Inter alia, this requires that no investment may exceed 15%
by value of the Company's portfolio at the point of investment. New
regulations for obtaining and retaining investment trust status have been
published by HM Revenue & Customs and came into force on 1 January 2012, which
no longer require this 15% test to be met. It remains the Company's investment
policy that the maximum investment in any single investee company will be no
more than 15% of the Company's investments at the time of investment.
The Company's capital requirement is reviewed regularly by the
Board.
18 Related party transactions
The Investment Manager: SVGIM is regarded as a related party of the
Company. The Investment Manager may draw upon advice from the IAP of which Sir
Clive Thompson, a Director of the Company, is a member. The IAP was
established to provide advice to SVGIM in relation to the strategy, operations
and management of potential investee companies.
The amounts payable to the Investment Manager are disclosed in Note
3 above.
The amount due to the Investment Manager at 30 June 2012 was
£115,000 (30 June 2011: £134,000).
SVGIM has entered into Commission Sharing Agreements with a number
of executing brokers. Under this arrangement the amount of commission received
by SVGIM in relation to trading activities carried out on behalf of the
Company for the period to 30 June 2012 was £4,000 (2011: £9,000). The amount
outstanding at the year end was £1,000 (2011: £Nil).
Notice of Annual General Meeting
The Annual General Meeting of Strategic Equity Capital plc will be
held at the offices of SVG Investment Managers Limited at 61 Aldwych, London
WC2B 4AE at 11.30 am on Thursday, 1 November 2012.
The notice of this meeting can be found in the Annual Report and
Accounts at: www.strategicequitycapital.com
National Storage Mechanism
A copy of the Annual Report and Financial Statements 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.
ENDS
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.