Interim Results
3i Smaller Quoted Co's Trust PLC
09 October 2003
9 October 2003
3i Smaller Quoted Companies Trust plc
Interim results for the six months to 31 August 2003
Strong absolute and relative performance
The Board of 3i Smaller Quoted Companies Trust plc ("the Trust") today announces
its interim results for the six months to 31 August 2003.
Highlights
• The net asset value ("NAV") per share rose by 46.3%, compared to a rise of
42.6% in the FTSE SmallCap index excluding investment companies ("the
benchmark"). By way of contrast, the FTSE All-Share index rose by only
17.4%.
• The Trust's outperformance of the benchmark principally derives from the
beneficial effects of gearing in a rising market and good stock selection.
• The share price rose by 54.9% during the period. The discount to NAV
narrowed over the period from 22.2% as at 28 February 2003 to 17.6% as at 31
August 2003.
• As markets started to recover, the Trust gradually increased its net
borrowing from £4 million at the start of the period to £10 million at 31
August 2003.
• The Directors have declared an unchanged interim dividend of 1.71p per
share.
Commenting on the results, Mike Prentis, Fund Manager, 3i Asset Management said:
"The period was marked by a strong recovery in the share prices of smaller
companies in the UK. The Trust outperformed its benchmark and the wider market.
This has been achieved whilst maintaining the Trust's defensive low risk
approach. Once again good stock selection contributed to the positive
performance.
Despite the strong rise in share prices over the last six months, smaller
companies continue to look reasonably valued overall given the forecasts of
improving economic news".
For further information, please contact:
Mike Prentis or Kirstie Hamilton / William Davidson Tulchan
Fund Manager Communications
3i Asset Management
(a division of 3i Investments plc,
the Investment Manager)
020 7975 3527 020 7353 4200
Notes to editors
The objective of 3i Smaller Quoted Companies Trust plc is to achieve long term
capital growth for shareholders in excess of the growth in the benchmark through
investment mainly in smaller UK quoted companies.
3i Smaller Quoted Companies Trust plc is managed by the Asset Management
division of 3i Investments plc which is an active fund manager seeking to
achieve returns in excess of benchmark indices through the use of fundamental
analysis. The Manager aims to use the skills and information base gained
through being part of the 3i Group. A significant proportion of the Trust's
portfolio by value is in companies formerly backed by the 3i Group.
3i Investments plc is regulated by the Financial Services Authority and is a
wholly owned subsidiary of 3i Group plc, Europe's leading venture capital
company. The relationship with the 3i Group brings several important benefits
to 3i Investments plc and the funds managed by its Asset Management division,
including access to 3i Group's specialist teams across its international
network.
In addition to the management of 3i Smaller Quoted Companies Trust plc, the
Asset Management division of 3i Investments plc is involved in the management of
the 3i Group's own portfolio of quoted investments and manages 3i Bioscience
Investment Trust plc, 3i European Technology Trust plc and the 3i Group Pension
Plan.
Chairman's statement
Overview
The six month period to 31 August 2003 was marked by a strong recovery in the
share prices of smaller companies in the UK. The Trust's net asset value ('NAV')
per share rose by 46.3%. This performance compares favourably with that of the
Trust's benchmark, the FTSE SmallCap index excluding investment companies, which
rose by 42.6%. By way of contrast, the FTSE All-Share index rose by only 17.4%.
In the Annual Report and Accounts 2003, I referred to the tendency for smaller
companies to outperform their larger brethren during periods of economic
recovery. It is encouraging to see that this has proved to be the case over the
last six months.
Earnings and dividends
Earnings per share were 2.67p for the period compared to 2.59p, excluding a
significant one-off dividend received, for the six months to 31 August 2002. The
Directors have declared an unchanged interim dividend of 1.71p per share.
Gearing
For much of last year net borrowing was held at about £4 million, reflecting
market uncertainty. As markets started to recover, the Investment Manager
gradually increased net borrowing to £10 million at 31 August 2003.
Discount and share buybacks
The Trust's share price rose by 54.9% during the period. This helped to narrow
the discount from 22.2% at the start of the period to 17.6% at the end. In the
early part of the period under review, the Trust bought in and cancelled 795,000
shares at an average price of 107p per share and an average discount to NAV of
22%.
Outlook
Confidence seems to be returning now that the main hostilities in Iraq are over.
In the UK, worries about a crash in the housing market have not been realised,
employment levels are high and unemployment is not increasing. There has not
been a collapse in consumer spending, although high domestic debt levels and
high mortgage equity withdrawal remain a worry. Interest rates may have
bottomed, but I believe the Monetary Policy Committee of the Bank of England is
well aware of the economic risk of raising rates too far or too fast. Government
debt has increased rapidly and significantly to the point that non-priority
spending areas are now clearly threatened and further taxation increases likely.
It has been difficult to identify clear and reliable signs of a pick up in
corporate spending, but there have been the first hints of a revival in IT
spending and in some forms of advertising. This slightly more confident tone
should lead to a gradual increase in business investment.
On the international scene, the US economy is recovering quite strongly judging
by GDP growth estimates, although this has been heavily influenced by the high
level of defence spending. It is also encouraging to see the first signs of a
revival for many years in the Japanese economy and a generally stronger picture
in the Far East. Within the Eurozone, the economic picture is weaker as the
larger economies are effectively in recession and unemployment is high. I do not
expect the situation to become materially worse and a sustained recovery in the
US would ultimately benefit those economies.
Stock markets are now anticipating economic recovery, which explains the big
rise in the value of cyclical and technology stocks in recent months, albeit
from a low base. I am optimistic that smaller companies will continue to make
good progress, however, it would be prudent to expect a pause in share prices
until there is real evidence of a sustained economic upturn.
William Govett
8 October 2003
Investment Manager's review
Overall performance
The Trust's strong absolute and relative performance over the last six months
has been achieved with a relatively defensive portfolio. The Trust has been, for
instance, underweight in technology throughout the period, has had minimal
investment in the telecoms sector, and has not chased the deep industrial
cyclicals. All these areas have done well. The Trust's outperformance derives
from good stock picking, a continued focus on investing in companies we regard
as undervalued or of very high quality, and also from our gearing policy.
Of the Trust's 3.7% outperformance of the benchmark, the main components were
2.5% due to the beneficial effects of gearing in a rising market and 1.3% to
portfolio performance. The contribution from gearing comes as a welcome benefit
after its negative impact last year.
Sector and stock performance
In absolute terms, the best performing sectors where the Trust had significant
investment during the period were Speciality & Other Finance, Software &
Computer Services and General Retailers. Stock selection was particularly good
in the first of these sectors where the value of our holdings in Paragon and
Kensington rose by 63% and 76% respectively. Both are specialist providers of
mortgages, are continuing to grow faster than the conventional mortgage banks,
and yet trade on much lower multiples even after their recent share price
appreciation. The software sector generally performed well, and although the
Trust was slightly underweight throughout the period, our stock selections
outperformed with particularly good performances from ITNET, royalblue and Intec
Telecom. Within General Retailers, the Trust benefited from strong performances
by Ottakar's and Blacks Leisure. Stocks such as Dechra Pharmaceuticals,
Whitehead Mann, Bodycote and T Clarke recovered strongly after profit warnings
and in each case the Trust acquired stock close to share price lows.
The Trust's worst performing stock was Expro. It was one of the top ten holdings
at the start of the period under review, but released a profit warning in early
March. Having met the company's management, and fearing a further profit
warning, we sold the Trust's entire holding.
Activity
Our approach throughout the period has been to take profits on some of the
defensive holdings that have outperformed over the last few years, such as
Taylor & Francis, Forth Ports and Intermediate Capital Group. Some of these
proceeds have been recycled into higher beta, more cyclical stocks and those we
regard as undervalued. However, as the period has progressed, we have found it
more difficult to find good cyclical stocks at valuations which do not already
discount much of the cyclical recovery.
In identifying new investments we take into account many factors including the
strengths of individual companies, their cyclicality and the secular trends
affecting them. Examples of new investments made during the period are SMG, BTG,
Torex and Belhaven. SMG is a media company which should benefit significantly
from a recovery in radio and TV advertising, and being heavily financially
geared, such a recovery should generate strong share price appreciation. We
started building a holding in BTG after a meeting with the company's management
which gave us comfort that the company had become much more focused on key
growth areas and that its treatment for varicose veins, Varisolve, had more
potential than recognised by the market. BTG may have been overlooked because it
is listed within the Support Services sector and yet most of its activities are
in the biotechnology area. The Trust's holding, bought in June and July at a
total cost of £692,000, was worth £1,633,000 at the period end. Torex provides
software and services principally to the healthcare sector. We regarded it as
one of the most attractively valued UK software stocks when we bought it,
particularly given that healthcare is a clear priority area for significant
Government spending. Since taking a holding, Torex has announced plans to merge
with competitor iSoft, which, if approved by the competition authorities, would
create a major force in healthcare IT. Belhaven is a Scottish brewer and owner
operator of pubs. It has an excellent long term record of growth. We bought
shares in a placing to fund the company's expansion.
There have been signs of a pick up in merger and acquisition activity, but as
yet this has not had a significant effect on the Trust's portfolio. We expect
more acquisition activity over the next six months both from corporate and
private equity buyers. Prices paid will need to recognise the medium term
potential for these businesses given that we are moving beyond the low point in
the cycle.
Portfolio positioning
After the strong rises in share prices experienced during the period, we see the
current investment environment as essentially a stockpicking one. Few clear
themes present themselves, although a slight increase in cyclical stocks at the
expense of some defensive exposure has already been mentioned. More than
anything, we are seeking to hold stocks which we regard as undervalued and which
could come to be regarded more highly. At present, we are aiming to ensure that
the average current year price to earnings ratio of the Trust's holdings is
below that of the benchmark and the yield approximates to the benchmark yield.
The Trust also owns a collection of core holdings where we have great confidence
in long term prospects and management, for instance Ultra Electronics, Aveva,
ITNET, Intermediate Capital Group, Victrex and Abbot.
Valuations are currently more realistic than was the case six months ago when
many stocks looked cheap. It is now more difficult to find compelling value, but
share prices of smaller companies look reasonable overall given the forecasts of
improving economic news.
Mike Prentis
3i Investments plc
8 October 2003
Statement of total return
for the six months ended 31 August 2003 (incorporating the revenue account)
6 months to 31 August 2003 6 months to 31 August 2002 12 months to 28 February 2003
(unaudited) (unaudited) (audited)
Revenue Capital Total Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Gains on
investments
Net realised
gains/(losses)
over
previous valuation 1,969 1,969 2,636 2,636 (3,804) (3,804)
Net unrealised
value
movement 34,397 34,397 (22,751) (22,751) (35,489) (35,489)
36,366 36,366 (20,115) (20,115) (39,293) (39,293)
Income 2,022 2,022 2,192 2,192 3,623 3,623
Investment
management fee (107) (319) (426) (131) (392) (523) (242) (725) (967)
Other expenses (159) (159) (164) (164) (342) (342)
Net return before
finance costs 1,756 36,047 37,803 1,897 (20,507) (18,610) 3,039 (40,018) (36,979)
Interest payable
and similar
charges (263) (333) (596) (263) (333) (596) (568) (609) (1,177)
Return on ordinary
activities for the
period 1,493 35,714 37,207 1,634 (20,840) (19,206) 2,471 (40,627) (38,156)
Dividends (956) (956) (977) (977) (2,441) (2,441)
Transfer to/(from)
reserves 537 35,714 36,251 657 (20,840) (20,183) 30 (40,627) (40,597)
Return per
ordinary share
(pence) 2.67p 63.77p 66.44p 2.85p (36.31)p (33.46)p 4.32p (71.02)p (66.70)p
Dividends per
ordinary share
(pence) 1.71p 1.71p 4.33p
All revenue and capital items in the above statement derive from continuing
operations.
No operations were acquired or discontinued during the period.
Reconciliation of total shareholders' funds
6 months to 31 6 months to 31 12 months to 28
August 2003 August 2002 February 2003
(unaudited) £'000 (unaudited) (audited)
£'000 £'000
Return on ordinary activities for the period 37,207 (19,206) (38,156)
Dividends (956) (977) (2,441)
36,251 (20,183) (40,597)
Purchase and cancellation of own ordinary shares
Premium to nominal value on shares purchased (660) (452) (795)
Nominal value of ordinary 25p shares purchased (199) (92) (192)
Movement in total shareholders' funds 35,392 (20,727) (41,584)
Opening total shareholders' funds 80,070 121,654 121,654
Closing total shareholders' funds 115,462 100,927 80,070
Balance sheet
as at 31 August 2003
31 August 31 August 28 February
2003 2002 2003
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Fixed assets
Investments 126,618 105,911 86,567
Current assets
Debtors 903 250 514
Cash, short term deposits and money market funds 4,580 11,322 10,628
5,483 11,572 11,142
Creditors: amounts falling due within one year (1,914) (1,846) (2,921)
Net current assets 3,569 9,726 8,221
Total assets less current liabilities 130,187 115,637 94,788
Creditors: amounts falling due after more than one year (14,725) (14,710) (14,718)
Net assets 115,462 100,927 80,070
Capital and reserves
Called-up share capital 13,985 14,284 14,184
Share premium 38,952 38,952 38,952
Capital redemption reserve 495 196 296
Capital reserve - realised 50,007 69,534 60,355
- unrealised 8,774 (25,378) (36,429)
Revenue reserve 3,249 3,339 2,712
Total equity shareholders' funds 115,462 100,927 80,070
Net asset value per ordinary share (pence) 206.4p 176.6p 141.1p
Approved by the Board on 8 October 2003
Cash flow statement
for the six months ended 31 August 2003
31 August 31 August 28 February
2003 2002 2003
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Operating activities
Investment income received 1,694 1,873 3,221
Income from money market funds 161 - 210
Deposit interest received 9 119 129
Underwriting commission received 8 11 14
Investment management fees paid (444) (628) (1,150)
Secretarial fees paid (29) (29) (59)
Other cash payments (179) (233) (341)
Net cash inflow from operating activities 1,220 1,113 2,024
Servicing of finance
Interest paid (581) (581) (1,162)
Net cash outflow from servicing of finance (581) (581) (1,162)
Financial investment
Purchase of investments (29,545) (22,395) (44,640)
Sale of investments 25,184 25,458 48,097
Net cash (outflow)/inflow from financial
investment (4,361) 3,063 3,457
Equity dividends paid (1,466) (1,506) (2,481)
Financing
Purchase of ordinary shares for cancellation (860) (544) (987)
Net cash outflow from financing (860) (544) (987)
(Decrease)/increase in cash (6,048) 1,545 851
Notes to the financial statements
1 Reconciliation of net revenue before finance costs to net cash inflow from
operating activities
31 August 31 August 28 February
2003 2002 2003
£'000 £'000 £'000
Net revenue before finance costs 1,756 1,897 3,039
Investment management fee allocated to
capital reserve - realised (319) (392) (725)
Increase in accrued income (150) (188) (49)
Decrease in creditors (37) (178) (241)
Increase in debtors (30) (26) -
Net cash inflow from operating activities 1,220 1,113 2,024
2 Reconciliation of net cash flow to movement in net debt
31 August 31 August 28 February
2003 2002 2003
£'000 £'000 £'000
(Decrease)/increase in cash in the period (6,048) 1,545 851
Amortised debenture stock issue expenses (7) (7) (15)
Movement in net debt in the period (6,055) 1,538 836
Opening net debt (4,090) (4,926) (4,926)
Closing net debt (10,145) (3,388) (4,090)
Independent review report of the auditors
Introduction
We have been instructed by the Trust to review the financial information for the
six months ended 31 August 2003 and we have read the other information contained
in the Interim report and considered whether it contains any apparent
misstatements or material inconsistencies with the financial information.
This report is made solely to the Trust. Our review work has been undertaken so
that we might report to the Trust in accordance with Bulletin 1999/4 issued by
the Auditing Practices Board and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone other than
the Trust for our work, for this report, or for the opinions we have formed.
Directors' responsibilities
The Interim report, including the financial information contained therein, is
the responsibility of, and has been approved by, the Directors. The Listing
Rules of the Financial Services Authority require that the accounting policies
and presentation applied to the interim figures should be consistent with those
applied in preparing the preceding annual accounts except where any changes, and
the reasons for them, are disclosed.
Review work performed
We conducted our review in accordance with guidance contained in Bulletin 1999/4
issued by the Auditing Practices Board. A review consists principally of making
enquiries of management and applying analytical procedures to the financial
information and underlying financial data and, based thereon, assessing whether
the accounting policies and presentation have been consistently applied unless
otherwise disclosed. A review excludes audit procedures such as tests of
controls and verification of assets, liabilities and transactions. It is
substantially less in scope than an audit performed in accordance with Auditing
Standards and therefore provides a lower level of assurance than an audit.
Accordingly we do not express an audit opinion on the financial information.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 31 August 2003.
Scott-Moncrieff
Chartered Accountants
Edinburgh
8 October 2003
Notes to the announcement
1 The interim dividend of 1.71p per ordinary share will be paid on 10
November 2003 to shareholders on the register of members at 17 October 2003.
2 The Interim report for the six months to 31 August 2003 will be posted to
shareholders on 17 October 2003 and thereafter copies will be available from
3i Investments plc, 91 Waterloo Road, London, SE1 8XP.
3 The accounting policies used in the preparation of the Interim report are
the same as those used in the statutory accounts for the year ended 28
February 2003 and those expected to be used for the year to 29 February 2004.
The six month period is treated as a discrete period. The figures for the
year to 28 February 2003 are extracted from the accounts filed with the
Registrar of Companies on which the auditors issued an unqualified report.
The Interim report and this announcement do not constitute statutory
accounts.
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