Interim Management Statement

RNS Number : 5554U

Bluehone AIM VCT2 PLC

18 October 2010

 



Bluehone AIM VCT2 plc

Interim management statement

For the three month period from 1 June 2010 to 31 August 2010

Investment Objective

The Company's investment objective is to provide shareholders with a tax efficient means of gaining long term capital growth and an attractive dividend stream, primarily through investment in a diversified portfolio of AIM companies or unquoted companies which anticipate a stock market quotation.

Performance Summary

Capital return	As at 31 August 2010	As at 31 May 2010	Movement
Net assets	£20.5m	£21.6m	(5.1)%
Net asset value per share	34.5p	36.4p	(5.2)%
Share price	23.5p	25.0p	(6.0)%
Discount to NAV	31.9%	31.3%
Total return	For the three month period ended 31 August 2010	For the nine month period ended 31 August 2010
Net asset value 1	(3.8)%	(13.6)%
Share price2	(4.0)%	2.9%
FTSE AIM3	0.7%	6.4%

¹NAV total return = NAV + reinvested dividends; Source: F&C Asset Management 

²Share price total return = mid to mid share price + reinvested dividends; Source: Datastream

³Source: Datastream

Market Background

Stock markets began the year in a positive mood with investors looking forward to economic recovery but this early euphoria was short lived and, after peaking in April, share prices fell sharply in May wiping out any gains made thus far.  The summer was a period of uncertainty with markets in subdued mood and in the main tracking sideways. There was a noticeable lack of activity in the smaller company end with AiM having fewer fundraisings, as well as suffering a sharp fall in the amount of shares being traded. This reduction in the liquidity of the AiM market has resulted in certain individual shares experiencing significant falls on little or no negative news. The FTSE AIM index ended the period with a gain of 0.6%, being held up by a 10.8% increase in the Oil and Gas sector which accounts for 21.3% of the value of the index. The AiM market continues to trade at a discount to the earnings multiple afforded to the FTSE ALL Share Index and yet the composite of analysts' forecasts for earnings growth remains significantly higher for AiM. As we enter the autumn the economic outlook for the UK is uncertain. On the one hand the recovery in GDP has surprised on the upside with manufacturing output and export growth showing a dramatic improvement, however, on the other hand consumer confidence is weakening following the austerity Budget and the growing certainty of public sector cuts to come. It remains to be seen whether the UK economy is able to avoid dipping back into recession.

Bluehone AiIM VCT2 Performance

The net assets fell by 5.1 per cent over the period, including the payment of the interim distribution in August of £316,000 and this amounted to a reduction of £1.1 million in the portfolio valuation. The fall in NAV after taking into account the distribution was 3.7 per cent. The main influence on performance was the continued fall in the valuation of Infrastrata which accounted for 57% of the fall in the value of the equity portfolio. In the case of Infrastrata the shares reacted negatively to the news that the company had abandoned its co-operation agreement with a group of parties that had expressed interest in acquiring a stake in its Portland Gas project.  Instead, the company signed a memorandum of understanding with the US based eCORP, which may lead to that company taking a stake in all Infrastrata's projects in return for certain funding obligations. This was not the deal investors had been expecting and the date when significant value might accrue to shareholders looks to have been pushed further out. Elsewhere in the portfolio a poor trading environment affected the performance of Servoca and Bond International but the news coming from the majority of companies was on the whole more encouraging.

Investment Activity and Realisations

Investment into the portfolio amounted to £909,586 during the quarter.

Placings were supported in:

Avia Health Informatics

As one of the major shareholders in Avia, Bluehone AiM VCT2 supported a small fund raising with a further investment of £75,000 to help accelerate the development of its mobile clinical decision support software products and to complete the development of specific touch screen applications. The first product was launched in July under the name Odyssey Marine Assess which has been targeted at global cargo shipping companies and is designed to assist them in saving the considerable costs associated with diversion or evacuation of a vessel in the event of injury to or illness of a crew member. The first trial was announced in August with the European-based shipping management group, Intresco for use on some of its cargo ships.

Third Quad Capital

Bluehone AiM VCT2 backed the first acquisition by the new team at Third Quad with a further investment of £100,000 to help them buy a software company involved in the distribution of Macintosh based software. This is complementary to Third Quad's pc based software subsidiary.

Water Intelligence

A further investment of £225,000 was made in Water Intelligence which is a water related services company that was formed out of the reverse takeover of Qonnectis by American Leak in a deal that was part financed by Bluehone AiM VCT2. The enlarged group will offer residential, commercial and municipal customers alerts of water overflow, leak detection and remediation services. The company has an established franchise operation in the USA as well as a presence in seven other countries and intends to roll out the business model in the UK where it sees significant potential within Qonnectis customers such as Thames Water and Scottish Water.

One new company joined the portfolio following an investment of £500,000 in EKF Diagnostics Holdings. EKF is the new acquisition and growth vehicle of the team that built and successfully sold BBI Diagnostics; a former holding in Bluehone AiM VCT2. Having moved into an AiM listed shell company called International Brand Licensing in 2009 the new management raised £15 million in July 2010 in order to purchase the business of EKF Group. EKF is an established business with operations in Germany, Poland and Russia and is focused on the design, development, manufacture and selling of diagnostic instruments and reagents. EKF has its own sales force and is strong in Eastern Europe and Russia but is under-represented in four of the five largest markets in Western Europe. This is seen as a growth opportunity for the new team which has experience of acquiring, integrating and growing businesses in the diagnostic area. EKF focuses on two of the main segments of the point of care market: diabetes and anaemia testing. We like the diagnostic market which continues to show good growth characteristics. It is estimated that 70% of medical decisions are based on diagnostic test results which have traditionally been carried out by centralised testing laboratories. However, improvements in technology have lead to the emergence of point of care testing, which greatly saves both time and cost and is seen offering the best commercial opportunity.  Further acquisitions are anticipated from this team. The shares responded well to the relisting on AiM following the first deal.

The purchases during the quarter were:

Company	Date	Cost (£'000)	VCT status
EKF Diagnostics Holdings	Jun	500	Qualifying
Avia Health Informatics	Jun	75	Qualifying
Kiotech International	Jun	10	Non-qualifying
Water	Jun	225	Qualifying
Third Quad Capital	Aug	100	Qualifying
Total purchases		910

Investment Realisation

Total sales during the quarter amounted to £792,861.

The sales during the quarter were:

Company	Date	Proceeds (£'000)	Profit / (loss) (£'000)
Fulcrum Pharma	Jun	465	109
Win	Aug	328	54
Total sales		793	163

The cash balance at the end of the quarter was £1.2 million or 5.8% of the asset value

Top ten investment holdings

Position as at 31 August  2010	Position  as at 31 May 2010	Company	Percentage of net assets as at 31 August  2010
1	(1)	Cambridge Sensors	7.2
2	(4)	Datum International	4.7
3	(5)	Quadnetics	4.2
4	(7)	Vectura	4.2
5	(2)	Infrastrata	4.0
6	(3)	Mears Group	3.8
7	(-)	EKF Diagnostics Holdings	3.6
8	(9)	Clarity Commerce Solutions	3.3
9	(12)	Egdon Resources	3.0
10	(11)	K3 Business Technology	2.8
Total			40.8

Sector breakdown (Including cash and interest bearing securities)

	Percentage of total investments at  31 August 2010	Percentage of total investments at 31 May  2010
Industrials	31.6	27.0
Technology	22.2	21.4
Health care	19.8	20.8
Oil and gas	8.1	9.4
Consumer services	3.7	4.0
Utilities	3.7	2.6
Financials	2.4	2.3
Consumer goods	1.7	1.9
Basic materials	1.0	1.1
Telecommunications	0.0	1.2
Cash	5.8	8.3
Total	100.0	100.0

Enhanced Buy-Back Facility and Top-Up Offer

The Board of Bluehone AiM VCT2 plc announced earlier in the year its intention to implement an Enhanced Buy-back Facility whereby the holders of shares in the Company could have their existing shares bought back by the Company with the proceeds used to subscribe for new shares under the Offer made by the Company on 9 March 2010 the benefit being to claim 30% income tax relief on the amount reinvested. Documents were sent to shareholders in June and the Board was very pleased with the response, with the Company purchasing for cancellation 5.49 million shares at an average price of 34.23 pence per share as well as issuing 5.37 million shares at an average price of 36.6 pence per share, which was near to the maximum amount available, by the close of the offer on 27 August 2010. Shareholders who took part in the Facility and Offer were sent new share certificates in September.

Daily and key information

Further information regarding the Company, including daily net asset values published since the end of the period and quarterly factsheets, can be found at the Company's website www.bluehoneaimvct2.com

Year end:                     30 November 2010

Dividends paid:           An interim capital dividend of 0.5 pence per share was paid on 27 August 2010 to shareholders on the register on 6 August 2010.

Issued Share Capital: 59,277,137 ordinary shares of 10p each

For further information please contact:

Robert Mitchell, Bluehone Investors LLP: 0207 496 8929

Scott Macrae, F&C Asset Management plc:  0207 628 8000

 

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