Half-year Report

RNS Number : 9658I

Montanaro European Smaller C.TstPLC

29 November 2018

 

To:      RNS

Date:   29 November 2018

From: MONTANARO EUROPEAN SMALLER COMPANIES TRUST PLC

LEI:     213800CWSC5B8BG3RS21

UNAUDITED HALF YEARLY FINANCIAL REPORT FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2018

 

The Board of Montanaro European Smaller Companies Trust plc announces the unaudited interim results of the Company for the six months ended 30 September 2018.

Highlights

·      Net asset value ('NAV') per Ordinary Share +17.5%

·      Share price +20.6%

·      Benchmark index (capital return) +3.3%

·      Total assets +7.8% (£186.4 million)

Chairman's Statement

Performance

The first six months of the fiscal year saw the MSCI Europe SmallCap (ex UK) Index (the "Benchmark") rise by 3.3% in Sterling terms. Despite this muted performance by European smaller companies as a whole, the NAV return of the Company was exceptionally strong, rising by 17.5%.  Shareholders also benefitted from a narrowing of the discount from 11.2% to 8.8%.  As a result, the share price of the Company rose by 20.6% during this period.

Since the period end, global equity markets have weakened and the shares of European smaller companies have been no exception to this, with the benchmark falling by 11.6% in sterling terms and the NAV of the Company by 12.8%.

Earnings and Dividends

Revenue earnings per share for the period were 9.1p (2017: 10.0p).  The Board has declared an unchanged interim dividend of 1.75p per Ordinary Share payable on 4 January 2019 to shareholders on the register on 7 December 2018.

Borrowings

The Company refinanced its borrowings in mid-September and reduced the fixed level of debt from €25 million at an average cost of 2.11% per annum to €10 million at a lower rate of annual interest of 1.33% fixed for five years.  In addition, the Company also entered into a five year revolving credit facility for €15 million, which has not been drawn down.

At the end of the period, the Company had gearing, net of cash, of 0.1% compared to 0.6% at 31 March 2018.

The Board

After 26 years on the Board and 14 years as Chairman, Andy Irvine retired following the conclusion of the Annual General Meeting on 29 August 2018. I was honoured to accept the Board's invitation to become Chairman.  Andy has been a truly exceptional Chairman for the Company and its shareholders and I would like to thank him for his dedication and service. 

Bruce Graham and Alex Hammond-Chambers also retired following the Annual General Meeting.  I would also like to thank Bruce and Alex for their outstanding contribution, sound advice and commitment to the Company over many years.

Outlook

Your portfolio consists of some of the highest quality, growing companies in Europe.  The last six months have seen such companies significantly outperform relative to those at the lower quality, "value" end of the market, as uncertainties around global trade, economic growth and geopolitics have risen.  While some of this outperformance has been driven by better than expected earnings growth, relative valuations have also widened.  Given this, it would be unrealistic to expect the level of outperformance we have seen so far this year to continue at this pace.

Nevertheless, we believe that a focus on high quality, growing companies will continue to deliver strong absolute and relative returns for shareholders over the long term.  While rising bond yields have already led to a degree of turbulence across world equity markets, the global economy is growing and companies, particularly the smaller more entrepreneurial ones, of the type the portfolio holds, continue to innovate.  The companies in your portfolio are delivering high returns on capital while maintaining strong balance sheets and investing for the future.  We sleep better at night knowing that your money is invested in solid businesses led by strong, highly experienced management teams. 

R M CURLING

Chairman

29 November 2018

 

Statement of Comprehensive Income

for the six months ended 30 September 2018 (unaudited)

	Revenue	Capital	Total
	£'000	£'000	£'000
Gains on investments held at fair value	-	26,539	26,539
Exchange gains	-	34	34
	-	26,573	26,573
Revenue
Investment income                                                                    3	2,363	-	2,363
Total income	2,363	26,573	28,936
Expenditure
Management expenses                                                             4	(245)	(454)	(699)
Other expenses	(336)	-	(336)
Total expenditure	(581)	(454)	(1,035)
Profit before finance costs and tax	1,782	26,119	27,901
Finance costs	(84)	(155)	(239)
Profit before tax	1,698	25,964	27,662
Tax	(170)	-	(170)
Total comprehensive income	1,528	25,964	27,492
Return per share                                                                      5	9.1p	155.2p	164.3p

The total column of this statement represents the Company's Income Statement and Statement of Comprehensive Income, prepared in accordance with IFRS.

The supplementary revenue return and capital return columns are both prepared under guidance published by the Association of Investment Companies.

All revenue and capital items in the above statement derive from continuing operations.

No operations were acquired or discontinued during the period.

 

Statement of Comprehensive Income

for the six months ended 30 September 2017 (unaudited)

	Revenue	Capital	Total
	£'000	£'000	£'000
Gains on investments held at fair value	-	15,791	15,791
Exchange losses	-	(254)	(254)
	-	15,537	15,537
Revenue
Investment income                                                                    3	2,485	-	2,485
Total income	2,485	15,537	18,022
Expenditure
Management expenses                                                             4	(217)	(403)	(620)
Other expenses	(311)	-	(311)
Total expenditure	(528)	(403)	(931)
Profit before finance costs and tax	1,957	15,134	17,091
Finance costs	(91)	(168)	(259)
Profit before tax	1,866	14,966	16,832
Tax	(191)	-	(191)
Total comprehensive income	1,675	14,966	16,641
Return per share                                                                      5	10.0p	89.4p	99.4p

The total column of this statement represents the Company's Income Statement and Statement of Comprehensive Income, prepared in accordance with IFRS.

The supplementary revenue return and capital return columns are both prepared under guidance published by the Association of Investment Companies.

All revenue and capital items in the above statement derive from continuing operations.

No operations were acquired or discontinued during the period.

 

Statement of Comprehensive Income

for the Year Ended 31 March 2018 (audited)

	Revenue	Capital	Total
Notes	£'000	£'000	£'000
Gains on investments held at fair value	-	15,962	15,962
Exchange losses	-	(284)	(284)
	-	15,678	15,678
Revenue
Investment income                                                                3	3,094	-	3,094
Total income	3,094	15,678	18,772
Expenditure
Management expenses                                                         4	(442)	(821)	(1,263)
Other expenses	(667)	-	(667)
Total expenditure	(1,109)	(821)	(1,930)
Profit before finance costs and tax	1,985	14,857	16,842
Finance costs	(179)	(333)	(512)
Profit before tax	1,806	14,524	16,330
Tax	(223)	-	(223)
Total comprehensive income	1,583	14,524	16,107
Return per share                                                                  5	9.5p	86.8p	96.3p

The total column of this statement represents the Company's Income Statement and Statement of Comprehensive Income, prepared in accordance with IFRS.

The supplementary revenue return and capital return columns are both prepared under guidance published by the Association of Investment Companies.

All revenue and capital items in the above statement derive from continuing operations.

No operations were acquired or discontinued in the year.

 

Balance Sheet

As at 30 September 2018

	Notes	As at 30 September 2018 (unaudited)	As at 30 September 2017 (unaudited)	As at 31 March 2018 (audited)
		£'000	£'000	£'000
Non-current assets
Investments held at fair value through profit and loss	7	177,338	154,650	151,728
Current assets
Trade and other receivables		638	585	578
Cash and cash equivalents		8,391	18,798	20,574
		9,029	19,383	21,152
Total assets		186,367	174,033	172,880
Current liabilities
Trade and other payables		(341)	(434)	(201)
Interest-bearing bank loans	8	-	(21,996)	(21,903)
		(341)	(22,430)	(22,104)
Non-current liabilities
Interest-bearing bank loans	8	(8,887)	-	-
Total liabilities		(9,228)	(22,430)	(22,104)
Net assets		177,139	151,603	150,776
Capital and reserves
Called-up share capital		8,724	8,724	8,724
Share premium account		5,283	5,283	5,283
Capital redemption reserve		2,212	2,212	2,212
Capital reserve		156,880	131,358	130,916
Revenue reserve		4,040	4,026	3,641
Shareholders' funds		177,139	151,603	150,776
Net asset value per share	9	1,058.6p	906.0p	901.1p

 

Statement of Changes in Equity

for the six months ended 30 September 2018 (unaudited)

	Share capital	Share premium account	Capital redemption reserve	Capital reserve	Revenue reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 1 April 2018	8,724	5,283	2,212	130,916	3,641	150,776
Total comprehensive income	-	-	-	25,964	1,528	27,492
Dividends  paid	-	-	-	-	(1,129)	(1,129)
Balance at 30 September 2018	8,724	5,283	2,212	156,880	4,040	177,139

Statement of Changes in Equity

for the six months ended 30 September 2017 (unaudited)

	Share capital	Share premium account	Capital redemption reserve	Capital reserve	Revenue reserve		Total
	£'000	£'000	£'000	£'000	£'000		£'000
Balance at 1 April 2017	8,724	5,283	2,212	116,392	3,439	136,050
Total comprehensive income	-	-	-	14,966	1,675	16,641
Dividends  paid	-	-	-	-	(1,088)	(1,088)
Balance at 30 September 2017	8,724	5,283	2,212	131,358	4,026	151,603

Statement of Changes in Equity

for the year ended 31 March 2018 (audited)

	Share capital	Share premium account	Capital redemption reserve	Capital reserve	Revenue reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 1 April 2017	8,724	5,283	2,212	116,392	3,439	136,050
Total comprehensive income	-	-	-	14,524	1,583	16,107
Dividends paid	-	-	-	-	(1,381)	(1,381)
Balance at 31 March 2018	8,724	5,283	2,212	130,916	3,641	150,776

 

Condensed Statement of Cash Flows

for the six months ended 30 September 2018

	Six months to		Six months to		Year to
	30 September		30 September		31 March
	2018		2017		2018
	(unaudited)		(unaudited)		(audited)
	£'000		£'000		£'000
Net cash inflow from operating activities	2,185		8,595		11,039
Cash outflow from financing activities	(14,784)		(1,331)		(1,859)
	(12,599)		7,264		9,180
Exchange gains	416		390		250
(Decrease)/ increase in cash and cash equivalents	(12,183)		7,654		9,430

Reconciliation of profit before finance costs and tax to net cash inflow from operating activities

Profit before finance costs and tax		27,901		17,091		16,842
Gains on investments held at fair value		(26,539)		(15,791)		(15,962)
Exchange (gains)/ losses		(34)		254		284
Withholding tax		(232)		(303)		(325)
Purchases of investments		(22,550)		(19,925)		(26,404)
Sales of investments		23,479		27,099		36,627
Changes in working capital and other non-cash items		160		170		(23)
Net cash inflow from operating activities		2,185		8,595		11,039

 

Statement of Principal Risks and Uncertainties

Most of the principal risks that could threaten the Company's objective, strategy, future returns and solvency are market related and comparable to those of other investment trusts investing primarily in quoted securities.

The principal risks faced by the Company are investment and strategic, gearing, financial, discount volatility, regulatory, operational and manager risks.  These risks, and the way in which they are mitigated, are described in more detail under the heading Principal Risks and Uncertainties and Risk Mitigation within the Business Model and Strategy in the Company's Annual Report for the year ended 31 March 2018.  The Company's principal risks and uncertainties have not changed materially since the date of that report and are not expected to change materially for the remaining six months of the Company's financial year.

Directors' Responsibility Statement in Respect of the Interim Report

We confirm that to the best of our knowledge:

·    the condensed set of financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting' and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company;

·    the Chairman's Statement (constituting the Interim Management Report) includes a fair review of the information required by the Disclosure Guidance and Transparency Rules ('DTR') 4.2.7R, being an indication of important events that have occurred during the first six months of the financial year and their impact on the financial statements;

·     the Statement of Principal Risks and Uncertainties shown above is a fair review of the information required by DTR 4.2.7R; and

·     the Chairman's Statement together with the condensed set of financial statements includes a fair review of the information required by DTR 4.2.8R, being related party transactions that have taken place in the first six months of the financial year and that have materially affected the financial position or performance of the Company during the period, and any changes in the related party transactions described in the last Annual Report that could do so.

On behalf of the Board

R M CURLING

Director

29 November 2018

 

Notes to the Accounts

1.         The condensed unaudited financial statements have been prepared in accordance with International Financial Reporting Standard ('IFRS') IAS 34 'Interim Financial Reporting' and the accounting policies set out in the statutory accounts of the Company for the year ended 31 March 2018. The condensed financial statements do not include all of the information required for a complete set of IFRS financial statements and should be read in conjunction with the financial statements of the Company for the year ended 31 March 2018, which were prepared under full IFRS requirements, to the extent that they have been adopted by the European Union.

2.         Earnings for the first six months should not be taken as a guide to the results for the full year.

3.         Income for the period is derived from:

	Six months to 30 September 2018 £'000	Six months to 30 September 2017 £'000	Year ended 31 March 2018 £'000
Overseas dividend income	2,363	2,485	3,094

4.         Management expenses:

	Six months to 30 September 2018			Six months to 30 September 2017			Year ended 31 March 2018
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Investment management fee	236	438	674	208	387	595	424	789	1,213
AIFM fee	9	16	25	9	16	25	18	32	50
	245	454	699	217	403	620	442	821	1,263

            The Company's Investment Manager is Montanaro Asset Management Limited ('MAM').  MAM receives an investment management fee of 0.9% per annum of the Company's market capitalisation (payable monthly in arrears).

            MAM is also entitled to a fee of £50,000 per annum for acting as the Company's AIFM.

5.         Earnings per Ordinary Share is based on a weighted average of 16,733,260 Ordinary Shares in issue during the period (year ended 31 March 2018: 16,733,260 and six months ended 30 September 2017: 16,733,260), excluding those shares bought back and held in treasury.

6.         The interim dividend relating to the year ending 31 March 2019 of 1.75p per Ordinary Share will be paid on 4 January 2019 to shareholders on the register on 7 December 2018.  In accordance with IFRS, this dividend has not been recognised in these financial statements.  The ex-dividend date for this payment is 6 December 2018.

            A final dividend relating to the year ended 31 March 2018 of 6.75p per Ordinary Share was paid during the six months to 30 September 2018 and amounted to £1,129,000.

 

7.          Investments at Fair Value Through Profit and Loss:

	30 September 2018 £'000	30 September 2017 £'000	31 March 2018 £'000
Opening book cost	93,523	89,157	89,157
Holding gains	58,205	56,832	56,832
Opening fair value	151,728	145,989	145,989
Purchases at cost	22,550	19,969	26,404
Sales - proceeds           - gains on sales	(23,479) 9,683	(27,099) 10,306	(36,627) 14,589
Holding gains	16,856	5,485	1,373
Closing fair value	177,338	154,650	151,728
Closing book cost	102,277	92,333	93,523
Holding gains	75,061	62,317	58,205
Closing valuation	177,338	154,650	151,728

8.         Interest-Bearing Bank Loans:

	30 September 2018 £'000	30 September 2017 £'000	31 March 2018 £'000
Opening Balance	21,903	21,335	21,335
Loans repaid during the period	(13,413)	-	-
Amortisation of set-up costs	15	17	34
Non-cash foreign currency movements	382	644	534
	8,887	21,996	21,903

The Company's fixed rate loan facilities totalling €25 million matured on 13 September 2018.  The Company refinanced €10 million by entering into a five year secured loan at a fixed rate of 1.33% per annum with ING Bank N.V.  This loan will mature on 13 September 2023. The Company's other fixed rate loan totalling €15 million was repaid.  The Company has also entered into a five year revolving credit facility with ING, for €15 million.

            Under the bank covenants relating to these facilities, the Company is to ensure that at all times the total borrowings of the Company do not exceed 40% of the Adjusted Net Asset Value (as defined in the facility agreements) and that the Adjusted Net Asset Value does not fall below £45 million. The Company met all covenant conditions during the period.

            The fair value of the fixed rate loans is show in note 10.

9.         The net asset value per Ordinary Share is based on 16,733,260 Ordinary Shares in issue at the end of the period (31 March 2018: 16,733,260 and 30 September 2017: 16,733,260), excluding those shares bought back and held in treasury.  As at 30 September 2018 there were 715,000 Ordinary Shares held in treasury (31 March 2018: 715,000 and 30 September 2017: 715,000).

10.        The Company held the following categories of financial instruments at the period end:

	Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
30 September 2018
Investments	177,338	-	-	177,338
Loans	-	(8,883)	-	(8,883)
30 September 2017
Investments	154,650	-	-	154,650
Loan	-	(22,209)	-	(22,209)
31 March 2018
Investments	151,728		-	151,728
Loans	-	(22,002)	-	(22,002)

The table above provides an analysis of financial instruments based on the fair value hierarchy described below and which reflects the reliability and significance of the information used to measure their fair value. The levels are determined by the lowest significant applicable input:

Level 1 reflects financial instruments quoted in an active market.

Level 2 reflects financial instruments whose fair value is evidenced by comparison with other observable current market transactions in the same instrument or based on a valuation technique whose variables include only observable market data.

Level 3 reflects financial instruments whose fair value is determined in whole or in part using a valuation technique based on assumptions that are not supported by prices from observable market transactions in the same instrument and not based on available observable market data.

There were no transfers between levels during the period ended 30 September 2018 (year ended 31 March 2018 and period ended 30 September 2017: none).

Listed investments held (see note 7) are valued at fair value through profit or loss.  For listed securities this is either bid price or the last traded price depending on the convention of the exchange on which the investment is listed.  The fair value of the loans is calculated using a discounted cash flow technique based on relevant current interest rates compared to their value as stated on the Balance Sheet at amortised cost of £8,887,000 (31 March 2018: £21,903,000 and 30 September 2017: £21,996,000).  The fair value of all other financial assets and liabilities is represented by their carrying value in the Balance Sheet.

Other aspects of the Company's financial risk management objectives and policies are consistent with those disclosed in the financial statements as at and for the year ended 31 March 2018.

11.        Rates of exchange (to Sterling):

	30 September 2018		31 March 2018
Danish Krone	8.37		8.50
Euro	1.12		1.14
Norwegian Krone	10.62		11.01
Swedish Krona	11.60		11.75
Swiss Franc	1.27		1.34

12.        The Board has considered the requirements of IFRS 8 'Operating Segments'. The Board is of the view that the Company is engaged in a single segment of business, of investing in European quoted smaller companies, and that therefore the Company has only a single operating segment. The Board of Directors, as a whole, has been identified as constituting the chief operating decision maker of the Company. The key measure of performance used by the Board to assess the Company's performance is the total return on the Company's net asset value, as calculated under IFRS, and therefore no reconciliation is required between the measure of profit or loss used by the Board and that contained in the financial statements.

13.        Going Concern:

In assessing the going concern basis of accounting, the Directors have had regard to the guidance issued by the Financial Reporting Council and have undertaken a rigorous review of the Company's ability to continue as a going concern.  They have considered the current cash position of the Company, the availability of the borrowing facilities to 13 September 2023, compliance with their covenants and the ability to refinance them, the Company's other liabilities and forecast revenues.  The Directors have also taken into account the Company's investment policy, which is subject to regular Board monitoring processes and is designed to ensure that the Company is invested mainly in liquid, listed securities.  The Company retains title to all assets held by its custodian and has financial covenants, relating to its bank borrowings with which it complied during the period.

The Directors believe, in light of the controls and review processes noted above and bearing in mind the nature of the Company's business and assets and liabilities, that the Company has adequate resources to continue in operational existence for a period of at least twelve months from the date of approval of the accounts.  For this reason, they continue to adopt the going concern basis in preparing the accounts.

14.      These are not statutory accounts in terms of Section 434 of the Companies Act 2006 and have not been audited or reviewed by the Company's Auditor. The information for the year ended 31 March 2018 has been extracted from the latest published financial statements and which have been filed with the Registrar of Companies. The auditor's report on those accounts was not qualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report and did not contain statements under section 498 (2) or (3) of the Companies Act 2006.  No statutory accounts in respect of any period after 31 March 2018 have been reported on by the Company's Auditor or delivered to the Registrar of Companies. The Half-Yearly Financial Report is available on the Manager's website: www.montanaro.co.uk.

For further information please contact:

Montanaro Asset Management Limited

Tel: [phone]

 

END

 

 

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