Half Yearly Report

RNS Number : 5139C

Montanaro European Smaller C.TstPLC

13 November 2009

 



MONTANARO EUROPEAN SMALLER COMPANIES TRUST PLC

Date:    13 November 2009

HALF YEARLY FINANCIAL REPORT FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2009

Investment Objective

To achieve capital growth by investing principally in European quoted smaller companies. The Company's benchmark index is the MSCI Europe SmallCap (ex UK) Index (in sterling terms).

Highlights

• Net Asset Value ('NAV') per Ordinary Share +44.4%

• Share price +49.0% 

• Benchmark index +57.5%*

• Total assets +57.7%(£71.8 million)

• European SmallCap outperformed European LargeCap by 25.8%

* MSCI Europe SmallCap Index (in sterling terms) until 31 May 2009. MSCI Europe SmallCap (ex UK) Index (in sterling terms) from 1 June 2009.

CHAIRMAN'S STATEMENT

Performance

I am happy to report a considerable recovery in the Company's net asset value ('NAV') over the six month period ended 30 September 2009. It rose by 44.4% from 257.36p to 371.62p per share; notably it ended the period 17.2% higher than a year ago when the financial crisis erupted. Even better still, the share price rose by 49.0% to 329.00p

European stock markets performed strongly over the period, as investor risk appetite rapidly improved and evidence accumulated of an improvement in economic conditions in Europe, reflecting the stimulative fiscal and monetary policies initiated globally in late 2008. There was also an improvement in the outlook for corporate profits, with signs that the levels of profit warnings and dividend cuts had peaked.

In these circumstances the benchmark (expressed in sterling) rose by 57.5%. The best performing shares were those of companies which were either heavily indebted or whose shares and profits had significant cyclical exposure. The share prices of more stable and soundly financial companies, in which the Company typically invests, did not perform as well, having, generally speaking, not fallen as far during the financial crisis. This is the principal reason for the underperformance of our NAV over this short period of time. 

Over the longer three year period ended 30 September 2009 since the appointment of Montanaro Asset Management Ltd as investment managers, the Company's NAV rose by 5.7% outperforming the benchmark which rose by 1.3% over that period.

Realignment of Portfolio

As stated in the recent Annual Report, since the change of Manager in 2006, the Company has invested in companies quoted both within Continental Europe and in the United Kingdom. As at 31 March 2009, 17.7% of the Company's portfolio was invested in UK quoted companies.

After discussions with advisors and investors, the Board decided that it would be more appropriate for the Company to be invested in, and only in, Continental European quoted companies. During the period under review, the Manager therefore realigned the portfolio, selling all the positions in UK quoted companies. To reflect this change, with effect from 1 June 2009, the Company's benchmark changed to the MSCI Europe SmallCap (ex UK) Index (in sterling terms), which comprises only companies in Continental Europe.

Earnings and Dividends

Revenue earnings per share were 3.39 pence in respect of the six month period ended 30 September 2009 (2008: 7.01 pence). The decrease in earnings for the period is due principally to lower levels of income from the portfolio and the absence of recoveries associated with VAT on investment management fees. Special dividends of 2.83 pence per share were paid in respect of VAT related recoveries during the year ended 31 March 2009. As previously reported, those special dividends were of an exceptional nature and will therefore not be repeated in future years.

The Board has declared an unchanged interim dividend of 1.75 pence per Ordinary Share, payable on 8 January 2010 to shareholders on the register on 11 December 2009. 

Borrowings

As a reflection of our more optimistic outlook, the Company's borrowings increased from £2.5 million to £10.1 million during the period.

The Company's borrowings are represented by a flexible revolving credit facility, which enables gearing to be increased or decreased as considered appropriate. 

Outlook

Although there are uncertainties as to the eventual shape of the economic recovery in Europe, the outlook is more promising than it was earlier in the year. However, the level of public debt in many countries is very high by historic standards, and unemployment is likely to continue to rise. These factors may temper the recovery. Furthermore, following the very strong rally over the period, stock markets may be considered overdue for a correction. 

That said, equities remain reasonably valued and SmallCap equities are not expensive relative to LargeCap equities. In the months ahead there are likely to be positive earnings surprises as well as a continued pick-up in mergers and acquisitions activity, which should support the continued outperformance of smaller companies relative to their larger counterparts. 

A R Irvine

Chairman

  Condensed Unaudited Group Income Statement

	Six Months to 30 September 2009
	Revenue		Capital		Total
	£'000		£'000		£'000
Income
Investment income	1,136		-		1,136
Other operating income	9		-		9
	______		______		______
	1,145		-		1,145
Gains on investments held at fair value	-		19,599		19,599
Exchange differences	-		(372)		(372)
	______		______		______
Total income	1,145		19,227		20,372
Expenses
Management expenses	(80)		(148)		(228)
Other expenses	(272)		-		(272)
	______		______		______
Profit before finance costs and tax	793		19,079		19,872
Finance costs	(28)		(52)		(80)
	______		______		______
Net operating profit before tax	765		19,027		19,792
Tax	(204)		99		(105)
	______		______		______
Net profit	561		19,126		19,687
	______		______		______
Earnings per share	3.39p		115.40p		118.79p
	______	______		______

The total column of this statement is the profit and Loss Account of the Group. 

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

No operations were acquired or discontinued during the period.  Condensed Unaudited Group Income Statement

	Six Months to 30 September 2008
	Revenue		Capital	Total
	£'000		£'000	£'000
Income
Investment income	1,321		-	1,321
Other operating income	145		-	145
	______		______	______
	1,466		-	1,466
Losses on investments held at fair value	-		(15,350)	(15,350)
Exchange differences	-		73	73
	______		______	______
Total income	1,466		(15,277)	(13,811)
Expenses
Management expenses	80		148	228
Other expenses	(182)		-	(182)
	______		______	______
Profit/(loss) before finance costs and tax	1,364		(15,129)	(13,765)
Finance costs	(49)		(90)	(139)
	______		______	______
Net operating profit/(loss) before tax	1,315		(15,219)	(13,904)
Tax	(124)		-	(124)
	______		______	______
Net profit/(loss)	1,191		(15,219)	(14,028)
	______	______		______
Earnings per share	7.01p		(89.62)p	(82.61)p
	______		______	______

The total column of this statement is the profit and Loss Account of the Group. 

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

No operations were acquired or discontinued during the period.

  Condensed Audited Group Income Statement

	Year to 31 March 2009
	Revenue		Capital	Total
	£'000		£'000	£'000
Income
Investment income	2,005		-	2,005
Other operating income	403		-	403
	______		______	______
	2,408		-	2,408
Losses on investments held at fair value	-		(26,364)	(26,364)
Exchange differences	-		880	880
	______		______	______
Total income	2,408		(25,484)	(23,076)
Expenses
Management expenses	88		164	252
Other expenses	(433)		-	(433)
	______		______	______
Profit/(loss) before finance costs and tax	2,063		(25,320)	(23,257)
Finance costs	(82)		(153)	(235)
	______		______	______
Net operating profit/(loss) before tax	1,981		(25,473)	(23,492)
Tax	(494)		322	(172)
	______		______	______
Net profit/(loss)	1,487		(25,151)	(23,664)
	______	______		______
Earnings per share	8.82p		(149.16)p	(140.34)p
	______		______	______

The total column of this statement is the profit and Loss Account of the Group. 

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

No operations were acquired or discontinued during the period.

  Condensed Unaudited Group Balance Sheet 

	As at 30 September 2009	As at 30 September 2008	As at 31 March 2009
	£'000	£'000	£'000
Non-current assets
Investments held at fair value	67,084	51,634	40,655
	_______	_______	_______
Current assets
Other receivables	141	619	393
Cash and cash equivalents	4,600	1,195	4,491
	_______	_______	_______
	4,741	1,814	4,884
	_______	_______	_______
Total assets	71,825	53,448	45,539
	_______	_______	_______
Current liabilities
Other payables	(10,236)	(139)	(2,886)
	_______	_______	_______
Total liabilities	(10,236)	(139)	(2,886)
	_______	_______	_______
Net assets	61,589	53,309	42,653
	_______	_______	_______
Capital and reserves
Called-up share capital	8,724	8,724	8,724
Share premium account	3,935	3,935	3,935
Capital redemption reserve	2,212	2,212	2,212
Capital reserve	44,324	35,680	25,198
Revenue reserve	2,394	2,758	2,584
	_______	_______	_______
Shareholders' funds	61,589	53,309	42,653
	_______	_______	_______
Net asset value per share	371.62p	316.97p	257.36p
	_______	_______	_______

  Unaudited Group Statement of Changes in Equity

	Share capital	Share premium account	Capital redemption reserve	Capital reserve	Revenue reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance as at 1 April 2009	8,724	3,935	2,212	25,198	2,584	42,653
Net loss on realisation of investments	-	-	-	(4,047)	-	(4,047)
Increase in unrealised appreciation	-	-	-	23,646	-	23,646
Exchange losses	-	-	-	(372)	-	(372)
Management fee charged to capital	-	-	-	(148)	-	(148)
Interest charged to capital	-	-	-	(52)	-	(52)
Taxation	-	-	-	99	-	99
Retained net revenue for the period	-	-	-	-	561	561
Dividends paid	-	-	-	-	(751)	(751)
	_____	______	______	______	______	______
Balance as at 30 September 2009	8,724	3,935	2,212	44,324	2,394	61,589
	_____	______	______	______	______	______
Balance as at 1 April 2008	8,724	3,935	2,212	52,238	1,952	69,061
Net loss on realisation of investments	-	-	-	(1,091)	-	(1,091)
Decrease in unrealised appreciation	-	-	-	(14,259)	-	(14,259)
Exchange gains	-	-	-	73	-	73
Management fee charged to capital	-	-	-	148	-	148
Interest charged to capital	-	-	-	(90)	-	(90)
Retained net revenue for the period	-	-	-	-	1,191	1,191
Ordinary Shares purchased to be held in treasury	-	-	-	(1,339)	-	(1,339)
Dividends paid	-	-	-	-	(385)	(385)
	_____	______	______	______	______	______
Balance as at 30 September 2008	8,724	3,935	2,212	35,680	2,758	53,309
	_____	______	______	______	______	______
Balance as at 1 April 2008	8,724	3,935	2,212	52,238	1,952	69,061
Net loss on realisation of investments	-	-	-	(4,698)	-	(4,698)
Decrease in unrealised appreciation	-	-	-	(21,666)	-	(21,666)
Exchange gains	-	-	-	880	-	880
Management fee charged to capital	-	-	-	164	-	164
Interest charged to capital	-	-	-	(153)	-	(153)
Taxation	-	-	-	322	-	322
Retained net revenue for the year	-	-	-	-	1,487	1,487
Ordinary Shares purchased to be held in treasury	-	-	-	(1,889)	-	(1,889)
Dividends paid	-	-	-	-	(855)	(855)
	_____	______	______	______	______	______
Balance as at 31 March 2009	8,724	3,935	2,212	25,198	2,584	42,653
	_____	______	______	______	______	______

   Condensed Unaudited Group Statement of Cash Flows

	Six months to		Six months to	Year to
	30 September		30 September	31 March
	2009		2008	2009
	£'000		£ '000	£'000
Net cash from operating activities	582		831	2,000
Cash flows from investing activities	(6,804)		567	508
Cash flows from financing activities	6,206		(12,512)	(10,990)
	______		______	______
	(16)		(11,114)	(8,482)
Exchange losses	125		73	737
	______		______	______
Increase/(decrease) in cash and cash equivalents	109		(11,041)	(7,745)
	______		______	______
Reconciliation of net operating profit/(loss) before finance costs and tax to net cash flow from operating activities
Net operating profit/(loss) before finance costs and tax		19,872	(13,765)	(23,257)
(Gains)/losses on investments held at fair value		(19,599)	15,350	26,364
Exchange differences		372	(73)	(880)
Withholding tax		(105)	(124)	(172)
Changes in working capital and other non cash items		42	(557)	(55)
		______	______	______
Net cash from operating activities		582	831	2,000
		______	______	______

  Notes to the accounts

1.    The accounting policies adopted in the preparation of the interim financial statements are consistent with those followed in the preparation of the annual report and financial statements for the year ended 31 March 2009.

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

3.    Management expenses

	Six Months to 30  September 2009			Six Months to 30 September 2008			Year ended 31 March 2009
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Investment Management Fee	80	148	228	99	185	284	163	303	466
VAT recoverable	-	-	-	(179)	(333)	(512)	(251)	(467)	(718)
	__	___	___	____	____	____	____	____	____
	80	148	228	(80)	(148)	(228)	(88)	(164)	(252)
	__	___	___	____	____	____	____	____	____

    The Association of Investment Companies and JP Morgan Claverhouse Investment Trust plc lodged a joint appeal in 2004 for the payment of management fees by investment trusts to be treated as exempt from VAT. In June 2007, the European Court of Justice ('ECJ') found in favour of the appellants, declaring that investment trusts should be treated as special investment funds and thus exempt from VAT on management fees. HM Revenue & Customs ('HMRC') announced that it would not appeal against the ECJ decision.

    The recoverable VAT above was in relation to agreement having been reached with HMRC for prior years.  This was recognised within the Income Statement during the year ended 31 March 2009 and allocated between revenue and capital in accordance with the accounting policies applicable to allocation of fees at the time the VAT was suffered.  

4.    Earnings per Ordinary Share is based on a weighted average of 16,573,260 Ordinary Shares in issue during the period (year end 31 March 2009: 16,861,863; six months ended 30 September 2008: 16,981,391), excluding those shares bought back and held in treasury.

5.    The interim dividend of 1.75 pence per Ordinary Share will be paid on 8 January 2010 to shareholders on the register on 11 December 2009.

6.    The NAV per Ordinary Share is based on 16,573,260 Ordinary Shares in issue at the end of the period (31 March 2009: 16,573,260; 30 September 2008: 16,818,260), excluding those shares bought back and held in treasury.

7.   The Group results consolidate those of MESCT Securities Limited, a wholly owned non-trading subsidiary.

8.  These are not statutory accounts in terms of Section 434 of the Companies Act 2006 and are unaudited. The information for the year ended 31 March 2009 has been extracted from the latest published financial statements which received an unqualified audit report and have been filed with the Registrar of Companies. No statutory accounts in respect of any period after 31 March 2009 have been reported on by the Company's Auditors or delivered to the Registrar of Companies. The Half Yearly Financial Report will be available on the website: www.montanaro.co.uk.

Statement of Principal Risks and Uncertainties

The principal risk faced by the Company is that it fails to produce the capital appreciation stated as its objective, and the NAV does not rise over the longer-term.  The risks which might give rise to this can be categorised as external, manager, investment and strategy, portfolio liquidity, gearing, regulatory, operational, financial, banking and reputational. In addition, shareholders face the risks of liquidity of the Company's shares and discount volatility.

These risks, and the way in which they are mitigated, are described in more detail under the heading Principal Risks and Risk Mitigation in the Report of the Directors in the Company's Annual Report for the year ended 31 March 2009. 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 Half Yearly Financial Report

We confirm that to the best of our knowledge:

• the condensed set of consolidated 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 of the Company;

• the Chairman's Statement (constituting the Interim Management Report) together with the Statement of Principal Risks and Uncertainties include a fair review of the information required by the Disclosure 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 condensed set of consolidated financial statements; and 

• The Chairman's Statement together with the financial statements include 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 current financial year and that have materially affected the financial position or performance of the Company during that period, and any changes in the related party transactions described in the last Annual Report that could do so.

On behalf of the Board

A R IRVINE

Director

For further information contact:

Montanaro Asset Management Limited: tel. [phone]

 

END

 

 

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