17 MAY 2016
NORTHERN 2 VCT PLC
RESULTS FOR THE YEAR ENDED 31 MARCH 2016
Northern 2 VCT PLC is a Venture Capital Trust (VCT) managed by NVM Private Equity. The trust invests mainly in unquoted venture capital holdings and aims to provide high long-term tax-free returns to shareholders through a combination of dividend yield and capital growth.
Financial highlights (comparative figures as at 31 March 2015):
| 2016 | 2015 |
Net assets | £71.3m | £78.7m |
Net asset value per share | 77.9p | 85.4p |
Return per share: | ||
Revenue | 1.5p | 1.8p |
Capital | 6.5p | 1.6p |
Total | 8.0p | 3.4p |
Dividend per share for the year: | ||
First interim dividend | 2.0p | 2.0p |
Second interim (special) dividend | 5.0p | 10.0p |
Proposed final dividend | 3.5p | 3.5p |
Total | 10.5p | 15.5p |
Cumulative return to shareholders since launch: | ||
Net asset value per share | 77.9p | 85.4p |
Dividends paid per share* | 90.9p | 75.4p |
Net asset value plus dividends paid per share | 168.8p | 160.8p |
Mid-market share price at end of year | 72.5p | 77.5p |
Share price discount to net asset value | 6.9% | 9.3% |
Tax-free dividend yield (based on mid-market share price at end of year): | ||
Excluding special dividend Including special dividend | 7.6% 14.5% | 7.1% 20.0% |
*Excluding second interim and proposed final dividend payable on 22 July 2016
For further information, please contact:
NVM Private Equity LLP
Alastair Conn/Christopher Mellor 0191 244 6000
Website: www.nvm.co.uk
NORTHERN 2 VCT PLC
CHAIRMAN'S STATEMENT
I am pleased to report that our investment portfolio has continued to make good progress over the past year and some significant exits were achieved, as a result of which your directors have declared a special dividend of 5.0p per share in addition to the annual payment of 5.5p per share we have maintained in recent years. Shareholders will be aware that the Government has recently introduced some unanticipated changes to the rules governing the VCT scheme. Whilst the new rules were being assimilated there has inevitably been a falling off in new investment activity over the second half of the financial year. The changes have also prompted a review of our future investment strategy.
Results and dividend
The net asset value (NAV) per share at 31 March 2016, after deducting dividends totalling 15.5p which were paid during the year, was 77.9p compared with 85.4p as at 31 March 2015. The total return per share for the year as shown in the income statement was 8.0p (last year 3.4p), equivalent to 9.4% of the opening NAV. Net gains on the sale of investments totalled £2.2 million and there was an overall uplift of £5.1 million in the valuation of the continuing portfolio, reflecting strong performance by a number of our unquoted holdings. Your directors consider that these are very satisfactory results.
Since 2004 our company has maintained an annual dividend payment of at least 5.5p per share, giving shareholders a degree of predictability as to the annual income from their investment. In the year to 31 March 2015 an exceptional level of investment realisations was achieved and the directors were able to declare an additional special dividend of 10.0p per share, taking the total for that year to 15.5p. In respect of the year ended 31 March 2016, an interim dividend of 2.0p per share was paid in January 2016 and a final dividend of 3.5p is again proposed by the directors. In addition, continuing strong cash flow from the portfolio enables us to declare a special dividend of 5.0p, making a total of 10.5p for the year. The special dividend will be designated as a second interim dividend for the year ended 31 March 2016, and will be paid on 22 July 2016 to shareholders on the register on 24 June 2016. The proposed final dividend will also, subject to approval by shareholders at the annual general meeting, be paid on 22 July 2016, so that the total dividend payment on 22 July will be 8.5p per share.
Whilst the board has no present intention of changing its annual dividend objective, shareholders ought to be aware that we will be keeping the position under review in the light of the likely changes in the profile of our venture capital portfolio as a result of the changes to the VCT legislation, on which further comment is made below.
We announced in January 2016 that the company's dividend investment scheme, which had been suspended during our initial appraisal of the legislative changes, would be reinstated with immediate effect. The scheme enables shareholders to re-invest their dividends in new ordinary shares in the company at a price equivalent to the latest NAV, with the benefit of the tax reliefs available on new subscriptions to VCTs. Further details of the scheme are included in a separate letter which will be sent to shareholders with the annual report.
Investment portfolio
As previously reported, in April 2015 we invested £9.1 million in six new companies launched with a view to commencing a VCT-qualifying trade. Subsequently two further unquoted investments, Love Saving Group and Entertainment Magpie Group, were completed as well as an AIM-quoted investment in Gear4music (Holdings). Our managers continue to see a good flow of investment opportunities which we anticipate will qualify under the new VCT rules, although we continue to see some delays in obtaining investment approvals from HM Revenue & Customs. HMRC has now issued draft guidelines to the operation of the amended VCT scheme which it is hoped will lead to an uplift in the level of activity.
Satisfactory exits were achieved during the year from the investments in Kitwave One, Control Risks Group Holdings, Tinglobal Holdings and Direct Valeting. Cash proceeds received amounted to £7.4 million, including £0.5 million of deferred consideration from investments sold in previous years. The companies still in the portfolio have generally performed well, and the number of cases where progress is significantly behind plan remains low.
Shareholder issues
The company has maintained its policy of buying back its own shares in the market, at a discount to NAV which the board reduced from 10% to 5% 12 months ago. During the year a total of 570,000 shares were repurchased for cancellation at an average price of 71.9p.
Shareholders will be aware that we have not raised new funds from share issues, other than through the dividend investment scheme, in either the 2014/15 or 2015/16 tax years. This reflects the high inflow of cash from successful investment realisations over the past two years and the directors' desire to avoid holding unnecessary levels of liquid funds. Nevertheless we appreciate that many shareholders would welcome the opportunity to make a further investment in the company, and we will keep further share offers under review.
The annual general meeting will be held in London on Thursday 14 July 2016 and the directors look forward to meeting and talking to shareholders on that occasion.
Board of directors
Michael Denny retired from the board at the annual general meeting in July 2015 and we thanked him for his distinguished service to the company over a period of 16 years and to the wider VCT sector.
The directors will all be seeking re-election at the annual general meeting, either as required by the AIC Code of Corporate Governance or voluntarily. The board's nomination committee keeps the composition of the board under regular review, and in accordance with best practice will seek to refresh its membership periodically.
VCT qualifying status
Your company has continued to meet the qualifying conditions laid down by HM Revenue & Customs for maintaining its approval as a VCT. Your board reviews the company's compliance position on a regular basis with the manager. Philip Hare & Associates LLP (formerly Robertson Hare LLP) continues to act as independent adviser to the company on VCT taxation matters.
VCT legislation
The Finance Act (No 2) 2015, which received Royal Assent in November 2015, made far-reaching and unexpected changes to the VCT legislation. The shareholder information section of the annual report contains a summary of the changes as they pertain to the type of investment which VCTs will be able to make in the future. In essence the effect is to prohibit certain types of transaction, such as management buyouts, and to direct future investment activity towards earlier stage companies for "growth and development" purposes. Unusually for changes in the VCT legislative framework, this material shift in emphasis is being applied to all funds raised by VCTs since their inception rather than just to new funds raised after the passing of the legislation.
The VCT sector as a whole is feeling its way cautiously as the new regime takes effect in practice. It is likely that we will see a steady change in the profile of our investment portfolio in the medium term, as existing holdings reach maturity and are replaced by new investments qualifying under the revised rules. There is a strong possibility that this will increase the volatility of investment returns, as investments are structured to meet the expected cash flow characteristics of relatively young investee companies. However NVM has a good long-term record in early stage investment, and is already recruiting additional and appropriate investment expertise in order to maintain a sharp focus in the changing environment.
A resolution will be proposed at the annual general meeting to amend the wording of the company's investment policy, so as to conform with the revised VCT qualifying investment requirements.
Outlook
There is likely to be a period of some uncertainty in the VCT market as boards and managers adapt to the recent changes. The performance of our existing portfolio remains strong, and the challenge will be to achieve the best exit outcomes from these investments over the coming years whilst ensuring a good supply of replacement holdings which are both VCT-qualifying and commercially attractive. We believe that our company and its manager are very well placed to achieve this.
David Gravells
Chairman
The audited financial statements for the year ended 31 March 2016 are set out below.
INCOME STATEMENT
for the year ended 31 March 2016
Year ended 31 March 2016 | Year ended 31 March 2015 | |||||
Revenue £000 | Capital £000 | Total £000 | Revenue £000 | Capital £000 | Total £000 | |
Gain on disposal of investments | - | 2,214 | 2,214 | - | 4,401 | 4,401 |
Movements in fair value of investments | - | 5,068 | 5,068 | - | (2,039) | (2,039) |
---------- | ---------- | ---------- | ---------- | ---------- | ---------- | |
- | 7,282 | 7,282 | - | 2,362 | 2,362 | |
Income | 2,334 | - | 2,334 | 2,776 | - | 2,776 |
Investment management fee | (385) | (1,524) | (1,909) | (397) | (1,190) | (1,587) |
Other expenses | (351) | - | (351) | (430) | - | (430) |
---------- | ---------- | ---------- | ---------- | ---------- | ---------- | |
Return on ordinary activities before tax | 1,598 | 5,758 | 7,356 | 1,949 | 1,172 | 3,121 |
Tax on return on ordinary activities | (205) | 205 | - | (319) | 319 | - |
---------- | ---------- | ---------- | ---------- | ---------- | ---------- | |
Return on ordinary activities after tax | 1,393 | 5,963 | 7,356 | 1,630 | 1,491 | 3,121 |
---------- | ---------- | ---------- | ---------- | ---------- | ---------- | |
Return per share | 1.5p | 6.5p | 8.0p | 1.8p | 1.6p | 3.4p |
BALANCE SHEET
as at 31 March 2016
31 March 2016 £000 | 31 March 2015 £000 | |
Fixed assets: | ||
Investments | 56,997 | 46,293 |
---------- | ---------- | |
Current assets: | ||
Debtors | 270 | 247 |
Cash and cash equivalents | 14,614 | 32,339 |
---------- | ---------- | |
14,884 | 32,586 | |
Creditors (amounts falling due within one year) | (544) | (203) |
---------- | ---------- | |
Net current assets | 14,340 | 32,383 |
---------- | ---------- | |
Net assets | 71,337 | 78,676 |
---------- | ---------- | |
Capital and reserves: | ||
Called-up equity share capital | 4,580 | 4,609 |
Share premium | 1,464 | 1,464 |
Capital redemption reserve | 59 | 30 |
Capital reserve | 58,614 | 71,234 |
Revaluation reserve | 5,562 | 292 |
Revenue reserve | 1,058 | 1,047 |
---------- | ---------- | |
Total equity shareholders' funds | 71,337 | 78,676 |
---------- | ---------- | |
Net asset value per share | 77.9p | 85.4p |
STATEMENT OF CHANGES IN EQUITY
for the year ended 31 March 2016
---------------Non-distributable reserves--------------- | Distributable reserves | Total | ||||||
Share capital | Share premium | Capital redemption reserve | Revaluation reserve | Capital reserve | Revenue reserve | |||
£000 | £000 | £000 | £000 | £000 | £000 | £000 | ||
At 1 April 2015 | 4,609 | 1,464 | 30 | 292 | 71,234 | 1,047 | 78,676 | |
Return on ordinary activities | ||||||||
after tax for the year | - | - | - | 5,270 | 693 | 1,393 | 7,356 | |
Net proceeds of share issues | - | - | - | - | - | - | - | |
Re-purchase of shares | (29) | - | 29 | - | (410) | - | (410) | |
Dividends recognised | - | - | - | - | (12,903) | (1,382) | (14,285) | |
---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ||
At 31 March 2016 | 4,580 | 1,464 | 59 | 5,562 | 58,614 | 1,058 | 71,337 | |
---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ||
STATEMENT OF CHANGES IN EQUITY
for the year ended 31 March 2015
---------------Non-distributable reserves--------------- | Distributable reserves | Total | ||||||
Share capital | Share premium | Capital redemption reserve | Revaluation reserve | Capital reserve | Revenue reserve | |||
£000 | £000 | £000 | £000 | £000 | £000 | £000 | ||
At 1 April 2014 | 4,562 | 377 | 7 | 9,298 | 62,007 | 337 | 76,588 | |
Return on ordinary activities | ||||||||
after tax for the year | - | - | - | (9,006) | 10,497 | 1,630 | 3,121 | |
Net proceeds of share issues | 70 | 1,087 | - | - | - | - | 1,157 | |
Re-purchase of shares | (23) | - | 23 | - | (350) | - | (350) | |
Dividends recognised | - | - | - | - | (920) | (920) | (1,840) | |
---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ||
At 31 March 2015 | 4,609 | 1,464 | 30 | 292 | 71,234 | 1,047 | 78,676 | |
---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ||
STATEMENT OF CASH FLOWS
for the year ended 31 March 2016
Year ended | Year ended | |
31 March 2016 | 31 March 2015 | |
£000 | £000 | |
Cash flows from operating activities: | ||
Return on ordinary activities before tax | 7,356 | 3,121 |
Adjustments for: | ||
Gain on disposal of investments | (2,214) | (4,401) |
Movement in fair value of investments | (5,068) | 2,039 |
(Increase)/decrease in debtors | (23) | 116 |
Increase/(decrease) in creditors | 341 | (825) |
---------- | ---------- | |
Net cash inflow from operating activities | 392 | 50 |
---------- | ---------- | |
Cash flows from investing activities: | ||
Purchase of investments | (13,883) | (15,660) |
Sale/repayment of investments | 10,461 | 23,565 |
---------- | ---------- | |
Net cash inflow/(outflow) from investing activities | (3,422) | 7,905 |
---------- | ---------- | |
Cash flows from financing activities: | ||
Issue of shares | - | 1,187 |
Share issue expenses | - | (30) |
Repurchase of ordinary shares for cancellation | (410) | (350) |
Dividends paid on ordinary shares | (14,285) | (1,840) |
---------- | ---------- | |
Net cash outflow from financing activities | (14,695) | (1,033) |
---------- | ---------- | |
Net increase/(decrease) in cash/cash equivalents | (17,725) | 6,922 |
Cash and cash equivalents at beginning of year | 32,339 | 25,417 |
---------- | ---------- | |
Cash and cash equivalents at end of year | 14,614 | 32,339 |
---------- | ---------- |
INVESTMENT PORTFOLIO SUMMARY
as at 31 March 2016
Cost £000 | Valuation £000 | % of net assets by value | |
Venture capital investments: | |||
Buoyant Upholstery | 1,508 | 3,643 | 5.1 |
MSQ Partners Group | 1,672 | 2,581 | 3.6 |
Lineup Systems | 974 | 2,470 | 3.5 |
No 1 Traveller | 2,142 | 2,332 | 3.3 |
Wear Inns | 1,868 | 2,235 | 3.1 |
Silverwing | 1,388 | 2,130 | 3.0 |
Entertainment Magpie Group | 1,503 | 2,028 | 2.8 |
Cawood Scientific | 1,031 | 1,720 | 2.4 |
Axial Systems Holdings | 1,004 | 1,716 | 2.4 |
Volumatic Holdings | 1,762 | 1,694 | 2.4 |
Closerstill Group | 1,683 | 1,683 | 2.4 |
Agilitas IT Holdings | 1,638 | 1,662 | 2.3 |
It's All Good | 1,145 | 1,660 | 2.3 |
Biological Preparations Group | 2,166 | 1,605 | 2.2 |
Arleigh Group | 45 | 1,551 | 2.2 |
---------- | ---------- | -------- | |
Fifteen largest venture capital investments | 21,529 | 30,710 | 43.0 |
Other venture capital investments | 22,120 | 18,072 | 25.4 |
---------- | ---------- | -------- | |
Total venture capital investments | 43,649 | 48,782 | 68.4 |
Listed equity investments | 3,955 | 4,568 | 6.4 |
Listed interest-bearing investments | 3,830 | 3,647 | 5.1 |
---------- | ---------- | -------- | |
Total fixed asset investments | 51,434 | 56,997 | 79.9 |
---------- | |||
Net current assets | 14,340 | 20.1 | |
---------- | -------- | ||
Net assets | 71,337 | 100.0 | |
---------- | -------- |
BUSINESS RISKS
The board carries out a regular and robust review of the risk environment in which the company operates. The principal risks and uncertainties identified by the board which might affect the company's business model and future performance, and the steps taken with a view to their mitigation, are as follows:
Investment and liquidity risk: many of the company's investments are in small and medium-sized unquoted and AIM-quoted companies which are VCT qualifying holdings, and which by their nature entail a higher level of risk and lower liquidity than investments in large quoted companies. Mitigation: the directors aim to limit the risk attaching to the portfolio as a whole by careful selection, close monitoring and timely realisation of investments, by carrying out rigorous due diligence procedures and maintaining a wide spread of holdings in terms of financing stage and industry sector. The board reviews the investment portfolio with the manager on a regular basis.
Financial risk: most of the company's investments involve a medium- to long-term commitment and many are relatively illiquid. Mitigation: the directors consider that it is inappropriate to finance the company's activities through borrowing except on an occasional short-term basis. Accordingly they seek to maintain a proportion of the company's assets in cash or cash equivalents in order to be in a position to take advantage of new unquoted investment opportunities. The company has very little direct exposure to foreign currency risk and does not enter into derivative transactions.
Economic risk: events such as economic recession or general fluctuation in stock markets and interest rates may affect the valuation of investee companies and their ability to access adequate financial resources, as well as affecting the company's own share price and discount to net asset value. Mitigation: the company invests in a diversified portfolio of investments spanning various industry sectors, and maintains sufficient cash reserves to be able to provide additional funding to investee companies where appropriate.
Stock market risk: some of the company's investments are quoted on the London Stock Exchange or AIM and will be subject to market fluctuations upwards and downwards. External factors such as terrorist activity can negatively impact stock markets worldwide. In times of adverse sentiment there can be very little, if any, market demand for shares in smaller companies quoted on AIM. Mitigation: the company's quoted investments are actively managed by specialist managers and the board keeps the portfolio under ongoing review.
Credit risk: the company holds a number of financial instruments and cash deposits and is dependent on the counterparties discharging their commitment. Mitigation: the directors review the creditworthiness of the counterparties to these instruments and cash deposits and seek to ensure there is no undue concentration of credit risk with any one party.
Legislative and regulatory risk: in order to maintain its approval as a VCT, the company is required to comply with current VCT legislation in the UK, which reflects the European Commission's State aid rules. Changes to the UK legislation or the State aid rules in the future could have an adverse effect on the company's ability to achieve satisfactory investment returns whilst retaining its VCT approval. Mitigation: The board and the manager monitor political developments and where appropriate seek to make representations either directly or through relevant trade bodies.
Internal control risk: the company's assets could be at risk in the absence of an appropriate internal control regime. Mitigation: the board regularly reviews the system of internal controls, both financial and non-financial, operated by the company and the manager. These include controls designed to ensure that the company's assets are safeguarded and that proper accounting records are maintained.
VCT qualifying status risk: the company is required at all times to observe the conditions laid down in the Income Tax Act 2007 for the maintenance of approved VCT status. The loss of such approval could lead to the company losing its exemption from corporation tax on capital gains, to investors being liable to pay income tax on dividends received from the company and, in certain circumstances, to investors being required to repay the initial income tax relief on their investment. Mitigation: the manager keeps the company's VCT qualifying status under continual review and its reports are reviewed by the board on a quarterly basis. The board has also retained Philip Hare & Associates LLP to undertake an independent VCT status monitoring role.
DIRECTORS' RESPONSIBILITIES STATEMENT
The directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations.
Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the financial statements in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice). Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the company and of the profit or loss of the company for the year.
In preparing the financial statements, the directors are required to (i) select suitable accounting policies and then apply them consistently; (ii) make judgements and estimates that are reasonable and prudent; (iii) state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and (iv) prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business.
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 enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the company and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the directors are also responsible for preparing a directors' report, strategic report, directors' remuneration report and corporate governance statement that comply with that law and those regulations.
The company's financial statements are published on the NVM Private Equity LLP (NVM) website, www.nvm.co.uk. The maintenance and integrity of this website is the responsibility of NVM and not of the company. The work carried out by KPMG LLP as independent auditor of the company does not involve consideration of the maintenance and integrity of the website and accordingly they accept no responsibility for any changes that have occurred to the financial statements since they were initially presented on the website. Visitors to the website should be aware that legislation in the United Kingdom governing the preparation and dissemination of the financial statements may differ from legislation in their jurisdiction.
In relation to the financial statements for the year ended 31 March 2016 each of the directors has confirmed that, to the best of his or her knowledge, (i) the financial statements, prepared in accordance with the applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit of the company; (ii) the annual report and financial statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the company's performance, business model and strategy; and (iii) the directors' report and strategic report 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 the company faces.
The directors of the company at the date of this announcement were Mr D P A Gravells (Chairman), Mr A M Conn, Mr C G A Fletcher, Miss C A McAnulty and Mr F L G Neale.
OTHER MATTERS
The above summary of results for the year ended 31 March 2016 does not constitute statutory financial statements within the meaning of Section 435 of the Companies Act 2006 and has not been delivered to the Registrar of Companies. Statutory financial statements will be filed with the Registrar of Companies in due course; the independent auditor's report on those financial statements under Section 495 of the Companies Act 2006 is unqualified, does not include any reference to matters to which the auditor drew attention by way of emphasis without qualifying the report and does not contain a statement under Section 498(2) or (3) of the Companies Act 2006.
The calculation of the revenue and capital return per share is based on the return on ordinary activities after tax for the year and on 92,102,422 (2015 92,068,505) ordinary shares, being the weighted average number of shares in issue during the year.
The calculation of the net asset value per share is based on the net assets at 31 March 2016 divided by the 91,608,230 (2015 92,178,230) ordinary shares in issue at that date.
The second interim dividend of 5.0p per share and, if approved by shareholders, the proposed final dividend of 3.5p per share for the year ended 31 March 2016 will be paid on 22 July 2016 to shareholders on the register at the close of business on 24 June 2016.
The full annual report including financial statements for the year ended 31 March 2016 is expected to be posted to shareholders by 17 June 2016 and will be available to the public at the registered office of the company at Time Central, 32 Gallowgate, Newcastle upon Tyne NE1 4SN and on the NVM Private Equity LLP website, www.nvm.co.uk.
Neither the contents of the NVM Private Equity LLP website nor the contents of any website accessible from hyperlinks on the NVM Private Equity LLP website (or any other website) is incorporated into, or forms part of, this announcement.