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Octopus VCT 3 plc (OVC3)

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Wednesday 29 April, 2015

Octopus VCT 3 plc

Octopus VCT 3 plc : Half-yearly report

Octopus VCT 3 plc : Half-yearly report

Octopus VCT 3 plc

 

Unaudited Half-Yearly Report for the Period Ended 28 February 2015

29 April 2015                                                                                                                   

Octopus VCT 3 plc, managed by Octopus Investments Limited, today announces the Half-Yearly results for the period ended 28 February 2015.

These results were approved by the Board of Directors on 29 April 2015.

About Octopus VCT 3 plc

Octopus VCT 3 plc ('OVCT 3' or 'Company') is a venture capital trust ('VCT') with a portfolio of investments in the renewable energy sector, with a particular focus on solar energy, where the Investment Manager is confident that investments have been structured to achieve a sustained and reasonable level of predictable income.

OVCT 3 was incorporated on 17 August 2011 with the first allotment of equity being on 6 March 2012. The total amount raised by 18 May 2012 was £8.2 million. The Offer for new subscriptions for shares closed on 19 June 2012. Whilst OVCT 3 has the ability to invest in a variety of sectors and technologies, the focus has been in the renewable energy sector and, in particular, on solar energy.

Venture Capital Trusts (VCTs)

VCTs were introduced in the Finance Act 1995 to provide a means for private individuals to invest in unquoted companies in the UK.  Subsequent Finance Acts have introduced changes to VCT legislation. The tax benefits currently available to eligible new investors in VCTs include:

  • up to 30% up-front income tax relief;
  • exemption from income tax on dividends paid; and
  • exemption from capital gains tax on disposals of shares in VCTs.

OVCT 3 has been provisionally approved as a VCT by HM Revenue & Customs ('HMRC'). In order to maintain its approval the VCT must comply with certain requirements on a continuing basis.  At least 70% of the VCT's investments must comprise 'qualifying holdings' of which at least 70% must be in eligible Ordinary shares. A 'qualifying holding' consists of up to £5 million invested in any one year in new shares or securities in an unquoted company (or companies quoted on AIM) which is carrying on a qualifying trade and whose gross assets do not exceed a prescribed limit at the time of investment. The definition of a 'qualifying trade' excludes certain activities such as property investment and development, financial services and asset leasing. As at 28 February 2015, qualifying investments represented 87.6% of the Company's portfolio. OVCT 3 will continue to monitor its compliance with these qualification requirements.

Financial Summary

  Six months to
28 February 2015
Six months to 28 February 2014 Year to
31 August 2014
       
Net assets (£'000s) 7,278 7,040 7,481
Return on ordinary activities after tax (£'000s) 210 (365) 76
Net asset value per share ("NAV") 88.1p 85.2p 90.5p
Dividends paid since launch 10.0p 5.0p 5.0p
Total return 98.1p 90.2p 95.5p

Chairman's Statement

I am pleased to present the half-yearly report for Octopus VCT 3 plc for the period ended 28 February 2015, my first since being appointed Chairman. As you are aware Mr Greenshields retired at the end of last year. I should like to take this opportunity to thank him for his excellent stewardship of the Company since launch.

Performance
As mentioned in previous Annual Reports, due to the nature of the Company's investments which have a planned twenty five year life, the Net Asset Value (NAV) is forecast to decline to zero over this period. This is because the Company intends to pay annual dividends and the value of the investee solar companies will reduce as their remaining years of operation decline with time.

With most of the portfolio companies having been operating for two years or more, they have been revalued once again to reflect current market conditions and the reduction in their revenue generating lives since inception. To date they have been performing in line with expectations and have distributed in total £911,000 of income to the Company.

The revaluation of the solar companies in this period, together with VCT running costs and payment of the recent dividend have resulted in the Net Asset Value (NAV) of the Company falling from 90.5p per share to 88.1p per share. However, if the 5.0p dividend paid in the period were added back, the NAV would have risen by 2.6p per share. The Total Return since launch is 98.1p per share.

NAV changes since August 2014
NAV at 31 August 2014 90.5p
Cash distributions from SolarCos +1.9p
Revaluation of SolarCos +2.3p
VCT running costs -1.6p
Dividends paid -5.0p
NAV at 28 February 201588.1p

Our focus remains on paying the targeted 5p dividend each year and to this end the underlying assets have been performing satisfactorily. The focus is also on keeping the VCT fixed running costs as low as possible in order to maintain returns to investors., The smaller than anticipated amount of funds raised for the Company in 2011/2012 and the resulting reduction in economies of scale leaves less margin for protection of the dividend than would otherwise have been the case.

Investment Policy & Portfolio
The qualifying funds are fully invested into seven companies, each containing an operational solar site. These sites have a range of capacities between 1 and 2MW and benefit from either the Feed In Tariff (FIT) or Renewable Obligation Certificates (ROCs), which form part of their revenue stream alongside the electricity they sell on the wholesale market. There are no plans to make any further qualifying investments as the Company intends to hold the assets for their full operating lives of twenty five years.

All seven sites are currently generating revenue in line with their forecasts, and are receiving their FIT/ROC and electricity sale revenues on a regular basis.

The Company also holds a small portion of funds for making short term non-qualifying loans from which it earns interest. Within the period under review a number of these loans were repaid. Repayments were received in December 2014 from Delambre Energy (£62,500), Huygens Energy (£62,500) and Akycha Power (£50,000), together with accrued interest

Cash and Liquid Resources
Cash awaiting investment is held on deposit with HSBC. The Company is broadly fully invested, resulting in modest levels of cash in the Company at the period end. Cash is paid from the solar companies up to the Company as and when needed to fund expenditure. In light of this the Company currently holds no other deposit accounts or money market funds.

Principal Risks and Uncertainties
Now that the Company owns a portfolio of fully operational assets the number of risks faced is reduced, as all core construction phases are effectively complete. The key risks to the ongoing operations are:

  • Power Prices- Revenues are derived from two sources; first, Government-backed subsidies such as FITs and ROCs and secondly from sales of the electricity produced by the solar sites. This portion of revenues, which represents over 40% of the total, is variable and will be subject to market forces. The Investment Team uses industry recognised forecasts to predict electricity prices for the life of the sites. It also mitigates price fluctuations in the short term via forward selling the electricity, using Power Purchase Agreements (PPAs) to reduce income volatility, so as to achieve budgeted revenue. However, it should be noted that long-term electricity prices can rise and fall, and can therefore have an impact on the Company's revenues and the NAV of the underlying solar sites.
  • Site Technical Issues- all sites are potentially vulnerable to unforeseen technical issues and, to the extent possible, all equipment is warranted to industry standard levels. In addition, each site has insurance in place so that, in the event of a fault occurring that causes the plant to be unable to generate revenues temporarily, the insurance can be invoked to claim for such losses.
  • Weather- all forecasts are based on an assumed level of sunlight each year, which is derived from historical averages, but this of course will vary from year to year. Less sunlight could potentially affect the Company's ability to pay the dividend, as lower revenues would be received by the sites. However, a prudent approach is adopted in the revenue forecasting to reduce the likelihood of this occurring.
  • Site Market Value - there are a number of drivers in the value or NAV of a solar site, including long term power prices and the level of return for the risk of owning the asset (which is largely driven by the technology employed and track record). Power prices can be mitigated to a degree by forward selling the electricity produced via PPAs. However, the rate of return (and thus its value) for each site cannot be predicted as easily in the medium to longer term, but a good operational track record can be quantified and therefore taken into consideration.

VCT Qualifying Status
PricewaterhouseCoopers LLP provides the Board and Octopus, the Company's Investment Manager, with advice on the ongoing compliance with HMRC rules and regulations concerning VCTs.  The Company's portfolio already exceeds the HMRC threshold which requires that 70% of the VCT's investments must comprise 'qualifying holdings' by the end of its third accounting period. As at 28 February 2015, qualifying investments represented 87.6% of the Company's portfolio. Octopus expects the required investment hurdle to be maintained.

Outlook
Over the preceding six month period the oil price, which is one of the key market drivers, has suffered a well-documented decline, driven by a global slump in the demand for energy, which has driven down UK wholesale electricity prices. However, this recent downward shift in pricing has not had a direct impact on the Company's ability to pay a dividend due to the purchase of forward sales contracts for its electricity at a fixed price, which is higher than the prevailing market price. The Company therefore remains confident of maintaining a 5p per annum dividend in the short term.

A continuation of lower electricity prices could reduce revenue generation and overall asset value and hence the Company's ability to deliver a total return of 110p per share at the 5 year point. As a reminder, the 110p total return comprises the sum of four annual dividends of 5p each and a targeted NAV of the solar assets of 90p at the 5 year point (i.e. 5p x 4 + 90p = 110p). As it stands today and as highlighted in the annual report for the year ended 31 August 2014, achieving a 90p NAV at the 5 year point remains challenging and is at the upper end of the current range of forecasts. Despite this there is plenty of well documented evidence to support rising energy prices in the long term. Finally, it should be highlighted that the combination of the PPAs in place and an above average sunny summer in 2015 could deliver over-performance within the current portfolio during the current financial year.

Gregor Michie
Chairman
29 April 2015

Responsibility Statement of the Directors in respect of the half-yearly report

We confirm that to the best of our knowledge:

  • the half-yearly financial statements have been prepared in accordance with the statement 'Half-Yearly Financial Reports' issued by the UK Accounting Standards Board;
     
  • the half-yearly report includes a fair review of the information required by the Financial Conduct Authority Disclosure and Transparency Rules, being:

- an indication of the important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements;

- a description of the principal risks and uncertainties for the remaining six months of the year; and

- a description of related party transactions that have taken place in the first six months of the current financial year, that may 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

Gregor Michie
Chairman
29 April 2015

Income Statement

 Six months to 28 February 2015 Six months to 28 February 2014 Year to 31 August 2014
 RevenueCapitalTotal Revenue Capital Total Revenue Capital Total
  £'000£'000£'000 £'000 £'000 £'000 £'000 £'000 £'000
                   
Gain on disposal of fixed asset
investments
--- - 3 3 - 3 3
                 
Gain/(loss) on valuation of fixed asset investments -193193 - (428) (428) - (14) (14)
                 
Income 155-155 156 - 156 317 - 317
 

Investment management fees
(12)(36)(48) (6) (19) (25) (14) (41) (55)
                 
Other expenses (79)-(79) (71) - (71) (156) - (156)
                 
Profit/(loss) on ordinary activities before tax64157221 79 (444) (365) 147 (52) 95
                 
Taxation on profit/(loss) on ordinary activities (11)-(11) - - - (19) - (19)
                 
Profit/(loss) on ordinary activities after tax53157210 79 (444) (365) 128 (52) 76
Profit/(loss) per share - basic and diluted0.6p1.9p2.5p 1.0p (5.4p) (4.4p) 1.6p (0.6p) 1.0p
                
  • The 'Total' column of this statement is the profit and loss account of the Company; the revenue return and capital return columns have been prepared under guidance published by the Association of Investment Companies.
  • All revenue and capital items in the above statement derive from continuing operations.
  • The Company has only one class of business and derives its income from investments made in shares and securities and from bank and money market funds.
  • The Company has no recognised gains or losses other than the results for the period as set out above.
  • The accompanying notes are an integral part of the half-yearly report.
Reconciliation of Movements in Shareholders' Funds

 
 Six months ended
28 February 2015
Six months ended
28 February 2014
Year ended
31 August 2014
 
 £'000 £'000 £'000  
Shareholders' funds at start of period7,481 7,818 7,818  
Profit/(loss) on ordinary activities after tax 210 (365) 76  
Dividends paid (413) (413) (413)  
Shareholders' funds at end of period7,278 7,040 7,481  

Balance Sheet
  As at 28 February 2015 As at 28 February 2014 As at 31 August 2014
 £'000£'000 £'000 £'000 £'000 £'000
             
Fixed asset investments*  7,199  6,767   7,181
Current assets:          
Debtors 76  97   93  
Cash at bank 84  214   291  
  160  311   384  
Creditors: amounts falling due within one year (81)  (38)   (84)  
Net current assets  79  273   300
Net assets 7,278  7,040   7,481
           
Called up equity share capital  83  83   83
Share Premium  99  99   99
Special Distributable Reserve  7,031  7,388   7,444
Capital Redemption Reserve  1  1   1
Capital Reserve - Unrealised  179  (428)   (14)
Capital Reserve - Realised  (168)  (110)   (132)
Revenue Reserve  53  7   -
Total equity shareholders' funds 7,278  7,040   7,481
Net asset value per share 88.1p  85.2p   90.5p

*Held at fair value

The statements were approved by the Directors and authorised for issue on 29 April 2015 and are signed on their behalf by:

Gregor Michie
Chairman

Company Number: 07744056

Cash flow statement
 Six months to
28 February 2015
Six months to
28 February 2014
Year to
31 August 2014
 £'000 £'000 £'000
     
Net cash inflow from operating activities31 263 353
       
Taxation- - (13)
       
Financial investment:     
Purchase of fixed asset investments - (225) (225)
Sale of fixed asset investments 175 53 53
       
Dividends paid(413) (413) (413)
       
Decrease in cash resources at bank(207) (322) (245)

 

 
 
  Six months to
28 February 2015
Six months to
28 February 2014
Year to
31 August 2014
  £'000 £'000 £'000
Profit/(loss) on ordinary activities after tax 210 (365) 95
Decrease in debtors 17 215 219
(Decrease)/increase in creditors (3) (12) 28
(Gain)/loss on valuation of fixed asset investments (193) 428 14
Gain on disposal of fixed asset investments - (3) (3)
Inflow from operating activities31 263 353

Reconciliation of net cash flow to movement in net funds  
  Six months to
28 February 2015
Six months to
28 February 2014
Year to
31 August 2014
  £'000 £'000 £'000
Decrease in cash resources at bank (207) (322) (245)
Opening net cash resources 291 536 536
Net funds at period end84 214 291

Notes to the Half-Yearly Report

1.         Basis of preparation
The unaudited half-yearly results which cover the period to 28 February 2015 have been prepared in accordance with the Accounting Standards Board's (ASB) statement on half-yearly financial reports (July 2007).

2.         Publication of non-statutory accounts
The unaudited half-yearly results for the six months ended 28 February 2015 do not constitute statutory accounts within the meaning of Section 415 of the Companies Act 2006.

3.         Earnings per share
The earnings per share at 28 February 2015 is calculated on the basis of 8,263,597 shares (28 February 2014: 8,263,597 shares and 31 August 2014: 8,263,597 shares), being the weighted average number of Ordinary shares in issue during the period.

There are no potentially dilutive capital instruments in issue and therefore no diluted returns per share figures are relevant. The basic and diluted earnings per share are therefore identical.

4.         Net asset value per share
The net asset value per share is based on net assets as at 28 February 2015 and 8,263,597 Ordinary shares in issue at that date (28 February 2014: 8,263,597 shares and 31 August 2014: 8,263,597 shares).

5.         Related Party Transactions
Katrina Johnston, a non-executive director of Octopus VCT 3 plc during the period ended 28 February 2015, is an employee of Octopus Investments Limited. Octopus VCT 3 plc paid Octopus Investments Limited £3,750 excluding VAT in the period for Katrina Johnston's Director's fees (28 February 2014: £3,750 and 31 August 2014: £7,500). However Katrina Johnston was not paid anything personally in the period as this was considered to be a normal part of her role as an Octopus Investments Limited employee.

Octopus provides investment management, administration & accounting services and company secretarial services to the Company under a management agreement which runs for a period of five years with effect from 17 August 2011 and may be terminated at any time thereafter by not less than twelve months' notice given by either party.  No compensation is payable in the event of terminating the agreement by either party if the required notice period is given.  The fee payable, should insufficient notice be given, will be equal to the fee that would have been paid should continuous service be provided.

Octopus is entitled to receive an annual management fee of 1.25% of net asset value. However, it is agreed that Octopus will reduce its annual management fee as necessary in order to avoid the Company exceeding its total expense cap of 2.15%. During the period to 28 February 2015, £48,000 was payable to Octopus in respect of management fees, of which £24,000 remained outstanding at the balance sheet date. During the comparative period to 28 February 2014, £25,000 was payable to Octopus and £nil remained outstanding. For the year to 31 August 2014, £55,000 was payable to Octopus, of which £30,000 remained outstanding at the balance sheet date.

Octopus is also entitled to receive an annual accounting and administration fee of 0.3% of net funds raised. During the period to 28 February 2015 £12,000 was paid to Octopus Investments Limited and there was £nil outstanding at the balance sheet date. During the comparative period to 28 February 2014, £12,000 was payable to Octopus and £nil remained outstanding. For the year to 31 August 2014, £23,000 was payable to Octopus and £nil remained outstanding at the balance sheet date.

In addition, Octopus also provides company secretarial services for an additional fee of £7,500 per annum.  During the period to 28 February 2015 £3,750 was paid to Octopus Investments Limited and there was £nil outstanding at the balance sheet date. During the comparative period to 28 February 2014, £3,750 was payable to Octopus and £nil remained outstanding. For the year to 31 August 2014, £7,500 was payable to Octopus and £nil remained outstanding at the balance sheet date). 

Octopus Capital Limited, a related party by virtue of being 100% owner of Octopus Investments Limited, owns 49.5% of Lightsource Renewable Energy Limited. Lightsource managed the underlying assets in the portfolio during the period.

Octopus VCT 3 plc owns 49.9% of the equity in each of its investee companies, with Octopus VCT 4 plc also owning 49.9%. The remainder of the equity in each investee company is owned by OCS Services Limited, a wholly owned subsidiary of Octopus Capital Limited.

  1. Other Information

Copies of this report are available from the registered office of the Company at 33 Holborn, London, EC1N 2HT.




This announcement is distributed by NASDAQ OMX Corporate Solutions on behalf of NASDAQ OMX Corporate Solutions clients.
The issuer of this announcement warrants that they are solely responsible for the content, accuracy and originality of the information contained therein.
Source: Octopus VCT 3 plc via Globenewswire

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