Half-yearly Report
Baronsmead VCT 3 plc
Half Yearly Financial Report Announcement
11 August 2009
Investment Objective
Baronsmead VCT 3 is a tax efficient listed company which aims to achieve
long-term capital growth and generate tax-- free dividends for private
investors.
Unaudited Half-yearly Financial Report Announcement -
Six months ended 30 June 2009
Baronsmead VCT 3 plc
Financial Headlines
3.0p Interim dividend of 3.0p per share (unchanged from prior year) payable
on 7 September 2009 to shareholders on the register at 21 August 2009.
4.4% NAV per share increased by 4.4 per cent over the six month period to
30 June 2009 from 98.22p to 102.51p before payment of the 3p interim
dividend.
56.0% NAV total return to ordinary shareholders since inception in 2001,
equivalent to an annualised total return of 5.4 per cent before the 20
per cent income tax relief (on subscription, at launch) and 6.8 per
cent afterwards.
8.2% Dividend yield of 8.2 per cent tax free to qualifying shareholders
(gross equivalent yield for a higher rate taxpayer is 12.1 per cent).
This is based on the 3.0p interim dividend payable in September 2009
plus the 4.5p dividend paid in March 2009 divided by the mid ordinary
share price of 91.3p at 30 June 2009.
Chairman's Statement - for the six months ended 30 June 2009
The Net Asset Value per share increased by 4.4 per cent in the last six
months, mainly because the value of AIM shares in the portfolio has shown a
degree of recovery from 2008 lows.
The 3p interim dividend reflects this positive total return in the period and
is payable largely out of capital reserves accumulated from successful unquoted
exits in prior years. The 68 strong portfolio is showing reasonable resilience
in a difficult trading environment and the Company is well positioned to make
new investments at an advantageous point in the cycle.
RESULTS
In the six months to 30 June 2009, the Net Asset Value (NAV) per share
increased by 4.4 per cent from 98.22p to 102.51p before payment (due on 7
September 2009) of a 3.0p per share interim dividend. This dividend comprises
2.5p per share of undistributed capital profits and 0.5p per share of net
revenue. The capital dividend is paid from the reserves accumulated from net
profits realised in previous years.
The increase in NAV per share of 4.4 per cent is nearly all represented by a
rise in the AIM portion of the portfolio, up 20 per cent since the year end.
The FTSE All-Share Index fell 2 per cent over the same period.
There have inevitably been challenges for some of the unquoted investee
companies as a result of the difficult economic climate. In this context the
performance of this portfolio has been good and its valuation as a whole has
remained stable over the period. The Manager has worked with the management of
the investee companies to weather the harder trading conditions and this is
reflected in the overall performance and valuation of the portfolio.
The Company continued to meet the six VCT operational tests during the period.
At the period end, over 70 per cent of the ordinary capital raised (net of
launch costs) prior to 31 December 2006 was invested in VCT qualifying
investments.
LONG TERM PERFORMANCE
The interim dividend will take the cumulative dividends paid, tax free to
qualifying shareholders, for founder shareholders to 43.8p per share and
compares to their original £1 investment (before tax relief).
There have been two prospectus fund raisings by Baronsmead VCT 3. All
shareholders from these prior offers have to date achieved positive absolute
total returns. The returns are also ahead of the FTSE All-Share Index over 1,
3 and 5 years as well as in the period since inception. The results compare
favourably with other VCTs and fuller comparisons have recently been
facilitated by the Association of Investment Companies (AIC) who publish
monthly data on their website, www.theaic.co.uk.
The returns to shareholders are even better once the tax benefits available to
VCT investors are taken into account. The VCT tax reliefs are designed to
address both the VCT constraints as well as the higher risks that relate to
investing in smaller unquoted and AIM-traded companies. At a time of lower and
sometimes negative investment returns, the proportional benefit from these
reliefs is greater. For instance the tax free nature of dividends for
qualifying shareholders is significant when deposit rates on cash are presently
at a historic low.
These tax benefits to the shareholders can be balanced against the ultimate
economic benefit for the UK of supporting entrepreneurial growth businesses.
This can be observed by measuring the increased employment and consequent
increase in tax revenue to the Treasury from investee companies that have
benefited from VCT investment. For example the top ten investee companies in
BVCT 3 have shown over 50 per cent growth in employment numbers over an average
duration of 3 years after investment based on their last audited annual
reports.
PORTFOLIO REVIEW
The Board reviews the relative health of portfolio companies quarterly, in
terms of profitability as well as other non-financial benchmarks. At the
period-end, 75 per cent of the portfolio companies were reporting better or
steady progress.
Following the write off of four AIM investments, the total portfolio was 68
companies (these four investments had a combined market value of £70k at 31
December 2008). 50 per cent of the portfolio by value was invested in unquoted
companies, 22 per cent in AIM investees and the balance of 28 per cent remained
in cash or government securities. The mix of AIM and unquoted companies helps
to create a more diversified portfolio whose constituent parts perform better
at different points in the cycle.
The Manager has endeavoured to prepare for the current downturn over the last
two years by selecting new investments in sub-sectors that are less cyclical
and with growth strategies that are intended to be less reliant on general
economic growth. The charts on page 7 of the interim report show the proportion
of the portfolio by value (including AIM-traded companies). Healthcare &
Education has almost doubled to 21 per cent and IT & Media has increased by
around a third to 27 per cent whilst the level invested in Consumer Markets has
remained relatively low at around 14 per cent.
Unquoted Portfolio
The chart on page 4 of the interim report shows that, on average, the portfolio
of the current unquoted investments is valued at some 30 per cent higher than
original cost. Fourteen companies are valued at a level greater than cost and
whilst six are valued below cost only two of these have a provision against
cost of greater than 25 per cent.
In addition, in the unquoted portfolio financial structures have been designed
to be prudent wherever possible with relatively low levels of external debt.
There are several ways of measuring borrowings but the most common relates to
the level of net borrowings divided by annual operating profits defined as
EBITDA - earnings before interest, tax, depreciation and amortisation. At an
average ratio of 1.8 times across the unquoted portfolio, the level of debt
within the portfolio as a whole is relatively low and considerably less than
those typically used in larger private equity transactions.
The Manager is actively involved in its private equity investments. Tight
control of overheads, a focus on efficient working capital management and early
communication with each investee company's banks have all helped to manage risk
and minimise issues. Presentations by investee companies at each AGM have
illustrated the close relationship between the executive management of unquoted
companies and the Manager. The CEO of Nexus, Neil McCrossan, based in Leeds,
presented to the AGM held in March 2009 to some 50 shareholders. Since first
investment in early 2008, this vehicle rental business has deployed its highly
advanced web based software platform to obtain good growth both by acquisition
and organically.
AIM-traded portfolio
The AIM market was oversold towards the end of 2008 and during the period, this
portion of the portfolio has bounced back with 20 per cent growth in value over
the last six months. Quoted share prices tend to move ahead of announced
earnings and the valuation movement in the AIM part of the portfolio
anticipated the recession. While returns from AIM investments were poor
throughout 2008, it is now making a positive contribution.
PROSPECTS FOR NEW INVESTMENT
The market for new unquoted deals remains relatively depressed at present with
overall M&A volumes significantly down. Hence, no new investments have been
completed recently although this does not reflect any lack of appetite. The
Manager is rightly focused on ensuring only high quality businesses with good
management teams are added to the portfolio. The M&A market will turn as
confidence starts to return and we will benefit from asset prices lower than
the recent peak. In the meantime, the Manager has an active programme of
directly approaching prospective investee companies in selected sectors, and
this is building a strong pipeline of entrepreneurs that would like to work
with the Manager when timing is right. This continues to be a significant
investment for the future.
The volume of qualifying AIM opportunities has increased from very low levels
earlier in the year. However, conversion rates have so far remained low as the
Manager seeks to maintain a high quality threshold for new investments. With
capital still scarce for smaller AIM companies and support from the recent
recovery in equity markets, prospects for new AIM investment during the
remainder of the year are improving.
SHAREHOLDER ISSUES
The top up offer in March/April 2009 raised gross proceeds of £1.5 million. Of
the 166 individual subscribers, we welcome 55 new shareholders to those 111
shareholders that invested again. The Directors continue to believe that it is
an advantageous time in the UK economic cycle to be investing in smaller
companies and that it is appropriate for the Company to raise further funds in
order to fund future investments. The Board's current intention is that there
will be a significant fundraising in the current tax year under the existing
shareholder authorities and it is considering making such an offer on a joint
basis with Baronsmead VCT 4.
During the six months to 30 June 2009 0.9 million shares were bought back at an
average discount to NAV of 10 per cent. This compares against the rest of the
VCT sector where discounts to NAV were generally much higher at the period end.
The Company's former broker, Teathers, ceased to operate as a market maker
during March 2009. However, several other firms became market makers during
that month thereby minimising the impact this could have had on the discount to
NAV at which the Company's shares were traded at. Currently there are three
market makers, namely Matrix Corporate Capital, Winterflood and Singer Capital
Markets. Following a review of brokers the Board agreed to appoint Matrix
Corporate Capital as the new broker to the Company from the beginning of August
2009.
In the April 2009 Budget there were only minor changes to the VCT rules and
regulations. However, the proposed 50 per cent income tax rate and restriction
of tax relief on pension contributions may mean that VCTs become increasingly
attractive. In the autumn, the Manager will seek to articulate these changes as
a follow up to the letter on utilising VCTs in retirement and estate planning
sent to shareholders in March 2009.
Again it is important to stress the need to consult professional advisers as so
much depends on the circumstances of individual shareholders. Please email
Michael.probin@isisep.com if you wish to contribute to these topics and state
what is important from your perspective as an interested shareholder.
APPOINTMENT OF NEW DIRECTOR
I am delighted to welcome Anthony Townsend who joined the Board with effect
from 4 August 2009. Anthony brings a wealth of experience from working in
investment banking and fund management. He currently chairs several investment
trusts and this appointment further strengthens your Board.
OUTLOOK
The extreme volatility in the UK economy during 2008 may now have passed and
there is higher confidence that many of the portfolio companies are trading
more steadily. Balance sheets are a little stronger and so investees should be
able to anticipate and benefit from the upswing when it comes.
The Board and Manager share the belief that we are entering one of the better
environments for making new investments now that a degree of stability has
returned to UK financial and industrial markets.
Mark Cannon Brookes
Chairman
11 August 2009
TABLE OF INVESTMENTS IN THE SIX MONTHS TO 30 JUNE 2009
Company Location Sector Activity Investment
cost (£'000)
Unquoted invest
ments
follow on
Occam DM Ltd Bath IT & Media Integrated data services 8
Xention Discovery Cambridge Healthcare & Developer of ion channel 91
Ltd education modulating drugs
Total Unquoted 99
investments
AIM-traded in
vestments
follow on
Ffastfill plc London IT & Media Trading platform 106
software providers
IDOX plc London IT & Media Document management 118
software
Total AIM-traded 224
investments
Total Investments 323
REALISATIONS FOR THE SIX MONTHS TO 30 JUNE 2009
Company First Value at Realised Overall
investment profit/
date 31 December (loss) this Multiple
2008 £'000 period £'000 return*
Unquoted
realisations
Scriptswitch Partial loan May 07 361 - 1.3
note redemption
Written off
Green Issues Dec 05 - - 0.2
Total Unquoted realisations 361 -
AIM-traded
realisations
Craneware plc Part sale Sep 07 174 11 1.7
Electric Word Market sale Mar 08 9 3 0.7
Plc
Independent Market sale Mar 08 9 4 0.8
Media
Distribution
Plc
MBL Group Plc Part sale Jan 03 13 11 0.6
205 29
Written off
EBTM plc May 07 51 (51)
FishWorks plc Jun 05 15 (15)
IPT Holdings Nov 04 4 (4)
plc
70 (70)
Total AIM-traded realisations 275 (41)
Total 636 (41)
Realisations
*Includes interest/dividends received, loan note redemptions and partial
realisations accounted for in prior periods.
Deferred proceeds were received for Language Line £26,000.
Responsibility statement of the Directors in respect of the half-yearly
financial report
We confirm that to the best of our knowledge:
•the condensed set of financial statements has been prepared in accordance with
the Statement `Half-yearly financial reports' issued by the UK Accounting
Standards Board;
•the Chairman's Statement (constituting the interim management report) includes
a fair review of the information required by DTR 4.2.7R of the Disclosure and
Transparency Rules, 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 financial statements;
•the Statement of Principal Risks and Uncertainties on page 12 of the interim
report is a fair review of the information required by DTR 4.2. 7R; and
•the financial statements include a fair review of the information required by
DTR 4.2.8R of the Disclosure and Transparency Rules, 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 entity during that period; and any changes in the related
party transactions described in the last annual report that could do so.
By Order of the Board,
M Cannon Brookes
Chairman
11 August 2009
Unaudited Income Statement
For the six months to 30 June 2009
Six months to 30 June Six months to 30 June Year to 31 December
2009 (£'000) 2008 (£'000) 2008
(£'000*)
Revenue Capital Total Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Unrealised - 2,438 2,438 - (7,785) (7,785) - (8,894) (8,894)
gains/
(losses) on
investments
Realised - (15) (15) - 3,393 3,393 - (808) (808)
(losses)/
gains on
investments
Income 678 - 678 1,400 - 1,400 2,255 - 2,255
Recoverable (2) (6) (8) - - - 266 1,038 1,304
VAT
Investment (170) (510) (680) (227) (679) (906) (405) (1,215) (1,620)
management
fee
Other (166) - (166) (153) - (153) (362) - (362)
expenses
Profit/(loss) 340 1,907 2,247 1,020 (5,071) (4,051) 1,754 (9,879) (8,125)
on
ordinary
activities
before taxa
tion
Taxation on (54) 54 - (238) 238 - (433) 433 -
ordinary
activities
Profit/(loss) 286 1,961 2,247 782 (4,833) (4,051) 1,321 (9,446) (8,125)
on ordinary
activities
after taxa
tion
Return per 0.53p 3.65p 4.18p 1.44p (8.89)p (7.45)p 2.44p (17.43) (14.99)
share: p p
Basic
*These figures are audited.
Unaudited Reconciliation of Movements in Shareholders' Funds
For the six months to 30 June 2009
Six months to Six months to Year to 31
30 June 2009 £ 30 June 2008 £ December 2008 £
'000 '000 '000*
Opening shareholders' funds 55,136 65,221 65,221
Profit/(loss) for the period 2,247 (4,051) (8,125)
Increase/(decrease) in share 1,524 (1,011) 1,118
capital in issue
Purchase of shares for treasury (816) (51) (1,398)
Expenses of share issue and (80) 1,118 (1,629)
conversion of share premium
Dividends paid (2,415) - (51)
Closing shareholders' funds 55,596 61,226 55,136
*These figures are audited.
Unaudited Balance Sheet
As at 30 June As at 30 June As at 31
2009 Total 2008 Total December 2008
Total
£'000 £'000 £'000*
Fixed assets
Unquoted investments 28,021 26,145 27,821
Traded on AIM 10,866 13,758 9,128
Quoted on FTSE SmallCap 1,087 720 804
Collective investment vehicles 516 - -
Interest bearing securities 12,864 19,128 14,203
53,354 59,751 51,956
Current assets
Debtors 236 539 2,000
Cash at bank and on deposit 2,490 1,556 1,732
2,726 2,095 3,732
Creditors (amounts falling due (484) (620) (493)
within one year)
Net current assets 2,242 1,475 3,239
Net assets 55,596 61,226 55,136
Capital and reserves
Called-up share capital 5,970 5,823 5,822
Share premium account 8,065 6,768 6,768
Capital redemption reserve 10,862 10,862 10,862
Revaluation reserve 1,630 791 (1,765)
Profit and loss account 29,069 36,982 33,449
Equity shareholders' funds 55,596 61,226 55,136
As at 30 June As at 30 June As at 31
2009 Ordinary 2008 Ordinary December 2008
Shares Shares Ordinary Shares
*
Net asset value per share 102.51p 113.19p 102.72p
Number of ordinary shares in 54,232,236 54,091,997 53,674,846
issue
Treasury net asset value per 101.49p 112.57p 101.77p
share
Number of ordinary shares in 54,232,236 54,091,997 53,674,846
issue
Number of ordinary shares held 5,467,317 4,135,000 4,552,151
in Treasury
Number of listed ordinary 59,699,553 58,226,997 58,226,997
shares
*These figures are audited.
Unaudited Statement of Cash Flows
Six months to Six months to Year to 31
30 June 2009 £ 30 June 2008 £ December 2008
'000 '000 £'000*
Net cash inflow from operating 1,123 452 951
activities
Capital expenditure and 1,423 (3,528) (1,830)
financial investment
Equity dividends paid (2,415) 5 (1,629)
Net cash inflow/(outflow) 131 (3,071) (2,508)
before financing
Net cash inflow/(outflow) from 627 56 (331)
financing
Increase/(decrease) in cash 758 (3,015) (2,839)
Reconciliation of net cash flow
to movement in cash
Increase/(decrease) in cash 758 (3,015) (2,839)
Opening net cash 1,732 4,571 4,571
Net cash at 30 June/31 December 2,490 1,556 1,732
Reconciliation of operating
profit before taxation to
net cash flow from operating
activities
Profit/(loss) on ordinary 2,247 (4,051) (8,125)
activities before taxation
Unrealised (gains)/losses on (2,438) 7,785 8,894
investments
Loss/(profit) on realisation of 15 (3,393) 808
investments
Changes in working capital and 1,299 111 (626)
other non-cash items
Net cash (outflow)/inflow from 1,123 452 951
operating activities
*These figures are audited.
PRINCIPAL RISKS AND UNCERTAINTIES
The Company's assets consist of equity and fixed interest investments, cash and
liquid resources. Its principal risks are therefore market risk, credit risk
and liquidity risk. Other risks faced by the Company include economic, loss of
approval as a Venture Capital Trust, investment and strategic, regulatory,
reputational, operational and financial risks. These risks, and the way in
which they are managed, are described in more detail under the heading
Principal risks, risk management and regulatory environment within the Business
Review in the Company's Annual Report and Accounts for the year ended
31 December 2008. The Company's principal risks and uncertainties have not
changed materially since the date of that report.
RELATED PARTIES
ISIS EP LLP (`the Manager') manages the investments of the Company. The Manager
also provides or procures the provision of secretarial, accounting,
administrative and custodian services to the Company. Under the management
agreement, the Manager receives a fee of 2.5 per cent per annum of the net
assets of the Company. This is described in more detail under the heading
Management within the Report of the Directors in the Company's Annual Report
and Accounts for the year ended 31 December 2008. During the period the Company
has incurred management fees of £680,000 and secretarial and accounting fees of
£48,000 payable to the Manager.
Notes
1. The unaudited interim results which cover the six months to 30 June 2009
have been prepared in accordance with applicable accounting standards and
adopting the accounting policies set out in the statutory accounts of the
Company for the period ended 31 December 2008.
2. Return per share is based on a weighted average of 53,697,653 ordinary
shares in issue (31 December 2008 - 54,385,064 ordinary shares).
3.Earnings for the first six months to 30 June 2009 should not be taken as a
guide to the results of the full financial year.
4. During the six months ended 30 June 2009 the Company issued 1,472,556
ordinary shares pursuant to the offer for subscription at an offer price of
103.5p per share which raised £1,524,095, before costs. During this period the
Company purchased 915,166 ordinary shares to be held in Treasury at a cost of £
816,926. At 30 June 2009 the Company holds 5,467,317 ordinary shares in
Treasury. Excluding Treasury shares, there were 54,232,236 ordinary shares in
issue at 30 June 2009 (31 December 2008 - 53,674,846 ordinary shares and 30
June 2008 - 54,091,997 ordinary shares).
5. The interim dividend of 3 pence per ordinary share (0.5 pence revenue and
2.5 pence capital) will be paid on 7 September 2009 to shareholders on the
register on 21 August 2009. The ex-dividend date is 19 August 2009.
6. The financial information contained in this half year report does not
constitute statutory accounts as defined in Section 434 of the Companies Act
2006. The information for the year ended 31 December 2008 has been extracted
from the latest published audited financial statements. The audited financial
statements for the year to 31 December 2008, which were unqualified, have been
filed with the Registrar of Companies. No statutory accounts in respect of any
period after 31 December 2008 have been reported on by the Companies auditors
or delivered to the Registrar of Companies.
7. Copies of the Interim Report will be mailed to shareholders and are
available from the Registered Office of the Company at 100 Wood Street, London
EC2V 7AN.
Date: 11/08/2009
Monday, 13th May 2024
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