Final Results
MONTANARO UK SMALLER COMPANIES INVESTMENT TRUST PLC
PRELIMINARY ANNOUNCEMENT OF UNAUDITED ANNUAL RESULTS
The Directors announce the unaudited statement of results for the year ended 31
March 2007 as follows:-
HIGHLIGHTS
* Net Asset Value ("NAV") +19.9% (£130 million)
* Gross assets +18.9% (£143 million)
* FTSE SmallCap (excluding investment companies) Index +12.4%
* Share price +17.2%
INCOME STATEMENT
for the year to 31 March 2007
Year to 31 March 2007 Year to 31 March 2006
Revenue Capital Total Revenue Capital Total
£000 £000 £000 £000 £000 £000
Gains on investments
at fair value - 23,331 23,331 - 33,354 33,354
Dividends and interest 2,423 - 2,423 1,986 - 1,986
Management fee (736) (736) (1,472) (592) (592) (1,184)
Management performance - (834) (834) - (704) (704)
fee
Other income 3 - 3 - - -
Other expenses (342) - (342) (336) - (336)
Net return before
finance costs
and taxation 1,348 21,761 23,109 1,058 32,058 33,116
Interest payable and
similar
charges (304) (304) (608) (258) (258) (516)
Net return before 1,044 21,457 22,501 800 31,800 32,600
taxation
Taxation (3) - (3) - - -
Net return after 1,041 21,457 22,498 800 31,800 32,600
taxation
Return per ordinary 2.92p 60.26p 63.18p 2.30p 91.57p 93.87p
share*
The total column of this statement is the profit and loss account of the
Company.
* The calculation of the 2006 return per ordinary share excludes shares held in
Treasury; the weighted average number of shares in issue during the year has
been adjusted to reflect this.
All revenue and capital items in the above statement derive from continuing
operations. No operations were acquired or discontinued in the year.
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
for the year to 31 March 2007
Year to 31 March 2007 Year to 31 March 2006
£000 £000
Net return after taxation 22,498 32,600
Total recognised gains 22,498 32,600
during the year
Prior period adjustment - (658)
Total recognised gains and 22,498 31,942
losses since last annual
report
Total recognised gain per 63.18p 91.97p
share
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
for the year to 31 March 2007
Called-up Share Capital Special Capital Capital Revenue Total equity
share premium redemption reserve shareholders'
capital account reserve reserve reserve - reserve funds
-realised -unrealised
£000 £000 £000 £000 £000 £000 £000 £000
Year to 31
March 2007
As at 31 3,561 19,307 1,149 9,835 42,022 31,276 1,611 108,761
March 2006
Net gains on - - - - 6,357 - - 6,357
realisation
of
investments
Unrealised - - - - - 16,974 - 16,974
appreciation
on
investments
before
transfer on
disposal
Transfer on - - - - 6,423 (6,423) - -
disposal of
investments
Costs - - - - (1,874) - - (1,874)
allocated to
capital
Dividends - - - - - - (819) (819)
paid in the
year
Net revenue - - - - - - 1,041 1,041
for the year
As at 31 3,561 19,307 1,149 9,835 52,928 41,827 1,833 130,440
March 2007
Called-up Share Capital Special Capital Capital Revenue Own Total equity
share premium redemption reserve shares shareholders'
capital reserve reserve reserve - reserve held in funds
account - unrealised Treasury
realised
£000 £000 £000 £000 £000 £000 £000 £000 £000
Year to 31
March 2006
As at 31 3,652 18,937 1,058 11,075 29,378 12,120 1,818 (2,588) 75,450
March 2005
Net gains on - - - - 12,854 - - - 12,854
realisation
of
investments
Unrealised - - - - - 20,500 - - 20,500
appreciation
on
investments
before
transfer on
disposal
Transfer on - - - - 1,344 (1,344) - - -
disposal of
investments
Costs - - - - (1,554) - - - (1,554)
allocated to
capital
Cancellation (91) - 91 (1,240) - - - 1,240 -
of ordinary
shares from
Treasury
Resale of - - - - - - - 1,348 1,348
ordinary
shares from
Treasury
Premium on - 370 - - - - - - 370
sale of
ordinary
shares from
Treasury
Dividends - - - - - - (1,007) - (1,007)
paid in the
year
Net revenue - - - - - - 800 - 800
for the year
As at 31 3,561 19,307 1,149 9,835 42,022 31,276 1,611 - 108,761
March 2006
BALANCE SHEET
as at 31 March 2007
31 March 31 March
2007 2006
£000 £000 £000 £000
Fixed assets
Investments at fair value 137,442 115,939
Current assets
Debtors 969 231
Cash at bank 4,360 3,905
5,329 4,136
Creditors: amounts falling due within
one year
Other creditors (1,831) (1,314)
Revolving credit facility (10,500) (2,500)
(12,331) (3,814)
Net current (liabilities)/assets (7,002) 322
Total assets less current liabilities 130,440 116,261
Creditors: amounts falling due after
more than one year
Revolving credit facility - (7,500)
Net assets 130,440 108,761
Share capital and reserves
Called-up share capital 3,561 3,561
Share premium account 19,307 19,307
Capital redemption reserve 1,149 1,149
Special reserve 9,835 9,835
Capital reserve
- realised 52,928 42,022
- unrealised 41,827 31,276
Revenue reserve 1,833 1,611
Total equity shareholders' funds 130,440 108,761
Net asset value per ordinary share 366.31p 305.43p
STATEMENT OF CASH FLOWS
for the year to 31 March 2007
Year to 31 March 2007 Year to 31 March 2006
£000 £000 £000 £000
Operating activities
Investment income received 2,147 1,897
Deposit interest received 125 110
Management fees paid (1,832) (978)
Company secretarial fees paid (54) (60)
Other cash expenses (598) (429)
Net cash (outflow)/inflow from (212) 540
operating activities
Servicing of finance
Interest and similar charges paid (612) (500)
Net cash outflow from servicing (612) (500)
of finance
Taxation
Taxation paid (3) -
Net cash outflow from taxation (3) -
Investing activities
Purchases of investments (34,074) (53,721)
Sales of investments 35,675 53,659
Net cash inflow/(outflow) from 1,601 (62)
investing activities
Equity dividends paid (819) (1,007)
Net cash outflow before financing (45) (1,029)
Financing
Proceeds of short-term credit 10,500 2,500
facility
Repayment of short-term credit (10,000) -
facility
Ordinary shares sold from - 1,718
Treasury
Net cash inflow from financing 500 4,218
Increase in cash 455 3,189
Notes:
1. DIVIDEND
The Directors propose a dividend for the year ended 31 March 2007 of 2.65p per
ordinary share to be paid on 10 August 2007 to shareholders on the register on
15 June 2007 (2006: 2.3p)
2. FINANCIAL INFORMATION
The financial information set out above does not constitute the Company's
statutory accounts for the years ended 31 March 2006 or 2007, and has been
based on the accounting policies used in the statutory accounts for the year
ended March 2006. Statutory accounts for 2006 have been delivered to the
Registrar of Companies, whereas those for 2007 will be delivered following the
Company's Annual General Meeting. The auditors have reported on the 2006
accounts; their report was unqualified and did not contain a statement under
section 237 (2) or (3) of the Companies Act 1985.
Chairman's Statement
Background
I am pleased to present the twelfth annual report of MUSCIT, which was launched
in March 1995. In 1996, the initial investment of £25 million was increased in
size through a £30 million "C" share issue. Net assets now stand at £130
million.
An investment trust is an attractive vehicle for shareholders to invest in
quoted UK "smaller" companies which are less well researched and more illiquid
than larger, blue chip companies.
Performance
In the year to 31 March 2007, the NAV of MUSCIT increased by 19.9% to 366.31p
in comparison with a 12.4% gain by the SmallCap, outperforming by 7.5%.
Since launch, the NAV of MUSCIT has increased by 269% in comparison with a gain
of 132% by the SmallCap, outperforming by 137%.
Discount
The discount of MUSCIT's share price to NAV stood at 14.4% on 31 March 2007
(2006: 13.2%) in comparison with a weighted sector average of 12.6% (Source:
Close Wins Investment Trusts).
Share Buy Backs
The Board is responsible for the implementation of the share buy back programme
which is undertaken at arms length from the Manager.
The Board continues to consider share buy backs as and when appropriate. Since
launch, 13,333,470 shares of the Company have been bought back.
No shares were bought back during the year.
Holding Shares in Treasury
As an alternative to cancellation, new regulations came into force on 1
December 2003 that allow companies, including investment trusts, to buy back
shares and hold them in Treasury for re-issue at a later date. This has the
benefit of improving liquidity as well as retaining the opportunity to enhance
the net asset value.
The Board has actively and carefully considered the use of Treasury Shares and
has been among the industry's pioneers. Our policy is to ensure that
shareholders receive a tangible benefit above and beyond an enhanced ability to
manage the liquidity of the shares of MUSCIT. Shares held in Treasury will only
be re-issued at a lower discount than when they were originally purchased and
to produce a positive absolute return. Shares not re-issued will be cancelled
within one year from purchase.
This policy is in accordance with the recommendations of the Association of
Investment Companies in their paper "Treasury Shares - A Guide to The
Commercial and Technical Issues" dated 28 August 2003. Indeed, it goes further
than their recommendations in seeking both absolute and relative returns for
investors.
There are currently no shares held in Treasury.
Gearing
The Board reviews the level of gearing considered appropriate for the Company
in discussion with the Manager. One of the benefits of investment trusts is the
ability to hold prudent levels of gearing, which can enhance investment
returns.
During the course of the year a new increased facility was arranged with ING
Bank, who now provide a revolving credit facility of up to £15 million. At 31
March 2007 £10.5m was drawn down at a weighted average rate of 5.60%.
During the year net gearing ranged from 3.9% to 8.9%. At 31 March 2007, net
gearing was 4.6%.
Dividend
MUSCIT's primary focus is on capital growth rather than income. The Board
proposes a final dividend of 2.65p per ordinary share, compared to the 2.3p
paid in 2006. It will be payable on 10 August 2007 to shareholders on the
register at the close of business on 15 June 2007.
Corporate Governance
The Directors have thoroughly reviewed the recommendations of the AIC Code of
Corporate Governance (the "Code") and have implemented new procedures where
appropriate. Consequently, MUSCIT has complied with the Code throughout the
year except where compliance would be inappropriate given the size and nature
of MUSCIT. Full disclosure of MUSCIT's compliance with the Code is included in
the Directors' Report.
Chairman's Comment
2006 was another strong year for the equity markets. The FTSE All Share gave a
total return of 13.2%, against 4.6% from cash and 0.7% for UK gilts. The recent
Barclays Equity Gilt Study reveals that the average UK equity outperformance
over gilts during the past 107 years is now 4.2% per annum in real terms.
It proved an even stronger year for the UK SmallCap market, which has now risen
by 140% from its nadir in March 2003. During this time MUSCIT returned 210%,
providing outperformance of 70%. In a historical context, the bottom 10% of the
market in value terms (the Hoare Govett Smaller Companies Index, or HGSC) has
now outperformed the All-Share Index in 35 of the last 51 years.
There any many reasons why smaller companies have fared better and why they
deserve, in my view, at least a market neutral weighting in every portfolio.
Indeed, as I argued last year, SmallCap is worthy of being considered an asset
class in its own right. Smaller companies prosper from the fact that they are
entrepreneurial, flexible, dynamic and not burdened by the bureaucracy and
controls that characterise larger companies. They operate in niche markets that
are less exposed to the vagaries of the global economy. They also experience a
greater level of M&A, as they represent attractive bite-size morsels for their
growth hungry, larger rivals.
With a supportive macro-economic backdrop, there is every reason to believe
that these growth biased businesses can continue to deliver earnings growth
comfortably in excess of their larger peers.
As you are aware, Dan Harlow took over as Manager of MUSCIT in April 2006. I am
very pleased that the transition from Charles Montanaro to Dan has gone so
smoothly. Charles remains closely involved and retains a large personal
shareholding.
The Montanaro investment team continues to expand and during the year four
senior appointments were made bringing the investment complement to thirteen
and the team to twenty in total - one of the biggest SmallCap teams in the UK.
It is pleasing to report that Montanaro have now outperformed the market in ten
years out of twelve. Indeed, the particularly strong performance over the last
three years was recently recognised by the award (curse?) of the Money Observer
UK SmallCap Investment Trust of the year. With a proven and consistent
investment philosophy in place, I believe we can look forward to the future
with confidence.
DAVID GAMBLE
Chairman
30 May 2007
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