Half-yearly Report
MONTANARO
UK Smaller Companies Investment Trust PLC
Half-Yearly Report 2008
The Montanaro UK Smaller Companies Investment Trust PLC ("MUSCIT") was launched
in March 1995 and is listed on the London Stock Exchange.
Investment Objective
MUSCIT's investment objective is capital appreciation (rather than income)
achieved by investing in small quoted companies listed on the London Stock
Exchange or traded on the Alternative Investment Market ("AIM") and to achieve
relative outperformance of its benchmark, the FTSE "SmallCap" (excluding
investment companies) Index ("SmallCap"). No unquoted investments are
permitted.
Investment Policy
The Company looks to achieve its objective and to diversify risk by investing
in a portfolio of UK Smaller Companies. At the time of initial investment, a
potential investee company must be profitable and smaller than the largest
constituent of the HGSC Index, which represents the smallest 10% of the UK
Stock Market by value. At the start of 2008, this was any company below £1.1
billion in size. The Manager looks to focus on the smaller end of this Index.
In order to manage risk the Manager will normally limit any one holding to a
maximum of 5% of the Company's investments. The weightings for every stock are
closely monitored to ensure they reflect the underlying liquidity of the
particular company. The Company's AIM exposure is also closely monitored by the
Board and is limited to 30% of total investments with Board approval required
for exposure to be above 25%.
The Manager is focused on identifying high quality niche companies operating in
growth markets. This typically leads the Manager to invest in companies that
enjoy high barriers to entry, a sustainable competitive advantage and strong
management teams. The portfolio is therefore constructed on a "bottom up" basis
and there are no sectoral constraints placed on the Manager.
The Board, in consultation with the Manager, is responsible for determining the
gearing strategy for the Company. Gearing is used to enhance returns when the
timing is considered appropriate. The Company currently has a credit facility
of £15 million through ING Bank. The Board has agreed to limit borrowings to
25% of shareholders' funds.
Highlights
for the 6 months to 30 September 2008
Results
> Net Asset Value ("NAV"): -15.2% (£86.4 million)
> Total borrowings drawn down: -£10 million (£5 million)
> FTSE SmallCap (excluding investment companies) Index: -22.5%
> Share price: -16.0%
As at As at
30 September 31 March
2008 2008
Ordinary share price 205.75p 245.00p
NAV per ordinary share 258.18p 304.52p
Manager's Review
Performance
Over the six months ended 30 September 2008, the Company's net asset value
("NAV") fell 15.2%, outperforming its benchmark, the FTSE SmallCap (excluding
investment companies) Index ("SmallCap"), which fell 22.5%.
From the launch of the Company in March 1995 to the end of September 2008, the
NAV has increased 159% compared to 24% by the SmallCap.
Important Events
Following approval by shareholders at the Annual General Meeting on 18 July
2008, a final dividend of 3.65p was paid on 18 August 2008 to shareholders on
the register on 13 June 2008.
Since 31 March 2008, the Company has bought a total of 145,500 shares for
cancellation.
The Company started the period with £15million drawn down from its £25million
facility with ING. During August, the decision was taken to repay £10million of
the drawn-down facility. This leaves a total of £5million drawn down at 30
September 2008. Since the period end the Company reduced the size of the
facility to £15m.
As detailed in previous statements, VAT is no longer payable on management
fees. The Company has been pursuing a claim from HM Revenue and Customs for the
VAT previously paid on management services and the associated interest. On 30
October 2008 the Company was pleased to announce that its claim for VAT
previously paid on management services had been successful. The Company will
receive £1,133,016, which will be split between revenue and capital on the same
basis it was originally accounted for. The Company's claim for the interest on
this reclaimed VAT is ongoing.
Review
The last six months have seen the credit crisis tighten its grip on global
economies. A period that started with the demise of Bear Stearns rapidly
escalated into a primary banking crisis that resulted in a coordinated
international recapitalisation of the banking system. Confidence on all levels
is low and as we enter the final quarter the UK sits on the verge of recession
as the financial volatility begins to impact the real economy.
In this tumultuous environment it is unsurprising that stock markets have seen
steep declines. Over the six month period the FTSE SmallCap (excluding
investment companies) Index fell 22.5%, while the FTSE All-Share fell 15.2%.
The equity investor has taken fright and moved to the relative security of cash
and gilts. This move has been more apparent in the Small Companies market where
underperformance against the All-Share is 22.1% over the last 18 months as the
greater level of domestic focus, as well as a lack of liquidity, have both
served to exaggerate the underperformance.
Our conservative investment style has continued to help our performance
relative to the overall market. We have been rewarded for our focus on the
quality end of the market and also the emphasis we place on cash generation and
balance sheet strength. At a time when there is such uncertainty in the
financial markets, those companies considered to have stretched balance sheets
and deteriorating prospects have been significant underperformers.
Across the portfolio there has been a wide divergence of performance. The two
strongest performers were software stocks that were both taken over. The most
beneficial to portfolio performance was Detica, the specialist IT analytics
business, bought by British Aerospace at a premium of 65%. The second takeover
was IBS OpenSystems, the public sector software business, which was bought by
Capita plc. In such a volatile environment we have been slow to reinvest these
proceeds. As a result our net gearing position has reduced from 3.8% to 1.3%
over the period.
Decisions to remain underweight in many of the weakest sectors have also helped
our relative performance. The greater financing constraints currently being
placed on many developers are impacting building programmes. We have remained
underweight in both the Construction & Materials and the Real Estate sectors,
which have fallen 36% and 22% respectively over the period under review.
Outlook
It will take time for the full impact of the serious financial turbulence of
the past six months to be seen. In the meantime the outlook for the British
economy is challenging: the housing market is seeing steep declines and
unemployment is heading towards two million. While the government has helped
provide some ballast to the balance sheet of the Banks, it is possible that as
time passes further action will be required.
With confidence so weak it is hard to identify catalysts for a recovery. No
doubt a significant and sustained improvement in the inter bank lending rates
will be crucial; a clear sign that the Banks have greater confidence in each
other will percolate through the system and help to establish a platform for
recovery. The recent unanimous decision by the MPC to cut interest rates by 150
basis points highlights the increasing efforts to this process. We believe that
further rate cuts are likely.
Stock markets have again proved a valid indicator of the weakness in the real
economy. The FTSE SmallCap, which is down approximately 60% from its peak, has
anticipated the move of the economy into probable recession. The scale of the
recent market declines suggests that the economic slowdown will be painful.
However, with the real economy lagging the markets, we remind ourselves that
the bottom will be reached well before any improvement in either sentiment or
the economy.
With this in mind we are focused on disciplined portfolio management. With 2009
earnings numbers set to see further pressure over coming months, we will remain
concentrated on full businesses with greatest visibility and highest quality of
earnings. We are also working hard to identify potential new investments with
good market positions and recognised brands whose valuations are reaching
attractive levels. These new ideas represent the next generation of holdings
which will help drive performance when the recovery arrives.
Dan Harlow
Montanaro Investment Managers Limited
27 November 2008
Fifty Largest Holdings
as at 30 September 2008
Holding Sector Value % of Market
cap
£000 portfolio £m
Dechra Pharmaceuticals PLC Pharmaceuticals & 2,946 3.3 267
Biotechnology
Dignity PLC General Retailers 2,774 3.1 441
Detica Group PLC Software & Computer 2,568 2.9 512
Services
Fisher (James) & Sons PLC Industrial 2,523 2.9 252
Transportation
BPP Holdings PLC Support Services 2,493 2.8 227
Hargreaves Services PLC Support Services 2,478 2.8 166
Wilmington Group PLC Media 2,397 2.7 146
Chloride Group PLC Electronic & Electrical 2,335 2.6 503
Equipment
Ricardo PLC Support Services 2,277 2.6 165
Latchways PLC Support Services 2,266 2.6 91
Ten Largest Holdings 25,057 28.3
Genus PLC Pharmaceuticals & 2,081 2.4 446
Biotechnology
NCC Group PLC Software & Computer 1,932 2.2 127
Services
Scott Wilson Group Support Services 1,899 2.2 133
Fenner PLC Industrial Engineering 1,760 2.0 308
Consort Medical PLC Health Care Equipment & 1,700 1.9 152
Services
Domino's Pizza UK & IRL PLC Travel & Leisure 1,550 1.8 318
Hill & Smith Holdings PLC Industrial Engineering 1,535 1.7 195
Care UK PLC Health Care Equipment & 1,448 1.6 212
Services
eaga PLC Support Services 1,441 1.6 333
Victrex PLC Chemicals 1,376 1.6 593
Albemarle and Bond Holdings General Financials 1,365 1.5 103
PLC
Croda International PLC Chemicals 1,358 1.5 822
Carclo PLC Chemicals 1,350 1.5 43
Synergy Healthcare PLC Health Care Equipment & 1,332 1.5 416
Services
Brewin Dolphin PLC General Financials 1,312 1.5 264
RPS Group PLC Support Services 1,304 1.5 517
Primary Health Properties Real Estate 1,295 1.5 93
PLC
Kewill PLC Software & Computer 1,275 1.4 69
Services
Mothercare PLC General Retailers 1,275 1.4 301
The Stanley Gibbons Group General Retailers 1,269 1.4 36
PLC
Thirty Largest Holdings 54,914 62.0
Phoenix IT Group PLC Software & Computer 1,246 1.4 130
Services
Senior PLC Industrial Engineering 1,233 1.4 338
WSP Group PLC Support Services 1,221 1.4 208
M.P. Evans Group PLC Food Producers 1,217 1.4 141
Domino Printing Sciences PLC Electronic & Electrical 1,215 1.4 226
Equipment
Barr (AG) PLC Beverages 1,200 1.4 200
Mears Group PLC Support Services 1,194 1.3 210
Ultra Electronics Holdings Aerospace & Defence 1,172 1.3 858
PLC
Hamworthy PLC Industrial Engineering 1,151 1.3 177
E2V Technologies PLC Electronic & Electrical 1,148 1.3 150
Equipment
Chemring Group Aerospace & Defence 1,129 1.3 724
London Capital Group General Financials 1,126 1.3 107
Holdings PLC
Brammer PLC Support Services 1,112 1.3 103
James Halstead PLC Construction & Materials 1,107 1.3 205
Hornby PLC Leisure Goods 1,103 1.2 49
Mucklow (A&J) Group Real Estate 1,071 1.2 168
VP Group PLC Support Services 995 1.1 80
Lok'n Store Group PLC Support Services 986 1.1 30
Gooch & Housego PLC Industrial Engineering 927 1.0 37
Holidaybreak PLC Travel & Leisure 919 1.0 157
Fifty Largest Holdings 77,386 87.4
Interim Management Report and Responsibility Statement
Interim Management Report
The important events that have occurred during the period under review are set
out in the section so entitled in the Manager's Review. The key factors
influencing the financial statements are set out in the Manager's Review.
The principal risks and uncertainties for the remaining six months of the
financial year are reviewed in the Outlook section of the Manager's Review. The
Company actively monitors its counterparty exposures and has been particularly
vigilant during the period.
Under the Listing Rules the Manager is regarded as a related party of the
Company. The amounts paid to the Manager during the period, were £556,000 (30
September 2007: £840,000; 31 March 2008: £1,433,000). At 30 September 2008, the
amount due to Montanaro Investment Managers Limited, included in creditors was
£76,000. However, the existence of an independent Board of Directors
demonstrates that the Company is free to pursue its own financial and operating
policies, and therefore in terms of FRS 8 "Related Party Transactions" the
Manager is not considered a related party.
Responsibility Statement
The Directors confirm that to the best of their knowledge:
- the condensed set of financial statements has been prepared in accordance
with the Statement on Half-Yearly Financial Reports issued by the UK Accounting
Standards Board;
- the interim management report includes a fair review of the information
required by:
(a) 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;
and a description of the principal risks and uncertainties for the remaining
six months of the year; and
(b) 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.
This Half-Yearly Report was approved by the Board of Directors on 27 November
2008 and the above responsibility statement was signed on its behalf by David
Gamble, Chairman.
Income Statement (unaudited)
for the 6 months to 30 September 2008
6 months to 30 September 6 months to 30 September Year to 31 March 2008
2008 2007
Revenue Capital Total Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
(Losses)/ - (14,906) (14,906) - (6,319) (6,319) - (22,427) (22,427)
gains on
investments
designated at
fair value
through
profit and
loss
Dividends and 1,597 - 1,597 1,433 - 1,433 2,823 - 2,823
interest
Management (278) (278) (556) (420) (420) (840) (716) (717) (1,433)
fee
Other income 3 - 3 - - - 5 - 5
Other (177) - (177) (146) - (146) (312) - (312)
expenses
Net return/ 1,145 (15,184) (14,039) 867 (6,739) (5,872) 1,800 (23,144) (21,344)
(deficit)
before
finance costs
and taxation
Interest (190) (191) (381) (183) (183) (366) (442) (442) (884)
payable and
similar
charges
Net return 955 (15,375) (14,420) 684 (6,922) (6,238) 1,358 (23,586) (22,228)
before
taxation
Taxation - - - - - - - - -
Net return 955 (15,375) (14,420) 684 (6,922) (6,238) 1,358 (23,586) (22,228)
after
taxation
Return per 2.84 (45.81) (42.97) 1.92 (19.44) (17.52) 3.82 (66.30) (62.48)
ordinary
share (pence)
The total column of this statement is the profit and loss account of the
Company. The supplementary revenue and capital columns are presented under
guidance issued by the Association of Investment Companies (AIC).
All revenue and capital items in the above statement derive from continuing
operations. No operations were acquired or discontinued in the period.
No Statement of Total Recognised Gains and Losses has been prepared as all such
gains and losses are shown in the Income Statement.
Reconciliation of Movements in Shareholders' Funds (unaudited)
for the 6 months to 30 September 2008
Called-up Share Capital Special Capital Revenue Own Total
share premium redemption reserve reserve reserve shares equity
capital account reserve held in shareholders
Treasury funds
6 months to £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
30 September
2008
As at 1 April 3,545 19,307 1,165 9,451 71,169 2,247 (4,501) 102,383
2008
Fair value - - - - (14,906) - - (14,906)
movement of
investments
Costs - - - - (469) - - (469)
allocated to
capital
Shares (15) - 15 (308) - - - (308)
purchased for
cancellation
Net revenue - - - - - 955 - 955
for the
period
Dividends - - - - - (1,227) - (1,227)
paid in
period
As at 30 3,530 19,307 1,180 9,143 55,794 1,975 (4,501) 86,428
September
2008
6 months to
30 September
2007
As at 1 April 3,561 19,307 1,149 9,835 94,755 1,833 - 130,440
2007
Fair value - - - - (6,319) - - (6,319)
movement of
investments
Costs - - - - (603) - - (603)
allocated to
capital
Net revenue - - - - - 684 - 684
for the
period
Dividends - - - - - (944) - (944)
paid in
period
As at 30 3,561 19,307 1,149 9,835 87,833 1,573 - 123,258
September
2007
Year to 31
March 2008
As at 1 3,561 19,307 1,149 9,835 94,755 1,833 - 130,440
April 2007
Fair value - - - - (22,427) - - (22,427)
movement of
investments
Costs - - - - (1,159) - - (1,159)
allocated to
capital
Shares (16) - 16 (384) - - - (384)
purchased for
cancellation
Shares - - - - - - (4,501) (4,501)
purchased for
Treasury
Net revenue - - - - - 1,358 - 1,358
for the year
Dividends - - - - - (944) - (944)
paid in the
year
As at 31 3,545 19,307 1,165 9,451 71,169 2,247 (4,501) 102,383
March 2008
Balance Sheet (unaudited)
s at 30 September 2008
As at As at As at
30 September 30 September 31 March
2008 2007 2008
£'000 £'000 £'000
Fixed assets
Investments designated at fair value 88,518 134,979 106,154
through profit and loss
Current assets
Debtors 336 323 460
Cash at bank 2,770 4,023 11,243
3,106 4,346 11,703
Creditors: amounts falling due
within one year
Other creditors (196) (1,067) (474)
Revolving credit facility (5,000) (15,000) (15,000)
(5,196) (16,067) (15,474)
Net current liabilities (2,090) (11,721) (3,771)
Total assets less current 86,428 123,258 102,383
liabilities
Net assets 86,428 123,258 102,383
Share capital and reserves
Called-up share capital 3,530 3,561 3,545
Share premium account 19,307 19,307 19,307
Capital redemption reserve 1,180 1,149 1,165
Special reserve 9,143 9,835 9,451
Capital reserves 55,794 87,833 71,169
Revenue reserve 1,975 1,573 2,247
Own shares held in Treasury (4,501) - (4,501)
Total equity shareholders' funds 86,428 123,258 102,383
Net asset value per ordinary share 258.18p 346.14p 304.52p
Summarised Statement of Cash Flows (unaudited)
as at 30 September 2008
As at As at As at
30 September 30 September 31 March
2008 2007 2008
£'000 £'000 £'000
Net cash inflow/(outflow) from 936 (266) 130
operating activities
Servicing of finance
- Interest and similar charges paid (488) (295) (802)
Net cash outflow from servicing of (488) (295) (802)
finance
Taxation
- Taxation paid - - -
Net cash outflow from taxation - - -
Capital expenditure and financial
investment
- Purchases of investments (8,267) (15,045) (28,763)
- Sales of investments 10,881 11,713 37,647
Net cash inflow/(outflow) from 2,614 (3,332) 8,884
capital expenditure and financial
investment
Equity dividends paid (1,227) (944) (944)
Net cash inflow/(outflow) before 1,835 (4,837) 7,268
financing
Financing
- Proceeds of short-term credit - 4,500 4,500
facility
- Repayment of short-term credit (10,000) - -
facility
- Ordinary shares purchased for (308) - (384)
cancellation
- -Ordinary shares purchased for - - (4,501)
Treasury
Net cash (outflow)/inflow from (10,308) 4,500 (385)
financing
(Decrease)/increase in cash (8,473) (337) 6,883
Notes to the Financial Statements
as at 30 September 2008
1 Financial information
The financial information contained in this report does not constitute full
statutory accounts as defined in section 240 of the Companies Act 1985. The
financial information for the six months ended 30 September 2008 and 30
September 2007 has not been audited or reviewed by the Company Auditor pursuant
to the Auditing Practices Board guidance on such reviews.
The information for the year ended 31 March 2008 has been extracted from the
latest published audited financial statements, which have been filed with the
Registrar of Companies. The Report of the Auditors on those financial
statements was unqualified and did not contain a statement under section 237(2)
or (3) of the Companies Act 1985.
The financial statements are prepared on the basis of the accounting policies
set out in note 1 of the annual financial statements for the year ended 31
March 2008.
2 Tax credit/charge on ordinary activities
The tax charge for the half-year is nil (30 September 2007: nil; 31 March 2008:
nil) based on an estimated effective tax rate of 0% for the year ending 31
March 2009. The estimated effective tax rate is 0% as investment gains are
exempt from tax owing to the Company's status as an Investment Trust and there
is expected to be an excess of management expenses over taxable income.
3 Reconciliation of net return before finance costs and taxation to net cash
inflow/(outflow) from operating activities
6 months to 6 months to Year to
30 September 30 September 31 March
2008 2007 2008
£'000 £'000 £'000
Net return before finance costs and 1,145 867 1,800
taxation
Management fee charge to capital (278) (420) (717)
(Decrease)/increase in creditors (22) 98 (910)
Decrease/(increase) in prepayments 91 (811) (43)
and accrued income
Net cash inflow/(outflow) from 936 (266) 130
operating activities
4 Reconciliation of net cash flows to movements in net debt
6 months to 6 months to Year to
30 September 30 September 31 March
2008 2007 2008
£'000 £'000 £'000
(Decrease)/increase in cash in the (8,473) (337) 6,883
period
Proceeds of credit facility - (4,500) (4,500)
Repayment of credit facility 10,000 - -
Movement in net debt 1,527 (4,837) 2,383
Net debt at beginning of period (3,757) (6,140) (6,140)
Net debt at end of period (2,230) (10,977) (3,757)
5. Analysis of net debt
As at As at
1 April 30 September
2008 Cash flows 2008
£'000 £'000 £'000
Cash at bank 11,243 (8,473) 2,770
Debt due in one year (15,000) 10,000 (5,000)
(3,757) 1,527 (2,230)
Tuesday, 4th June 2024
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