Half-yearly Report
Strategic Equity Capital plc
Half Yearly Report for the period ended 31 December 2008
Key highlights:
* Period sees worst equity market performance in recent history; smaller
companies affected particularly badly.
* NAV per share falls 47.4% to 40.60p.
* A further 1.46m shares bought back.
For further information, please contact:
Capita Sinclair Henderson Limited 01392 412 122
Tracey Brady
SVG Investment Managers Limited 020 7010 8900
Tony Dalwood / Adam Steiner
Copies of the press release and other corporate information can be found on
the Company website at: http://www.strategicequitycapital.com
Chairman's statement
The six month period ended 31 December 2008, has been the most difficult in
recent equity market history. The stock markets experienced dramatic falls as
the banking crisis fully unfolded, bringing about one of the worst bear
markets in modern times. Almost all asset classes performed badly, and within
that, smaller companies underperformed larger, more liquid securities. Ratings
have fallen significantly, discounting substantial further reductions in
corporate earnings. This, coupled with severe credit shortages has meant that
companies with higher debt levels have been severely marked down. Private
equity and corporate M&A have almost completely dried up as finance has been
very difficult to raise, whether leveraged debt in the case of private equity
or corporate debt or equity in the case of corporate buyers. The removal of
the `long term buyer' has meant that, in some cases, valuations have fallen to
very attractive levels for longer term investors.
The FTSE Smaller Companies (excluding Investment Trusts) Index fell 38.9% in
the six months, bringing the fall from its peak in 2007, to 62.8%. At 31
December, the Index was at a similar level to April 1993, having given up
nearly 16 years of gains. By contrast, the FTSE All-Share Index was down only
22.6% in the six months, and 36.5% off its peak.
Within the various indices, there has been extreme volatility. Financials,
automotive, industrial and the resources sectors were worst affected, where
the major sector indices were down more than 50%, in the period. Investment
themes have also shown significant dispersion in performance, with value-based
strategies significantly underperforming. This has led to a number of
well-established value style fund managers recording their worst performances
on record.
In this environment it has again been extremely difficult to generate absolute
returns. However, the project based investment philosophy that the Company
pursues enables a focus on opportunities aimed at realising value over the
period of the project. Although the macroeconomic environment has deteriorated
rapidly and presented new challenges, now more than ever, a clear management
plan is required to steer companies through these difficult times and hence we
remain confident that the philosophy is sound and should deliver long term
performance.
Performance
At 31 December 2008 the Company had net assets of £28.3 million which equates
to an NAV per share of 40.60p, a decrease of 47.4% since June 2008 (net asset
value of 77.21p per share). This performance is very disappointing,
particularly as it has arisen from substantial de-ratings of companies whose
share prices have previously been resilient. The concentrated nature of the
portfolio has meant that the impact of certain falls on net asset value has
been significant. More detail is provided in the Investment Manager's review.
Volatility has continued into January 2009. Stability in the credit markets
and financial system is necessary for equity markets to improve. The unaudited
NAV per share as at 31 January 2009 was 37.92p.
Investment Manager
The Company's portfolio is managed by SVG Investment Managers Limited. Its
detailed investment processes and techniques are focussed on companies that
can benefit from strategic, operational and management initiatives.
Investment strategy
The Company's investment strategy remains to achieve absolute returns by
investing in securities which the Manager believes are undervalued and could
benefit from strategic, operational or management initiatives. The Company's
investment horizon is typically three to five years. The techniques adopted
focus around valuation metrics, due diligence, ongoing dialogue and the
formulation and agreement of a clear value creation plan with management.
Borrowing Facility
In current markets the Company has no immediate plans to use its borrowing
facility. The Company had no borrowings at 31 December 2008.
Dividend
The Directors expect that any returns for shareholders will derive primarily
from the capital appreciation of the Ordinary shares rather than from
dividends. The Directors intend only to declare final dividends and then to
the extent necessary to maintain investment trust status. Accordingly, the
Board does not intend to declare an interim dividend.
Discount management
Given the wide discount that the Company reached in November and December
2007, the Board decided to use its authority to enact an ad hoc buy-back
programme. The programme commenced shortly before Christmas 2007 and has been
used tactically since then.
In October 2008, the Board was made aware of a minority group of
shareholders which had indicated a preference for realising their investment.
Accordingly, I obtained the views of shareholders representing over 90 per
cent of the issued share capital who indicated a strong view that the Company
should continue to pursue its investment strategy. Following this process, the
Board announced that it had re-examined its buy-back policy in light of market
conditions and had concluded that, whilst it will continue to use its share
buy-back authority where it can be applied for the benefit of all
shareholders, it believed it impractical to seek to reduce the discount to 10
per cent or less during the prevailing market conditions. However, the Board
gave a commitment to shareholders that it would present an ordinary resolution
at the annual general meeting of the Company in November 2010 where
shareholders will vote on the continuation of the Company.
The Board will continue to regularly review its stance on share buy-backs. In
view of the continued uncertain and volatile market conditions, the Board's
view on discount management has not changed since the October announcement.
As at 31 December 2008, the Company had bought back a total of 3,045,500
shares at an average price of 61.45p per share, representing a weighted
average discount of 19.2% to NAV. Shares bought back are held in treasury.
Outlook
The continued volatility and uncertainty surrounding equity markets
will undoubtedly present both opportunities and threats. For investors
prepared to take a long term view and to back strong management teams, there
are a growing number of interesting, value investment opportunities. In the
short term, companies are likely to remain cash constrained as banks rebuild
balance sheets. This will undoubtedly hinder near term corporate performance
as efforts are focused on cash preservation. The challenge for companies and
investors alike is therefore to manage through the difficult periods and to
create the right platform to take advantage of the eventual upturn.
It is my belief that the Company's portfolio, where investments are
based around clear value creation plans, is well positioned to do this.
John Hodson
12 February 2009
Investment Management Report
Portfolio review
At 31 December 2008, the Company had net assets of £28.3 million (40.60p per
share), held 2.8% cash and a portfolio of 24 companies. The investment
strategy remains highly focused, with the top 10 holdings accounting for 77%
of the portfolio at the end of the calendar year. Investments are typically
made on the basis of a three to five year plan. Evidence that the current
economic environment is having a marked impact on almost all businesses has
become increasingly clear, particularly after the severe fall out in the
global banking sector, highlighted when Lehman Brothers failed. The
consequence has seen significant earnings downgrades across the UK market and
severe pressure on cash flows. Within the portfolio, the slowdown has affected
different companies in different ways, and whilst we remain pleased that the
majority of management teams are adapting their operating and strategic plans
accordingly, the time horizon for achieving these has become less clear. In
the short term, strategies are likely to focus on balance sheet preservation
and positioning businesses to win market share from weaker rivals on a
recovery.
Private equity activity almost ceased in the fourth quarter of 2008, as debt
has become extremely scarce. Corporate activity likewise has slowed, as
management teams try to balance historically low prices with the uncertainty
of the macroeconomic climate. Four companies in the portfolio were in or
remain subject to takeover talks in the period, but none have yet come to
fruition.
Our ability to engage directly with companies has increased in the current
financial environment. Bank debt is more difficult and expensive to raise and
equity markets are extremely unpredictable, meaning new equity issues are
difficult and uncertain. We have seen and expect to continue to see a high
number of refinancing opportunities. In this environment, we will be highly
selective about which, if any, we participate in. In the interim, our
attentions have focused on existing investments where we have been active in
engaging with management teams to ensure that appropriate actions are being
taken to preserve equity value.
Performance
The period's performance has been overshadowed by the unprecedented fallout in
the global banking sector and the extreme volatility experienced in equity
markets. Our approach of applying private equity techniques in the public
markets has proved successful in most cases where we have been able to follow
an investment from inception through to completion and exit. In the current
environment, however, the absence of the private equity and the corporate
buyer, coupled with the disappearance of any meaningful liquidity in the
smaller companies market, has meant exiting investments at sensible prices
have been impossible. This has been particularly evident in cases where forced
sellers have driven prices down on relatively small volumes. The underlying
performance of the Fund has been disappointing, but should be seen in the
context of the smaller companies' sector, in which we operate and the extreme
volatility experienced during the period. We remain confident that there is
significant value in the portfolio and that, with a return of modest equity
appetite, significant value will re-emerge.
Realisations
The project based investment style dictates that, over time, performance will
be driven by realisations. As already mentioned, the conditions during the
second half of 2008 have made realisations extremely difficult. We completed
only two realisations during the period. We had begun the process of disposing
of our holding in Evolution during the first half of 2008. The decision to
exit was driven by our view that management's strategy had moved somewhat, in
terms of reducing their net cash exposure to fund their trading book, however,
the full potential value realisation strategy was not to be pursued. The
process was completed resulting in a 0.78x multiple. We also exited our
remaining holding in STV Group (formerly SMG Group) during the period. We
supported the new strategy outlined for the business by CEO Rob Woodward at
the time he went in and remain of the view that it is the right one for the
business. However, the values realised for the disposals and, more
importantly, the extremely weak outlook for television advertising and STV's
exposure to ITV led us to believe that the turnaround will be significantly
more costly and complex than originally thought. The majority of our residual
investment was realised through participating in a tender offer completed in
October 2008. The investment returned 0.48x cost.
Performance review
The most significant negative contributors to the Company's NAV during the
period were Redstone, Pinewood Shepperton, Mecom, Entertainment Rights, Renold
and Intec Telecom.
Redstone is an integrated telecom and IT service provider to the small and mid
cap corporate market. The share price fell significantly on the back of
earnings downgrades driven by reduced IT spending, a slowdown in
infrastructure spending and some concerns over the company's balance sheet. We
have had close contact with the company and understand that bank arrangements
are being renegotiated and that the company has significantly reduced its cost
base. The company is well placed to win further contracts in the Government's
Building Schools for the Future (`BSF') programme and believe the long term
drivers of convergence between voice, data and other communications will
provide strong future growth.
Pinewood Shepperton owns and manages film and television studios, based on the
western perimeter of London and provides property and ancillary services to
the media industry. The company has planning consents to develop up to 1.8
million square feet on its freehold property for media use. Some of this
development has commenced on the back of pre-lets, which will lead to rental
income growth in the near term. The share price has fallen on the back of
diminishing interest in property. The biggest fall, however, occurred when
Pinewood fell out of the All-Share Index in December as a result of the new
FTSE Index liquidity rules. The shares are tightly held and the move out of
the index led to a fall of approximately 35%. The underlying business remains
strong, in our view, supported by the company's trading update in November,
which stated that revenue is ahead of prior year and demand for both TV and
film remains strong.
Mecom is an integrated European newspaper business with interests in Germany,
Poland, Scandinavia and the Netherlands. The business was founded by David
Montgomery and has been built over the past three years through a number of
acquisitions, many of which were financed with debt. The share price has
fallen heavily after the company announced that it's earnings before interest
tax and depreciation would fall some 10% below market expectations. With
further uncertainty about the state of the European regional newspaper market,
the equity market now expects Mecom to breach covenants, although the company
has stated that it remains within covenants at this stage. The company
announced that it was considering a number of potential disposals to reduce
debt. Since the year end, it has announced the sale of its German business for
€152million. We believe this disposal will significantly reduce the risk of
covenant breaches and will in any event build goodwill with the banks which
will allow the business to continue its strategy to reduce debt. Whilst this
was well received, the company then announced that as a result of significant
differences of view on the board, a number of directors had resigned. The
major shareholders continue to support David Montgomery.
Entertainment Rights owns and develops children's media rights for television,
home entertainment and merchandise. In July 2008, following a strategic
review, the CFO departed and the company announced that it had had to
renegotiate a key distribution contract in the USA which would lead to a
substantial reduction in earnings. This led to fears about covenant breaches
and triggered a further investigation into the company's financial affairs
instigated by the banks. It has subsequently become evident that the company's
true financial performance had been misrepresented to the board and to
shareholders through aggressive accounting policies. A new CFO with a wealth
of turnaround experience has since been appointed and the CEO role has been
assumed by the former head of the North American business. The two are working
closely with the banks. In December 2008, the company announced that it had
received an approach for the business. Whilst the underlying business is now
relatively stable under the new management, until the debt levels are
addressed, the equity is unlikely to have any meaningful value. The
`misrepresentation' of information to the board may well lead to further
investigations on behalf of the broad shareholder base.
Intec Telecom supplies software solutions that provide interconnect billing
and settlement services between telecom companies and their customers. In May
2008, Intec received an unsolicited approach to buy the company. These talks
had continued until October when they were terminated, as a result of market
conditions. The process had failed to generate a firm bid at a level which the
Board could recommend to shareholders. Notwithstanding this, the results for
the year ended 30 September 2008, came in significantly above analyst
expectations. The outlook for H1 2009 is very positive, but management comment
over H2 is understandably cautious.
Renold is an engineering company whose major activity is the manufacture and
supply of industrial chain. The share price has been hit by fears over the
capital goods sector and falling orders. Until the year end, the company had
retained its forecasts for the year, but trading in November and December was
significantly behind expectations. The short term outlook remains uncertain
and this has significantly affected the share price.
Two positive contributors to NAV during the period were Vintage 1 and
4imprint.
Vintage 1 is a securitised private equity fund of funds portfolio managed by
Mizuho bank. The structure was set up as a €500m fund comprising €300m of
senior debt and €200m of subordinated notes. The investment was made as it
provided access to a high quality initial portfolio transferred in at GP NAV.
SVG was instrumental in selecting the underlying fund commitments and
structure and it provided the Company exposure to European private equity
opportunities. The performance to date has been very strong, with senior debt
paid down to €100m and cash returns to investors of 32% of their called
investment. A further cash return of 12% of called capital has been made in
January 2009. The positive contribution arose entirely from the appreciation
of the euro against sterling as the investment is euro denominated. This has
offset modest write-downs in the portfolio.
4imprint provides direct marketing and promotional products in the UK and USA.
The executive chairman is continuing to execute his strategic plan. The share
price recovered from its lows after a trading statement revealed that, whilst
activity in North America had slowed, the business was still growing. Director
buying has also fuelled sentiment.
Corporate activity
Our policy of ongoing corporate engagement has been very much in evidence
during the last six months with evidence of value improvement from previous
engagements coming to the fore as well as further engagement taking place.
After a weak share price performance in Q3 2008, RPC rebounded strongly at the
end of November following the company's interim results announcement. In the
announcement, amongst other things, the company stated that the strategic
review had led to a significant operational and commercial improvement
programme which would improve return on capital by at least 4%. This review
had been instigated after a change of chairman earlier in the year. We had
been engaged with the company in concert with North Atlantic Value in the run
up to both the chairman change and the strategic review.
Filtronic paid a further special dividend of 40p per share, distributing
further proceeds from the disposal and corporate restructuring programme led
by chairman John Poulter. We have been in close communication with the
management since John Poulter's selection in 2006, having become involved in
the months leading to his appointment.
In October 2008, we cornerstoned a placing by Statpro, which had hitherto been
a toe-hold investment. Statpro's principal banking relationship was with
Kaupthing, which was put into administration by the UK government. This meant
that the remainder of Statpro's undrawn banking lines were immediately
cancelled. We immediately began discussions with the company and participated
in a discounted placing aimed at replacing the `lost' facilities. The actions
taken in conjunction with Statpro illustrate some of the benefits to companies
of our engaged investment style.
New investments
Two new small investments were made in the period. In July, the Company took a
small holding in the issue of convertible preference shares by Inspired
Gaming. The preference shares convert into shares or are redeemed at 100%
premium to their par value on the disposal of the business. Management and the
major shareholders are engaged actively in talks to dispose of the business.
We also participated in a placing of shares by Avingtrans in September. The
investment is a toe-hold investment to support the chairman who has a clear
value creation plan centred on the re-focusing of the group towards core
activities and development into China.
Outlook
The weak outlook for the global economy and shortage of credit will
undoubtedly provide challenging conditions for our investee companies in the
weeks and months ahead. However, we believe a strategy which aims to work with
management teams, ensuring that efforts are focused on cash generation and
shareholder value will generate strong returns in the future. Valuations are
at historically lows levels on traditional metrics, providing significant
opportunities for equity performance. The quality of the portfolio and the
inherent opportunity therein, is well illustrated when its characteristics are
looked at with an estimated price to earnings ratio of under 4.0x and a price
to book value of under 0.5x. In addition, the portfolio's earnings growth
achieved and the forecast growth are superior to that of the market.
Our ability to recycle cash from future realisations into these opportunities
is highly attractive. Coupled with the current discount at which the Company's
shares are trading to the underlying net asset value, the opportunity for
value creation for shareholders should be substantial.
Sector split
Investment companies 13.1%
Technology 20.6%
Net cash 2.8%
Support services 17.6%
Media 9.2%
Industrial 18.8%
Financial General 3.8%
Leisure 1.1%
Retail 9.5%
Construction 0.4%
Telecoms 3.1%
Size split
(by market capitalisation
Net cash 2.8%
< £100m 63.8%
£100m - £300m 20.2%
£300m - £500m 3.3%
>£500m 9.9%
SVG Investment Managers Limited
12 February 2009
All statements of opinion and/or belief contained in this Investment Manager's
report and all views expressed and all projections, forecasts or statements
relating to expectations regarding future events or the possible future
performance of the Company represent SVG Investment Managers Limited's own
assessment and interpretation of information available to it as the date of
this report. As a result of various risks and uncertainties, actual events or
results may differ materially from such statements, views, projections or
forecasts. No representation is made or assurance given that such statements,
views, projections or forecasts are correct or that the objectives of the
Company will be achieved.
Top 10 holdings
A summary of the top 10 investments, which represent approximately
77% of net assets, is given below:
Company Sector Cost Valuation % of invested % of net
Classification £'000 £'000 portfolio assets
RPC Group Industrials 4,220 3,168 11.51 11.21
4imprint Group Support Services 4,885 2,905 10.56 10.28
Thorntons Retail 4,049 2,704 9.83 9.57
Investment
*Vintage 1 Limited Companies 529 2,555 9.29 9.04
Pinewood Shepperton Media 3,929 2,357 8.57 8.34
Intec Telecom Telecoms 3,028 1,990 7.23 7.04
Spirent Communication Telecoms 2,597 1,673 6.08 5.92
Statpro Group Technology 2,526 1,459 5.30 5.16
Communisis Support Services 2,953 1,291 4.69 4.57
Ora Capital Financial General 1,300 1,079 3.92 3.82
30,016 21,181 76.98 74.95
* The valuation of Vintage 1 Limited is based on the valuation provided by the
fund manager at the end of November 2008 based on underlying asset valuations
as at 30 September 2008. Following the period end, Vintage 1 Limited made a
distribution of £69,000 (€78,500).
Investment objective
The investment objective of the Company is to achieve absolute returns (i.e.
growth in the value of investments) rather than relative returns (i.e.
attempting to outperform selected indices) over a medium-term period,
principally through capital growth.
Investment policy
The Company invests primarily in securities quoted on any securities market
operated by the London Stock Exchange that the Investment Manager believes are
undervalued and could benefit from strategic, operational or management
initiatives. The Company also has the flexibility to invest up to 20% of the
Company's gross assets at the time of investment in securities listed or
traded on other recognised stock exchanges and up to 20% of the Company's
gross assets at the time of investment in unlisted securities and in any class
of debt or equity related instrument.
Capital structure
Issued share capital
72,626,000 ordinary shares of 10p each: £7,262,600
The Company has been incorporated with an indefinite life. All shares have
equal voting rights.
Treasury shares
During the six months to 31 December 2008 the Company repurchased 1,463,000
ordinary shares which are held in treasury.
During the year 30 June 2008 the Company repurchased 1,582,500 (30 June 2007:
nil) Ordinary shares which are held in treasury. At the date of this report a
total of 3,045,500 ordinary shares are held in treasury.
Financial summary
1 July 2008 to Year to 1 July 2007 to
31 December 30 June 31 December
2008 2008 2007
Total return:
Total return £(25,759,000) £(26,857,000) £(15,975,000)
Return per ordinary share* (36.91)p (37.14)p (21.99)p
Revenue:
Net revenue after taxation £117,000 £(4,000) £(47,000)
Revenue return per ordinary 0.17p (0.01)p (0.06)p
share*
As at As at As at
31 December 30 June 31 December
2008 2008 2007
Assets (investments valued
at bid-
market prices):
Net assets £28,252,000 £54,851,000 £66,743,000
Net asset value per ordinary
share
- (including current period 40.60p 77.21p 91.96p
revenue)
Middle market quotation:
Ordinary shares 14.50p 66.25p 70.00p
Discount to NAV (64.29)% (14.20)% (23.88)%
* Returns per ordinary share are calculated based on 69,782,429 (30 June 2008:
72,314,265 and 31 December 2007: 72,623,283) being weighted average number of
ordinary shares, excluding shares held in treasury, in issue throughout the
period.
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 12 February
2009 and the above responsibility statement was signed on its behalf by John
Hodson, Chairman.
Income statement
(unaudited) for the period ended 31 December 2008
Period ended Year ended Period ended
31 December 2008 30 June 2008 31 December 2007
Revenue Capital Revenue Capital Revenue Capital
return return Total return return Total return return Total
Note £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Investments
(Losses)/gains on
investments at fair value
through profit or loss - (25,876) (25,876) - (27,237) (27,237) - (16,314) (16,314)
Net investment result - (25,876) (25,876) - (27,237) (27,237) - (16,314) (16,314)
Income
Dividends 516 - 516 792 - 792 362 - 362
Interest 14 - 14 187 - 187 92 - 92
Underwriting commission - - - 5 - 5 - - -
Total income 2 530 - 530 984 - 984 454 - 454
Expenses
Investment Manager's 5
fee (208) - (208) (453) - (453) (156) - (156)
Investment Manager's
performance fee 6 - - - - 387 387 - 386 386
Other expenses (183) - (183) (372) (3) (375) (235) - (235)
Total expenses (391) - (391) (825) 384 (441) (391) 386 (5)
Net return/(loss) before
finance costs and
taxation 139 (25,876) (25,737) 159 (26,853) (26,694) 63 (15,928) (15,865)
Finance costs
Interest payable (22) - (22) (163) - (163) (110) - (110)
Total finance costs (22) - (22) (163) - (163) (110) - (110)
Net return/(loss) before
taxation 117 (25,876) (25,759) (4) (26,853) (26,857) (47) (15,928) (15,975)
Taxation 7 - - - - - - - - -
Net return/(loss) after
taxation for the period 117 (25,876) (25,759) (4) (26,853) (26,857) (47) (15,928) (15,975)
Returns per ordinary share pence pence pence pence pence pence pence pence pence
- Basic and diluted 3 0.17 (37.08) (36.91) (0.01) (37.13) (37.14) (0.06) (21.93) (21.99)
The total column of this statement is the income statement of the Company. All
items in the above statement derive from continuing operations. These accounts
are unaudited and are not the Company's statutory accounts. These accounts
have been prepared under International Financial Reporting Standards, and in
accordance with the accounting policies.
Statement of changes in net equity
(unaudited) for the period ended 31 December 2008
Share Share Special Capital Revenue
capital premium reserve reserve reserve Total
£'000 £'000 £'000 £'000 £'000 £'000
For the period ended 31
December 2008
1 July 2008 7,262 2,070 61,238 (16,092) 373 54,851
Return for the period - - - (25,876) 117 (25,759)
Ordinary shares purchased
and held in treasury - - (840) - - (840)
31 December 2008 7,262 2,070 60,398 (41,968) 490 28,252
For the year to 30 June 2008
1 July 2007 7,262 2,070 62,282 10,761 377 82,752
Return for the year - - - (26,853) (4) (26,857)
Dividend paid - - (1,044) - - (1,044)
30 June 2008 7,262 2,070 61,238 (16,092) 373 54,851
For the period ended 31
December 2007
1 July 2007 7,262 2,070 62,282 10,761 377 82,752
Return for the period - - - (15,928) (47) (15,975)
Ordinary shares purchased
and held in treasury - - (34) - - (34)
31 December 2007 7,262 2,070 62,248 (5,167) 330 66,743
These accounts have been prepared under International Financial Reporting
Standards, and in accordance with the accounting polices.
Balance sheet
(unaudited) as at 31 December 2008
31 December 30 June 31 December
2008 2008 2007
£'000 £'000 £'000
Non-current assets
Fair value through profit and loss
investments 27,514 52,588 65,800
Current assets
Other receivables 174 809 814
Cash and cash equivalents 793 2,933 1,371
967 3,742 2,185
Total assets 28,481 56,330 67,985
Current liabilities
Bank loan - - 1,000
Other payables 229 1,479 242
229 1,479 1,242
Total assets less current liabilities 28,252 54,851 66,743
Net assets 28,252 54,851 66,743
Represented by:
Shareholders' equity
Share capital 7,262 7,262 7,262
Share premium account 2,070 2,070 2,070
Special reserve 60,398 61,238 62,282
Capital reserve (41,968) (16,092) (5,167)
Revenue reserve 490 373 330
Total shareholders' equity 28,252 54,851 66,743
Net asset value per share pence pence pence
Basic and diluted 40.60 77.21 91.96
Shares in issue number number number
Ordinary shares (excluding shares held
in treasury) 69,580,500 71,043,500 72,576,000
These accounts have been prepared under International Financial Reporting
Standards, and in accordance with the accounting policies.
The half yearly financial information was approved by the Board of Directors
and authorised for issue on 12 February 2009. It was signed on behalf of the
Board by
J Hodson
Chairman
12 February 2009
Statement of cash flows
(unaudited) for the period ended 31 December 2008
Period ended Year ended Period ended
31 December 30 June 31 December
2008 2008 2007
£'000 £'000 £'000
Operating activities
Net loss before finance costs and
taxation (25,737) (26,694) (15,865)
Adjustment for losses on investments 25,876 27,239 16,314
Interest paid (22) (165) (99)
Operating cash flows before movements
in working capital 117 380 350
Decrease/(increase) in receivables 674 (721) (688)
Decrease in payables (75) (2,696) (2,685)
Income tax recovered - 24 24
Purchases of portfolio investments (5,349) (17,256) (8,397)
Sales of portfolio investments 3,333 24,327 11,883
Net cash (outflow)/inflow from operating
activities (1,300) 4,058 487
Financing activities
Repayment of revolving credit facility - (1,000) -
Purchase of t reasury shares (840) (1,043) (34)
Net cash outflow from financing activities (840) (2,043) (34)
(Decrease)/increase in cash and cash
equivalents for period (2,140) 2,015 453
Cash and cash equivalents at start of
period 2,933 918 918
Cash and cash equivalents at 31
December 2008 793 2,933 1,371
These accounts have been prepared under International Financial Reporting
Standards, and in accordance with the accounting policies.
1.1 Corporate information
Strategic Equity Capital plc is a limited company incorporated and domiciled
in the United Kingdom whose shares are publicly traded.
The Company carries on business as an investment trust.
1.2 Basis of preparation/statement of compliance
The interim financial statements of the Company have been prepared using
accounting policies consistent with International Financial Reporting
Standards (`IFRS') issued by the International Accounting Standards Board (as
adopted by the EU), interpretations issued by the International Financial
Reporting Interpretations Committee, and applicable requirements of United
Kingdom company law, and reflect the following policies which have been
adopted and applied consistently. Where presentational guidance set out in the
Statement of Recommended Practice (`SORP') for investment trusts issued by the
Association of Investment Companies (`AIC') in January 2003 (as revised
December 2005) is consistent with the requirements of IFRS the Directors have
sought to prepare financial statements on a basis compliant with the
recommendations of the SORP.
The same accounting policies, presentation and method of computation are
followed in these condensed financial statements as were applied in the
preparation of the financial statements for the year ended 30 June 2008.
Convention
The financial statements are presented in Sterling, being the currency of the
primary environment in which the Company operates, rounded to the nearest
thousand.
Segmental reporting
The Directors are of the opinion that the Company is engaged in a single
segment of business, being investment business.
1.3 Accounting policies
Investments
(a) Classification
All investments in the scope of IAS 39 held by the Company are classified as
`fair value through profit or loss'. As the entity's business is investing in
financial assets with a view to profiting from their total return in the form
of interest, dividends or increase in fair value, listed equities and fixed
income securities are designated as fair value through profit or loss on
initial recognition. The entity manages and evaluates the performance of these
investments on a fair value basis in accordance with its investment strategy.
Investments are initially recognised at cost, being the fair value of the
consideration given, excluding transaction costs associated with the
investment that are charged to the income statement and allocated to capital.
After initial recognition, investments are measured at fair value, with
unrealised gains and losses on investments and impairment of investments
recognised in the income statement and allocated to capital. Realised gains
and losses on investments sold are calculated as the difference between sales
proceeds and cost.
(b) Fair value estimation
For investments actively traded on organised financial markets, fair value is
generally determined by reference to Stock Exchange quoted market bid prices
at the close of business on the balance sheet date, without adjustment for
transaction costs necessary to realise the asset.
In respect of unquoted instruments, or where the market for a financial
instrument is not active, fair value is established by using recognised
valuation methodologies, in accordance with International Private Equity and
Venture Capital (`IPEVC'), Valuation Guidelines. New investments are initially
carried at cost, for a limited period being the price of the most recent
investment in the investee. This is in accordance with IPEVC Guidelines as the
cost of recent investments will generally provide a good indication of fair
value. Fair value is the amount for which an asset could be exchanged between
knowledgeable, willing parties in an arm's length transaction.
(c) Recognition, derecognition and measurement
All `regular way' purchases and sales of financial assets are recognised on
the `trade date' i.e. the date that the entity commits to purchase or sell the
asset. Regular way purchases, or sales, are purchases or sales of financial
assets that require delivery of the asset within a time frame generally
established by regulation or convention in the market place.
Interest income and dividend income
Dividends receivable on quoted equity shares are taken into account on the
ex-dividend date. Where no ex-dividend date is quoted, they are brought into
account when the Company's right to receive payment is established. Other
investment income and interest receivable are included in the financial
statements on an accruals basis. Dividends received from UK registered
companies are accounted for net of imputed tax credits.
Expenses
All expenses are accounted for on an accruals basis. Transaction costs and
other expenses incurred on the acquisition of an investment classified as fair
value through profit or loss are not included within the cost of that
investment but are charged separately through the income statement and
allocated to capital. The Company's investment management and administration
fees, finance costs (including interest on the bank facility) and all other
expenses are charged through the income statement. These expenses are
allocated 100% to the revenue column of the income statement. The Investment
Manager's performance fee is allocated 100% to the capital column of the
income statement. In the opinion of the Directors the fee is awarded entirely
for the capital performance of the portfolio.
Cash and cash equivalents
Cash in hand and in banks and short term deposits which are held to maturity
are carried at cost. Cash and cash equivalents are defined as cash in hand,
demand deposits and short-term, highly liquid investments readily convertible
to known amounts of cash subject to insignificant risk of changes in value.
Bank overdrafts that are repayable on demand which form an integral part of
the Company's cash management are included as a component of cash and cash
equivalents for the purpose of the statement of cash flows.
Bank loans and borrowings
All bank loans and borrowings are initially recognised at cost, being the fair
value of the consideration received, less issue costs where applicable. After
initial recognition, all interest-bearing loans and borrowings are
subsequently measured at amortised cost, with any difference between cost and
redemption value being recognised in the income statement over the period of
the borrowings on an effective interest basis.
Taxation
Income tax on the profit or loss for the period comprises current and deferred
tax. Income tax is recognised in the income statement except to the extent
that it relates to items recognised directly in equity, in which case it is
recognised in equity.
Current tax is the expected tax payable on the taxable income for the period,
using tax rates enacted or substantively enacted at the balance sheet data,
and any adjustment to tax payable in respect of previous years. The tax effect
of different items of expenditure is allocated between revenue and capital on
the same basis as the particular item to which it relates, using the Company's
effective rate of tax, as applied to those items allocated to revenue, for the
accounting period.
Deferred income tax is provided, using the liability method, on all temporary
differences at the balance sheet date between the tax basis of assets and
liabilities and their carrying amount for financial reporting purposes.
Deferred income tax liabilities are measured at the tax rates that are
expected to apply to the period when the liability is settled, based on tax
rates (and tax laws) that have been enacted or substantively enacted at the
balance sheet date.
Dividends payable to shareholders
Interim dividends to shareholders are recognised as a liability in the period
in which they are paid. Final dividends to shareholders are recognised as a
liability in the year in which they have been declared and approved by the
shareholders. Dividends are charged to the statement of changes in net equity.
Foreign currency translation
(a) Functional and presentation currency
The currency of the Primary Economic Environment in which the Company operates
is pounds Sterling (`Sterling') which is also the presentational currency.
Transactions denominated in foreign currencies are translated into Sterling at
the rates of exchange ruling at the date of the transaction.
(b) Transactions and balances
Investments are converted to Sterling at the rates of exchange ruling at the
balance sheet date. Exchange gains and losses relating to investments are
taken to the capital column of the income statement.
2. Income
Period ended Year ended Period ended
31 December 30 June 31 December
2008 2008 2007
£'000 £'000 £'000
Income from investments:
UK dividend income 516 792 362
Convertible bond income (9) 122 63
Liquidity fund income 21 48 19
528 962 444
Other income:
Bank interest receivable 2 17 10
Underwriting commission - 5 -
Total income comprises:
Dividends 516 792 362
Interest 14 187 92
Underwriting commission - 5 -
530 984 454
3. Returns per ordinary share
Period ended 31 Year ended 30 June Period ended 31
December 2008 2008 December 2007
Revenue Capital Revenue Capital Revenue Capital
return return Total return return Total return return Total
pence pence pence pence pence pence pence pence pence
Returns per
ordinary
share - 0.17 (37.08) (36.91) (0.01) (37.13) (37.14) (0.06) (21.93) (21.99)
basic and
diluted
Returns per ordinary share are calculated based on 69,782,429 (30 June 2008:
72,314,265 and 31 December 2007: 72,623,283) being the weighted average number
of ordinary shares, excluding shares held in treasury, in issue throughout the
period.
4. Share buybacks
The Company has taken advantage of a change in the Companies Act 1985 which
came into force on 1 December 2003 to allow companies, including investment
trusts, to buy shares and hold them in treasury for re-issue at a later date.
In accordance with IAS 32, the consideration paid for shares held in treasury
is presented as a deduction from shareholders' equity.
During the period ended 31 December 2008 the company repurchased 1,463,000
ordinary shares, for a total consideration of £840,000, to be held in
treasury.
5. Investment Manager's fee
A basic management fee is payable to the Investment Manager at the annual rate
of 1% of the Net Asset Value ("NAV") of the Company. The basic management fee
accrues daily and is payable quarterly in arrears.
6. Performance fee
The Investment Manager will be entitled to a performance fee in certain
circumstances. This fee is payable by reference to the increase in Adjusted
NAV per share over the course of a `performance period'. The first performance
ended on 30 June 2007; each subsequent performance period is a period of six
months. The Investment Manager will become entitled to a performance fee is
respect of a performance period only if two criteria are met.
First, a performance hurdle test must be met. The performance hurdle is the
amount by which the Adjusted NAV per share at the end of the relevant
performance period exceeds a target Adjusted NAV per share for that
performance period of an amount equal to the NAV per share on the date of
Admission, increased at a rate of 7% per annum on a compounding basis.
The second test to be met (a `high watermark test') is that the Adjusted NAV
per share at the end of the relevant performance period is higher than the
highest previously recorded Adjusted NAV per share at the end of a performance
period in relation to which a performance fee was earned (or if no performance
fee has been earned since Admission, is higher than the NAV per share on the
date of Admission).
If the performance hurdle is met, and the high watermark exceeded, the
performance fee will be an amount equal to 15% of the increase in the Adjusted
NAV per share of the time weighted average of the total number of shares in
issue since the performance period in respect of which a performance fee was
last earned (or since Admission, if no performance fee has yet been earned).
Payment of a performance fee that has been earned will be deferred to the
extent that making payment would cause the performance hurdle or high
watermark not to be met - amounts deferred will be payable when, and to the
extent that, following any later performance period(s) with respect to which a
performance fee is payable, it is possible to pay the deferred amounts without
causing the performance hurdle or high watermark not to be met.
During the period ended 31 December 2008 no performance was payable.
7. Taxation
The tax charge for the half year is nil (30 June 2008 £nil; 31 December 2007:
£nil) based on an estimated effective tax rate of 0% for the year ending 30
June 2009. The estimated effective tax rate is 0% as investment gains are
exempt from tax owing to the Company's status as an Investment Company and
there is expected to be an excess of management expenses over taxable income.
Directors & advisers
Directors Registrar and transfer Auditors
office
J Hodson* Computershare Investor Ernst & Young LLP
Services plc
Sir Clive M Thompson The Pavilions 1 More London
Place
J E Cornish* Bridgwater Road London
M C Phillips* Bristol BS13 8AE SE1 2AF
* Independent of the Shareholder enquiries: 0870
Investment Manager 707 1285
Investment Manager Sponsor and brokers Solicitors
SVG Investment Managers Close Brothers Securities Slaughter and May
Limited
111 Strand The Atrium Buildings One Bunhill Row
London WC2R 0AG Cannon Bridge London
25 Dowgate Hill EC1Y 8YY
Secretary and registered London EC4R 2GA
office
Capita Sinclair Henderson
Limited
Beaufort House Custodian
51 New North Road HSBC Global Services
Exeter EX4 4EP Level 27
Enquiries: 01392 412122 8 Canada Square
London E14 5HQ
Shareholder information
Financial calendar Share dealing NAV
Company's year end Shares can be traded The Company's net asset value
through
30 June your usual stockbroker is announced weekly to the
London Stock Exchange.
Annual results announced Share register enquires
September The register for the Website
ordinary
shares is maintained by Further information on the
Annual General Meeting Computershare Investor Company can be accessed via
November Services plc. In the the Company's website
event of
queries regarding your www.strategicequitycapital.com
holding,
Company's half year please contact your
Registrars
31 December on 0870 702 0100.
Changes of
name and/or address must
be
Half yearly results notified in writing to
announced the
February Registrar, whose address
is shown above.
Share price
The Company's ordinary
shares are listed on the
London Stock
Exchange. The mid-market
price is quoted daily in
the Financial Times under
`Investment Companies'.
An investment company as defined under Section 833 of the Companies Act 2006.
REGISTERED IN ENGLAND No. 5448627
A member of the Association of Investment Companies.
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