Final Results
3i Smaller Quoted Co's Trust PLC
27 April 2004
27 April 2004
3i Smaller Quoted Companies Trust plc
Annual results for the year to 29 February 2004
"3i SQC delivers 66% rise in NAV and increases dividend''
The Board of 3i Smaller Quoted Companies Trust plc ("the Trust") today announces
its annual results for the year to 29 February 2004.
Results overview
• The net asset value ("NAV") per share rose by 66.3% to 234.7p (2003: 141.1p).
This compares to a rise of 59.9% in the benchmark index (the FTSE SmallCap
Index excluding Investment Companies).
• UK smaller quoted companies outperformed larger capitalisation stocks by a
significant margin; the FTSE 100 Index increased by 22.9%.
• The Board is recommending a final dividend of 2.71p per share (2003: 2.62p)
making a total dividend for the year of 4.42p (2003: 4.33p), an increase
of 2.1% on last year.
• The dividend yield of 2.4% is amongst the highest for UK smallcap investment
trusts investing principally in equities.
• The Trust bought in for cancellation a total of 3,095,000 shares during the
year. This represents 5.5% of the issued share capital at the start of the
financial year. A further 1,250,000 shares have been bought in since 29
February 2004.
Commenting on the results, Mike Prentis, Fund Manager, 3i Asset Management said:
"The strong returns generated by the Trust reflect an excellent period for UK
smaller companies. The Trust has maintained its sound stockpicking record, and
the decision to increase gearing at the right time was a contributory factor to
the Trust's good performance.
We expect the positive newsflow from smaller companies to continue in the coming
months, and the high level of new fundraisings and IPOs also present the Trust
with some interesting opportunities. Company valuations are generally reasonable
and we look forward to the year ahead with confidence."
- ends -
For further information, please contact:
Mike Prentis or Kate Inverarity / William Davidson
Fund Manager Tulchan Communications
3i Asset Management
(a division of 3i Investments plc,
the Investment Manager)
020 7975 3527 020 7353 4200
Notes to editors
The objective of 3i Smaller Quoted Companies Trust plc is to achieve long term
capital growth for shareholders in excess of the growth in the benchmark index
through investment mainly in smaller UK quoted companies.
3i Smaller Quoted Companies Trust plc is managed by the Asset Management
division of 3i Investments plc which is an active fund manager seeking to
achieve returns in excess of benchmark indices through the use of fundamental
analysis. The Manager aims to use the skills and information base gained
through being part of the 3i Group. A significant proportion of the Trust's
portfolio by value is in companies formerly backed by the 3i Group.
3i Investments plc is authorised and regulated by the Financial Services
Authority and is a wholly owned subsidiary of 3i Group plc, Europe's leading
venture capital company. The relationship with the 3i Group brings several
important benefits to 3i Investments plc and the funds managed by its Asset
Management division, including access to 3i Group's specialist teams across its
international network.
In addition to the management of 3i Smaller Quoted Companies Trust plc, the
Asset Management division of 3i Investments plc is involved in the management of
the 3i Group's own portfolio of quoted investments and manages 3i Bioscience
Investment Trust plc, 3i European Technology Trust plc and the 3i Group Pension
Plan.
Chairman's statement
Review of the year to 29 February 2004
I am pleased to report that the Trust's net asset value ("NAV") per share rose
by 66.3% over the year to 29 February 2004. This compares favourably with the
Trust's benchmark index, the FTSE SmallCap Index excluding Investment Companies,
which rose by 59.9%.
These strong returns reflect the beginning of a cyclical economic recovery and,
as has historically been the case at the start of such recoveries, smaller
company share prices have performed very well. By way of contrast, the FTSE 100
Index rose by 22.9% during the same period.
Earnings and dividend
Earnings per share for the year to 29 February 2004 were 4.32p, identical to
those achieved last year. It is worth noting that the previous year's earnings
benefited from one significant special dividend receipt, without which earnings
would have been 4.06p per share. The underlying growth in earnings was therefore
about 6%, roughly equivalent to the average increase in dividends paid by our
portfolio companies over the same period.
The Board is recommending a final dividend of 2.71p per share, bringing the
total for the year to 4.42p per share, a 2.1% increase on last year. The total
full year dividend is payable on a reduced share capital base following share
buybacks during the year, and is covered by earnings. The Trust also has revenue
reserves brought forward from prior years of £2.7million.
At the current share price and dividend level, the Trust's shares yield 2.4% per
annum, which is amongst the highest for UK smallcap investment trusts investing
principally in equities.
Gearing
The Trust began the year with net borrowing of £4 million. Markets bottomed in
mid March 2003, and in May 2003 your Board agreed that the time was right to
increase gearing. By the end of July 2003 net borrowing had been increased to
just over £11 million, and since then has been maintained in the £10 million to
£13 million range. The timing of the increase in net borrowing was good, and
helped the Trust to outperform the benchmark index.
Gearing is reviewed regularly with the Investment Manager and at present the
intention is to maintain it at around current levels.
Discount and share buybacks
During the year, the Trust's shares traded at a discount to NAV per share of
between 17% and 26%, finishing the year at 22%. This discount is comparable to
most of the companies in the Trust's peer group.
The Trust bought in for cancellation a total of 3,095,000 shares during the
year, representing 5.5% of the issued share capital at the start of the
financial year. These shares were bought in at discounts ranging from 22% to
23%. Since 29 February 2004, the Trust has bought in a further 1,250,000 shares
at a discount of 18%.
Whilst the discount to NAV per share has narrowed recently, it is still higher
than the Board and the Investment Manager would like. By historical standards
the discount is also at a high level. In part, the Board believes that the
discount is a reflection of the difficult time UK equities have had since
markets peaked in late 1999/early 2000. As the UK economic recovery becomes
clearer and stronger, I would expect confidence in equities to improve, and the
discount to narrow further. Your Board monitors the discount closely and remains
committed to narrowing it over the medium term and to using share buybacks when
it considers them to be appropriate.
Review of Investment Strategy
The Board regularly reviews the Trust's investment strategy and positioning. It
last did so in January 2004 and concluded that these were satisfactory.
Specifically, the Board confirms that the Trust has a bias towards growth
companies, but seeks to increase the Trust's dividend over the medium term.
Board Change
Paul Wates, who has been a Director since 1998, has decided to retire from the
Board at the Annual General Meeting in June. Paul's extensive knowledge of the
construction and real estate sectors has been valuable to the Board and
Investment Manager. More generally, he has consistently been a source of wise
counsel, which has been much appreciated by the Board members and the Investment
Manager. I thank him most warmly for his contribution.
Outlook
The Trust's last financial year was an excellent time for UK smaller company
equities, and such high returns are unlikely to be repeated in the near future.
I am, however, positive about prospects for our sector.
At the macro economic level, UK Gross Domestic Product ("GDP") has been stronger
than anticipated and the economy is generally in good shape with low
unemployment and low inflation. The UK continues to benefit from a much more
flexible labour market than in continental Europe and has an independent central
bank which has managed monetary policy effectively to allow economic recovery.
The recovery has been underpinned by strong consumer and Government spending,
both of which have been financed through high levels of borrowing. I expect
further interest rate rises aimed at gradually cooling the housing market, but
not to the point of stifling consumer spending. The Government is committed to
further spending, particularly in the health and education areas. There is
mounting evidence that business is increasing its spending and investment, and I
expect this to become gradually more evident as the year unfolds. Whilst the
strength of sterling will not be helpful to some companies, especially those
exporting to the US, high levels of GDP growth in the US and many Asian
countries is a benefit to various UK smaller companies in which the Trust does,
or could, invest.
Looking forward, the threat of terrorism is ever present and worrying, but until
now has tended to have a short-term impact on markets. Overall economic
conditions are attractive enough for many UK smaller companies to prosper, and
to provide the Trust with good investment opportunities. I expect UK smaller
company shares to continue to perform well this year.
William Govett
26 April 2004
Investment Manager's review
Overall Performance
Over the period under review, the Trust's NAV per share increased by 66.3%, 6.4%
ahead of the benchmark index. The decision to increase gearing in May 2003 was
an important factor behind this, as was continued good stockpicking. Strong
absolute performance reflected a recovery in markets from oversold levels at the
start of the Trust's financial year when the war in Iraq was about to commence.
Anticipation of cyclical recovery has been a key factor driving the strong
performance of UK smaller quoted companies and their significant outperformance
of larger capitalisation stocks.
Portfolio Performance
The sectors producing the largest absolute gains to the portfolio during the
year were Support Services, Speciality and Other Finance, Software and Computer
Services, and General Retailers. The latter three sectors also showed very high
percentage returns. Good percentage gains were also achieved in Mining and
Information Technology Hardware, although these were not sectors with high
average investment values during the year. The worst sector for investment was
Oil and Gas.
The Trust's success within Speciality and Other Finance was attributable to a
good performance by Brewin Dolphin, which is one of the largest independent
discretionary fund managers in the UK. It has benefited from the strong recovery
in equity markets. We see further upside as markets continue to recover. Major
contributions also came from the Trust's investments in two specialist mortgage
providers, Paragon and Kensington Group. Paragon provides mortgages to
professional landlords in the buy-to-let area. Kensington provides mortgages in
the sub-prime market, often to the self-employed. Both performed well, but with
rising interest rates and some concerns about the sustainability of house
prices, we have, since the financial year end, sold out of both companies.
Despite concerns over the sustainability of the strength of consumer spending,
shares in the General Retailers sector performed well. The Trust's holdings in
Ottakar's and Blacks Leisure both appreciated strongly. Ottakar's, the
specialist bookshop chain, continues to expand organically and was helped by its
acquisition of Hammicks. Blacks Leisure is the clear leader in the outdoor
market with brands such as Blacks and Millets, and has also grown its surfwear
business which includes the O'Neill and Free Spirit brands. We see plenty of
potential for both companies to continue their roll out strategies.
Our performance within the Support Services sector was helped by a good share
price performance at Whitehead Mann, the leading executive search firm, which
has seen a stabilisation of demand and some early signs of cyclical recovery.
The company's new chief executive has been successful in reshaping the business.
In the technology sector, Intec Telecom experienced improved demand for its
interconnect and mediation software which is sold to telecommunication
operators. Telemetrix saw better demand for its analogue semiconductors, and
sold its telecommunications related activities.
The Trust made some relatively small investments within the Mining sector, which
has been very strong on the back of sharply rising prices for precious and base
metals. Of these, Monterrico Metals has been the most successful investment to
date. It has a substantial, and high quality, copper deposit in Peru which is
being evaluated. Peter Hambro Mining and Celtic Resources both own substantial
gold resources in Russia, and improving production levels and reserves have led
to good share price appreciation. All of these companies are quoted on the
Alternative Investment Market ("AIM").
The most disappointing sector for the Trust was Oil and Gas. This was due to two
companies: Ramco and Expro. Ramco owns the Seven Heads gas field off Southern
Ireland. In December 2003 it brought gas on-stream for the first time. Initial
production levels looked very promising, and the risks inherent to the company
seemed to have reduced significantly. Alas, a few weeks later gas pressures and
output started to fall, causing doubts as to the recoverability of much of the
gas, and a precipitous fall in the share price. Expro International, an oilfield
service company, issued a profits warning early in the Trust's financial year.
The shares fell sharply, and having met management, which has since changed, we
decided further bad news was likely and sold the Trust's holding.
Activity
The major move during the financial year was to invest much of the Trust's cash
into equities. At a sector level, the Trust built up a position in the
Automobiles and Parts sector, and later in the year increased exposure to the
Information Technology Hardware sector.
Following positive meetings with the management teams of Pendragon and Reg
Vardy, the Trust purchased holdings in these major UK motor distributors; both
have since performed well. Most notably, Pendragon acquired CD Bramall late in
the Trust's financial year, and Pendragon's share price appreciated strongly in
recognition of the achievable synergies.
Within the Information Technology Hardware sector, holdings acquired included
CSR, Plasmon and Filtronic. We view each of these companies as having secular
growth prospects, rather than purely cyclical attractions. CSR is the leading
designer and supplier of Bluetooth semiconductors, used to enable wireless
transmission of data over short distances, for instance, between headsets and
handsets. This 3i-backed company was successful in its Initial Public Offering
("IPO") in February 2004 and the Trust acquired two thirds of its holding from
3i Group plc on IPO at the issue price. Plasmon is considered to have good
potential for its data storage solutions, which are attracting significant
interest from various major US corporations. Filtronic is a leading supplier to
Nokia of key components for handsets and base station infrastructure. It should
be a key beneficiary of the eventual roll out of 3G networks.
Some cyclical stocks were acquired which should benefit from a pick up in
advertising, for instance SMG, and increased temporary recruitment, for instance
Spring Group.
Portfolio Positioning
We have sought to position the portfolio so as to contain a significant
proportion of good growth companies, especially, but not limited to, those with
market capitalisations of up to £100 million. Ottakar's, Parkdean Holidays,
Aveva and Dechra Pharmaceuticals are examples of such companies where the Trust
has a significant holding. Smaller holdings include Next Fifteen Communications,
Watermark and Whittard of Chelsea. As with many companies of this size, most of
these shareholdings are fairly illiquid. The Trust also owns a group of stocks
with both attractive yields and steady medium term growth prospects, for example
T Clarke and Marshalls. Another key area of investment is stocks benefiting from
cyclical recovery. These include Telemetrix, Brewin Dolphin, Whitehead Mann and
SMG. Lastly, the Trust owns a small proportion of value stocks, which are mainly
mining and real estate companies.
Valuations of the cyclical recovery companies are the most difficult to assess.
Timing of recovery is, of course difficult to predict with any confidence, and
the degree of operational gearing, usually substantial, needs to be considered
in the light of possible cost inflation. For these reasons, we have increased
our cyclical weightings slowly and cautiously.
Our monitoring of newsflow from smaller companies has consistently indicated
slightly better than expected news in recent months and, with a favourable macro
economic background, we expect this to continue. The current high level of new
fundraisings, including IPOs, also provides some interesting new opportunities,
and we aim to pick only the best of these. Ratings for our portfolio investments
are generally reasonable in the light of forecast earnings and cash generation.
We look forward to the rest of the current financial year with confidence.
Mike Prentis
Fund Manager
3i Investments plc
26 April 2004
Approach to investment
The Manager believes that stock markets, and especially smaller company markets,
are inefficient, with the consequence that share prices do not always accurately
reflect the prospects for companies. We form our view of a company's worth by
understanding how it makes money and by then seeking to assess how the market is
valuing that profits stream. To aid our analysis of companies and to compare
them, we consider how companies are exposed to three sets of dynamics: those
that are secular in nature; those that are cyclical in nature; and those that
are specific to the company itself.
Secular dynamics are factors such as demographics, globalisation, lower
inflation and continuing technological change. These are elements that can be
expected to remain in place for a considerable period. They may exert either a
positive or negative influence on a company. For example the continuing spread
of computing into more areas of everyday life is an immense positive for
manufacturers of high-tech components. On the other hand, globalisation has
played a part in reducing the pricing power of some undifferentiated
manufacturing companies. Our analysis seeks to identify how a company is exposed
to long-run trends such as these.
Cyclical dynamics, as the phrase implies, are factors that vary over a period of
time with some predictability or which show elements of mean-reversion. The
cyclicality may be linked to the wider global or national economy, as with
commodity prices, or to a sector cycle, such as with insurance pricing. Our
analysis seeks to identify and predict the cycles relevant to each company.
Clearly there may be an overlap between secular and cyclical elements and this
requires considerable analysis. For instance, the interplay between the secular
positives in technology and the cyclical weaknesses that became apparent three
to four years ago are complex.
It is clearly too simple to say that companies that benefit from positive
secular and cyclical dynamics will outperform others. The final grouping of
factors to be considered can be labelled company dynamics. At their most extreme
these can mean that a company's current management is so poor, or its balance
sheet so weak, that we expect it to perform badly despite being exposed to
positive forces. Alternatively, a strong brand may allow a company to maintain
prices for longer than a rival in the face of sector deflation. More typically,
the challenge is to assess how well the management can cope with a given set of
secular and cyclical factors, and to understand what is already reflected in the
price.
Statement of total return
for the year ended 29 February 2004 (incorporating the revenue account)
Revenue Capital Total Revenue Capital Total
2004 2004 2004 2003 2003 2003
£'000 £'000 £'000 £'000 £'000 £'000
Gains/(losses) on investments
Net realised gains/(losses)
over previous valuation 10,777 10,777 (3,804) (3,804)
Net unrealised value
movement 41,048 41,048 (35,489) (35,489)
51,825 51,825 (39,293) (39,293)
Income 3,392 3,392 3,623 3,623
Investment management
fee (214) (642) (856) (242) (725) (967)
Other expenses (322) (322) (342) (342)
Net return before
finance costs 2,856 51,183 54,039 3,039 (40,018) (36,979)
Interest payable and
similar charges (459) (718) (1,177) (568) (609) (1,177)
Return on ordinary
activities for the
financial year 2,397 50,465 52,862 2,471 (40,627) (38,156)
Dividends (2,376) (2,376) (2,441) (2,441)
Transfer to/(from)
reserves 21 50,465 50,486 30 (40,627) (40,597)
Return per ordinary
share 4.32p 91.01p 95.33p 4.32p (71.02)p (66.70)p
All revenue and capital items in the above statement derive from continuing
operations.
No operations were acquired or discontinued during the year.
Balance sheet
as at 29 February 2004
2004 2003
£'000 £'000
Fixed assets
Investments 140,419 86,567
Current assets
Debtors 49 514
Cash, short term deposits and money market funds 3,745 10,628
3,794 11,142
Creditors: amounts falling due within one year (3,590) (2,921)
Net current assets 204 8,221
Total assets less current liabilities 140,623 94,788
Creditors: amounts falling due after more than
one year (14,732) (14,718)
Net assets 125,891 80,070
Capital and reserves
Called-up share capital 13,410 14,184
Share premium 38,952 38,952
Capital redemption reserve 1,070 296
Capital reserve - realised 45,720 60,355
- unrealised 24,006 (36,429)
Revenue reserve 2,733 2,712
Total equity shareholders' funds 125,891 80,070
Net asset value per ordinary share 234.7p 141.1p
The financial statements were approved by the Board on 26 April 2004 and were
signed on its behalf by:
William Govett
Director
Cash flow statement
for the year ended 29 February 2004
2004 2003
Notes £'000 £'000
Operating activities
Investment income received 3,181 3,221
Income from money market funds 226 210
Deposit interest received 10 129
Underwriting commission received 9 14
Investment management fees paid (869) (1,150)
Secretarial fees paid (59) (59)
Other cash payments (275) (341)
Net cash inflow from operating activities 1 2,223 2,024
Servicing of finance
Interest paid (1,163) (1,162)
Net cash outflow from servicing of finance (1,163) (1,162)
Financial investment
Purchase of investments (65,877) (44,640)
Sale of investments 65,021 48,097
Net cash (outflow)/inflow from financial investment (856) 3,457
Equity dividends paid (2,422) (2,481)
Financing
Purchase of ordinary shares for cancellation (4,665) (987)
Net cash outflow from financing (4,665) (987)
(Decrease)/increase in cash (6,883) 851
Notes to the financial statements
1. Reconciliation of net revenue before finance costs to net 2004 2003
cash inflow from operating activities £'000 £'000
Net revenue before finance costs 2,856 3,039
Investment management fee allocated to capital
reserve - realised (642) (725)
Decrease/(increase) in accrued income 35 (49)
Decrease in creditors (27) (241)
Decrease in debtors 1 -
Net cash inflow from operating activities 2,223 2,024
2. Reconciliation of net cash flow to movement in net debt 2004 2003
£'000 £'000
(Decrease)/increase in cash in the year (6,883) 851
Amortised Debenture stock issue expenses (14) (15)
Movement in net debt in the year (6,897) 836
Opening net debt (4,090) (4,926)
Closing net debt (10,987) (4,090)
3. Analysis of changes in net debt
Amortised
Cash issue
Opening flows expenses Closing
£'000 £'000 £'000 £'000
Cash, short term deposits and
money market funds 10,628 (6,883) - 3,745
Debt due after more than one year (14,718) - (14) (14,732)
(4,090) (6,883) (14) (10,987)
Notes to the announcement
1 A final dividend of 2.71p per ordinary share is recommended and, subject to
its approval at the Annual General Meeting on 3 June 2004, will be paid on
17 June 2004 to shareholders on the register of members at 14 May 2004.
2 The statutory accounts for the year ended 29 February 2004 will be posted to
shareholders on 5 May 2004 and thereafter copies will be available from
3i Investments plc, 91 Waterloo Road, London SE1 8XP. Alternatively, the
statutory accounts and accompanying slide presentation will be posted on our
website at www.3isqc.com
3 The Annual General Meeting will be held at 12 noon on 3 June 2004 at the
offices of 3i plc, 91 Waterloo Road, London SE1 8XP.
4 The statutory accounts for the year ended 29 February 2004 have not yet been
delivered to the Registrar of Companies. The statutory accounts for the
year ended 28 February 2003 have been filed with the Registrar of Companies.
The auditors' reports on both sets of statutory accounts were unqualified
and did not contain any statements under Section 237 (2) or (3) of the
Companies Act 1985. This announcement does not constitute statutory
accounts.
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