Interim Results
3i Smaller Quoted Co's Trust PLC
10 October 2002
10 October 2002
3i Smaller Quoted Companies Trust plc
Interim results for the six months to 31 August 2002
The Board of 3i Smaller Quoted Companies Trust plc ("the Trust") today announces
the interim results for the six months to 31 August 2002.
Results overview
• The net asset value per share of the Trust fell by 16.5% during the
period, compared with a fall in the benchmark index (the FTSE SmallCap Index
excluding Investment Companies) of 16.7%.
• Performance was positively affected by the takeover of four portfolio
companies and by the Initial Public Offering of three 3i-backed companies.
• The Trust has maintained its interim dividend of 1.71p per share.
• Net borrowing, at approximately £4 million, remains well below the normal
level of £10 million.
• Mike Prentis has taken over as fund manager from Henrietta Marsh, who
left 3i on 31 August 2002 to move abroad.
Commenting on the results, Mike Prentis, 3i Asset Management, said:
"Equity markets remain volatile and since the period end we have seen a further
18% fall in the net asset value of the Trust. In the immediate future we feel it
is appropriate to be cautious, as many smaller companies are finding trading
conditions challenging with demand remaining weak. In the early stage of a
market recovery, larger companies may outperform smaller ones, mainly on
liquidity grounds, but in the medium term we believe smaller companies offer
more attractive growth prospects from relatively low current valuations."
ENDS
For further information, please contact:
Mike Prentis or Vanessa Orr/Kate Inverarity
Fund Manager Tulchan Communications
3i Asset Management (a division of 3i 020 7353 4200
Investments plc, the Manager)
020 7975 3527/3531
Chairman's statement
Overview
The six month period to 31 August 2002 was one of extreme volatility for equity
markets in general, which were affected by news of corporate failures and
accounting irregularities in the US. This significantly undermined confidence in
markets which were already weak as a result of a continuing stream of poor
economic data.
The Trust was not immune to these market factors and its net asset value ("NAV")
per share fell by 16.5% during the period, compared with a fall in the benchmark
index of 16.7%.
Earnings and dividend
Earnings per share were 2.85p. Excluding a special, non recurring dividend from
AEA Technology, earnings per share were 2.59p, which compares with 2.96p for the
same period last year. The fall was mainly due to the takeover of certain high
yielding investments. The Directors have declared a dividend of 1.71p per share,
which is unchanged from last year.
Gearing
In the difficult market conditions, net borrowing has been kept below the £10
million level which the Board considers appropriate in more normal conditions.
Gearing averaged 5.4% over the six months and at 31 August 2002 net borrowing
stood at £3.4 million, 3.3% of net assets. Until the current difficult
conditions ameliorate, net borrowing will remain below normal levels.
Discount and share buybacks
During the period the Trust bought back a total of 370,000 shares at an average
discount of 23%. Given the very nervous state of the markets, this had no
material effect on the level of discount, although it finished the period near
to 20%.
Change of fund manager
Henrietta Marsh, who has led the team responsible for the management of the
Trust in recent years, left 3i on 31 August 2002 to move abroad. We are grateful
for her contribution and wish her well. Mike Prentis, who managed the Trust for
a period when Henrietta was on maternity leave, has taken over as fund manager.
The team responsible for the management of the Trust otherwise remains
unchanged.
Outlook
Since the period end we have seen a further fall in the net asset value of the
Trust of 18%. Market sentiment remains very fragile and worries persist about
the strength of most large economies and the possibility of conflict with Iraq.
However, recent economic data for the UK has been slightly better than for most
other major economies. Many smaller companies are domestically biased and are
well placed to benefit from the relative strength of the UK economy. The Trust's
portfolio is well diversified and composed of companies which the Board
considers to be both resilient and attractively valued. Short term risks remain,
but we continue to believe that the portfolio offers good medium term potential.
William Govett
9 October 2002
Investment Manager's review
Overall performance
The Trust performed in line with its benchmark during the period. Performance
was positively affected by merger and acquisition ("M&A") activity amongst
portfolio companies and by the success of several 3i-backed Initial Public
Offerings ("IPOs").
Sector and stock performance
The Trust's holdings in the construction and building materials sector performed
well, especially the holdings in BSS, Westbury and Marshalls. We favour
companies within the general construction sector, particularly those exposed to
government spending which is expected to remain strong.
Cyclical services remains the largest area of investment for the Trust,
accounting for 39% of portfolio investments at the period end, up from 35% at
the start of the period. Within this grouping our largest and most overweight
position was in support services. This is composed of a wide variety of
businesses and the Trust's overweight stance reflects our positive view of many
of these individual businesses rather than the sector as a whole. The Trust's
largest underweight cyclical services position was in general retailers, where
we believe the strong retail spending so far this year may show some signs of
weakening.
The Trust is also very underweight in real estate and insurance. We remain
cautious about the prospects for the London property market and sold the Trust's
main investment in this area during the period. The Trust also benefited from a
bid for Saville Gordon, the proceeds of which were used to reduce net borrowing.
Although insurance premiums have firmed this year, we have been slightly
cautious of the insurance sector due to the lack of transparency of earnings.
Exposure to the information technology sector fell in the period, mainly due to
the poor performance of the holdings in Marlborough Stirling, IDS and royalblue.
Valuations are looking more attractive in this sector, but poor sentiment and
very tightly controlled corporate IT budgets indicate that uncertainties remain.
Activity
Activity can be divided into three categories: IPOs, M&A and normal purchases
and sales. Whilst IPO markets were generally quiet during the period, the Trust
took advantage of its links with 3i to acquire stock in three 3i-backed IPOs:
Corin, a supplier of artificial knee and hip parts; Parkdean, an operator of
caravan parks; and Property Fund Management, which manages industrial property
for institutions. Each of these stocks has performed well and collectively they
outperformed the benchmark by a weighted average of 28% during their holding
periods. We sold the Trust's holding in Corin towards the end of the period
crystallising a healthy profit.
The Trust's performance was enhanced significantly by the takeover of four
portfolio companies: Dixon Motors, jazz fm, Brake Brothers and Saville Gordon.
The weighted average gain on these stocks during the period was 36%. We expect
to see more M&A activity when companies become more confident that the economy
is recovering.
Normal purchases and sales included the disposal of the Trust's holding in
Roxboro in May and June 2002, which realised a 20% gain on its valuation at the
start of the period. We had become more cautious about prospects for some of
Roxboro's products, even though the share price had risen strongly. Subsequent
to this sale, the share price fell 29% by the period end. The Trust also reduced
its holdings in Greggs and Minorplanet, before their prices weakened.
Purchases included: Syltone, the leader in providing technically-advanced
products for the loading and discharge of bulk materials in the transport
industry; Topps Tiles, which is involved in retail and wholesale distribution of
ceramic tiles and related products; and Shanks Group, which provides waste
management services. These companies are attractively valued, have good yields
and strong positive cash flows. The Trust also bought a holding in Acambis,
which researches and manufactures vaccines against infectious diseases and won a
contract from the US government to supply Smallpox vaccine.
Strategy and outlook
The investment strategy continues to focus on investing in high quality
businesses that have strong market positions and medium term growth prospects.
The links with 3i will continue to be used both to gather knowledge and to take
advantage of 3i-backed IPOs, although we expect IPO activity to remain subdued
over the next few quarters.
Market conditions remain difficult, as evidenced by the latest 3i Enterprise
Barometer published in early September 2002, which showed a deterioration in
business confidence. In the immediate future we feel it is appropriate to be
cautious, as many smaller companies are finding trading conditions challenging
with demand remaining weak. Profitability is being damaged by factors such as
lower GDP growth overseas, the weaker US dollar and sharply increased insurance
premiums. However, not all smaller companies are exposed to each of these
issues.
In the early stage of a market recovery, larger companies may outperform smaller
ones, mainly on liquidity grounds, but in the medium term we believe smaller
companies offer more attractive growth prospects from relatively low current
valuations.
Mike Prentis
3i Investments plc
9 October 2002
Statement of total return
for the six months ended 31 August 2002 (incorporating the Revenue Account)
6 months to 31 August 2002 6 months to 31 August 2001 12 months to 28 February 2002
(unaudited) (unaudited) (audited)
Revenue Capital Total Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Gains on
investments
Net realised gains
/(losses) over
previous valuation 2,636 2,636 80 80 (7,347) (7,347)
Net unrealised
depreciation (22,751) (22,751) (28,791) (28,791) (32,323) (32,323)
(20,115) (20,115) (28,711) (28,711) (39,670) (39,670)
Income 2,192 2,192 2,299 2,299 3,813 3,813
Investment
management fee (131) (392) (523) (174) (522) (696) (331) (993) (1,324)
Other expenses (164) (164) (139) (139) (277) (277)
Net return before
finance costs 1,897 (20,507) (18,610) 1,986 (29,233) (27,247) 3,205 (40,663) (37,458)
Interest payable
and similar (263) (333) (596) (279) (348) (627) (511) (712) (1,223)
charges
Return on ordinary
activities for the
period 1,634 (20,840) (19,206) 1,707 (29,581) (27,874) 2,694 (41,375) (38,681)
Dividends (977) (977) (984) (984) (2,490) (2,490)
Transfer to
reserves 657 (20,840) (20,183) 723 (29,581) (28,858) 204 (41,375) (41,171)
Return per
ordinary share 2.85p (36.31)p (33.46)p 2.96p (51.29)p (48.33)p 4.68p (71.82)p (67.14)p
(pence)
All revenue and capital items in the above statement derive from continuing
operations.
No operations were acquired or discontinued during the period.
Reconciliation of total shareholders' funds
6 months to 31 6 months to 31 12 months to 28
August 2002 August 2001 February 2002
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Return on ordinary activities for the period (19,206) (27,874) (38,681)
Dividends (977) (984) (2,490)
(20,183) (28,858) (41,171)
Purchase and cancellation of own ordinary shares
Premium to nominal value on shares purchased (452) (253) (347)
Nominal value of ordinary 25p shares purchased (92) (39) (54)
Movement in total shareholders' funds (20,727) (29,150) (41,572)
Opening total shareholders' funds 121,654 163,226 163,226
Closing total shareholders' funds 100,927 134,076 121,654
Balance sheet
as at 31 August 2002
31 August 31 August 28 February
2002 2001 2002
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Fixed assets
Investments 105,911 145,192 128,901
Current assets
Debtors 250 353 185
Cash and short term deposits 11,322 5,192 9,777
11,572 5,545 9,962
Creditors: amounts falling due within one year (1,846) (1,965) (2,506)
Net current assets 9,726 3,580 7,456
Total assets less current liabilities 115,637 148,772 136,357
Creditors: amounts falling due after more than one year
(14,710) (14,696) (14,703)
Net assets 100,927 134,076 121,654
Capital and reserves
Called-up share capital 14,284 14,391 14,376
Share premium 38,952 38,952 38,952
Capital redemption reserve 196 89 104
Capital reserve
- realised 69,534 67,893 67,435
- unrealised (25,378) 9,550 (1,895)
Revenue reserve 3,339 3,201 2,682
Total shareholders' funds 100,927 134,076 121,654
Net asset value per share (pence) 176.6p 232.9p 211.6p
Approved by the Board on 9 October 2002
Cash flow statement
for the six months ended 31 August 2002
31 August 31 August 28 February
2002 2001 2002
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Operating activities
Investment income received 1,873 1,940 3,453
Deposit interest received 119 90 270
Underwriting commission received 11 21 21
Investment management fees paid (628) (1,278) (1,974)
Secretarial fees paid (29) (29) (59)
Other cash payments (233) (181) (233)
Net cash inflow from operating activities 1,113 563 1,478
Servicing of finance
Interest paid (581) (731) (1,332)
Net cash outflow from servicing of finance (581) (731) (1,332)
Financial investment
Purchase of investments (22,395) (17,986) (36,165)
Sale of investments 25,458 25,572 49,115
Net cash inflow from financial investment 3,063 7,586 12,950
Equity dividends paid (1,506) (1,512) (2,496)
Financing
Purchase of ordinary shares for cancellation (544) (292) (401)
Repayment of short term loan - (3,500) (3,500)
Net cash outflow from financing (544) (3,792) (3,901)
Increase in cash 1,545 2,114 6,699
Notes to the financial statements
1 Reconciliation of net revenue before finance costs to net cash inflow from operating activities
31 August 31 August 28 February
2002 2001 2002
£'000 £'000 £'000
Net revenue before finance costs 1,897 1,986 3,205
Scrip dividends - (36) (63)
Investment management fee allocated to capital reserve - realised
(392) (522) (993)
Increase in accrued income (188) (214) (6)
Decrease in creditors (178) (637) (664)
Increase in debtors (26) (14) (1)
Net cash inflow from operating activities 1,113 563 1,478
2 Reconciliation of net cash flow to movement in net debt
31 August 31 August 28 February
2002 2001 2002
£'000 £'000 £'000
Increase in cash in the period 1,545 2,114 6,699
Cash outflow from change in debt - 3,500 3,500
Amortised Debenture stock issue expenses (7) (8) (15)
Movement in net debt in the period 1,538 5,606 10,184
Opening net debt (4,926) (15,110) (15,110)
Closing net debt (3,388) (9,504) (4,926)
Independent review report of the auditors
Introduction
We have been instructed by the Trust to review the financial information set out
on pages 5 to 9 and we have read the other information contained in the Interim
report and considered whether it contains any apparent misstatements or material
inconsistencies with the financial information.
Directors' responsibilities
The Interim report, including the financial information contained therein, is
the responsibility of, and has been approved by, the Directors. The Listing
Rules of the Financial Services Authority require that the accounting policies
and presentation applied to the interim figures should be consistent with those
applied in preparing the preceding annual accounts except where any changes, and
the reasons for them, are disclosed.
Review work performed
We conducted our review in accordance with guidance contained in Bulletin 1999/4
issued by the Auditing Practices Board. A review consists principally of making
enquiries of management and applying analytical procedures to the financial
information and underlying financial data and, based thereon, assessing whether
the accounting policies and presentation have been consistently applied unless
otherwise disclosed. A review excludes audit procedures such as tests of
controls and verification of assets, liabilities and transactions. It is
substantially less in scope than an audit performed in accordance with Auditing
Standards and therefore provides a lower level of assurance than an audit.
Accordingly we do not express an audit opinion on the financial information.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 31 August 2002.
Scott-Moncrieff
Chartered Accountants
Edinburgh
9 October 2002
Notes to editors
The objective of 3i Smaller Quoted Companies Trust plc is to achieve long term
capital growth by investing mainly in smaller UK quoted companies.
The Trust's benchmark is the FTSE SmallCap Index excluding Investment 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 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 the 3i Group's international network, which operates across
16 countries on three continents. This provides an important source of
information on local companies.
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.
Notes to the announcement
1 The interim dividend of 1.71p per ordinary share will be paid on 8
November 2002 to holders of shares on the register of members at 18 October
2002.
2 The Interim report for the six months to 31 August 2002 will be posted
to shareholders on 18 October 2002 and thereafter copies will be available from
3i Investments plc, 91 Waterloo Road, London, SE1 8XP.
3 The accounting policies used in the preparation of the Interim report
are the same as those used in the statutory accounts for the year ended 28
February 2002 and those expected to be used for the year to 28 February 2003.
The six month period is treated as a discrete period. The figures for the year
to 28 February 2002 are extracted from the accounts filed with the Registrar of
Companies on which the auditors issued an unqualified report. The Interim
report and this announcement do not constitute statutory accounts.
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