Interim Results
AIM VCT2 PLC
12 July 2006
To: RNS
From: AiM VCT2 plc
Date: 12 July 2006
Investment Objective
AiM VCT2 plc aims to provide shareholders with a tax efficient means of gaining
long term capital growth and an attractive dividend stream through investment in
a diversified portfolio of AiM companies and unquoted companies which anticipate
a stock market listing within 18 months.
Interim Results - Six Month Period Ended 31 May 2006
Ordinary Shares
• Net asset value of 80.4 pence per share at 31 May 2006
• New and follow-on investments totaled £681,000
C Shares
• Net asset value per share of 95.8 pence.
• New investments totalled £366,000
The Chairman Gordon Brough said:
'Performance After a good start to the year the Company's performance
has been frustrated by the return of more turbulent market conditions as well as
disappointing trading updates from a handful of portfolio holdings. The recent
fall in the markets has had a detrimental impact on the valuation of a number of
the holdings with the effect that the overall performance of the Net Asset Value
(NAV) per share is down marginally for the year so far.
The year started well with continued buoyant market conditions. Rising commodity
prices and a strong resource sector helped to propel the AiM market to recent
highs. Against this favourable background and despite AiM VCT2 by its nature
being under-represented in the resource sector, progress reported by a good
number of companies within the portfolio helped the NAV to reach 87.6 pence per
share on 25 April 2006. This was an increase of 5.5 per cent from the start of
the year and this would have been higher but for a fall in valuation, following
poor trading updates, from the Trust's holdings in Widney, 1st Dental
Laboratories, Armour Group and Real Good Food Group. Nevertheless, most
companies within the portfolio were reporting progress with their business
plans.
When I last reported to shareholders in February there was the prospect of a
modest easing in UK interest rates which would usually provide support for our
domestic smaller companies. However, since the middle of May there has been
widespread concern about the possible inflationary impact of high fuel and
commodity prices followed by the increased likelihood of monetary tightening by
authorities around the world to stem this pressure. The resulting fall
experienced by equity markets generally has been more severe on AiM where the
companies are perceived as higher risk and more vulnerable to increases in
interest rates. Liquidity has reduced significantly, particularly at the smaller
company end of the market, and many share prices have experienced sharp falls on
the slightest selling pressure. AiM VCT2 has been affected by this with many of
the portfolio's largest holdings decreasing in value without any related bad
news. The NAV has fallen back from its recent high to 80.4 pence per share at 31
May 2006, a decrease of 1.4 per cent since the start of the year, after adding
back the capital distribution of 1.5 pence per share, paid to shareholders in
April 2006.
The portfolio Favourable market conditions in the early part of the year
enabled the Manager to continue to concentrate the portfolio through the
reduction in the number of holdings from 85 at the start of the period to 80 at
31 May 2006. In total £2 million was raised from the sale of eight holdings in
their entirety and eight where partial disposals were made. These sales included
further top slicing of the portfolio's largest holding, Egdon Resources, where
shares worth £467,000 were sold close to the recent peak of the company's share
price. In addition, the remaining part of the Trust's holding in Pilat Media was
also sold, realising a further £380,000. Elsewhere, the Manager continued to
sell holdings which had proved disappointing investments and where positive
impact on the portfolio going forward was deemed unlikely.
The new issue market on AiM continued to be very busy in the first half of 2006,
with record amounts of new capital raised and companies joining the market.
However, the number of VCT qualifying new issues was lower than in recent years
and the Manager was further restricted from making new investments as most of
the available funds were used to satisfy further share buy backs of AiM VCT2
shares. AiM VCT2 backed four existing portfolio companies, All IPO, BBI, Jelf
Group and Obus, which raised further capital and acquired shares from the market
to increase its holding in Gladstone after a positive update from the company.
The combined total of these investments was £381,000.
Although the NAV fell marginally over the period a number of the Company's
holdings made encouraging progress with their business plans. I am pleased to
report that this was the case with the majority of the portfolio's twenty
largest holdings as at the start of the year. And whilst this was not always
adequately reflected in their valuations we anticipate further positive news
flow during 2006 from these and other holdings. We hope this will be recognised
by the market when more benign conditions return to enhance the value of these
investments and aid the performance of the portfolio as a whole.
The portfolio's largest holding is in Egdon Resources, probably the only AiM
company in the resource sector which has qualified for VCT investment. The
strong performance in Egdon's shares experienced last year continued into the
current period and provided the most significant contribution to the NAV. The
Manager took advantage of this to make a further modest reduction to the holding
given its weighting within the portfolio. Egdon announced the results of recent
drilling programmes which confirmed the existence of a gas column of 19 meters
at its Kirkletham site and also gas shows on its Westerdale prospect. This is
encouraging; but of more importance, and the likely driver of the shares in the
future, was the commencement of drilling under Portland harbour in March 2006.
At the end of June Egdon confirmed the presence of a salt sequence with a
thickness of 135 metres and a low insoluble content which is suitable for the
creation of caverns to store natural gas. This is exciting news and Egdon's
shares have responded positively. It is anticipated that the completed
feasibility study will be announced in August 2006 and that it will confirm a
project to construct a gas storage facility which will ultimately have the
capacity to store 35 billion cubic feet (Bscf) of gas when complete. Whilst this
investment is not without risk, this has been significantly reduced by the
recent announcement. The Manager feels the well documented need for gas storage
facilities in the UK gives considerable further upside potential to this
strategic holding within the portfolio.
The second largest holding and another strong performer in the period is Vectura
which continued to announce positive news including: the award from the European
Medicines Agency of Orphan Drug Status for its inhaled drug for Parkinson's
disease; a collaboration agreement with a leading international pharmaceutical
company for the development of a combination asthma therapy using Vectura's
GyroHaler dry powder inhaler (including the potential for up to €20 million in
milestone payments); a deal to develop an inhaler device for Boehringer
Ingelheim which resulted in that company investing £7 million in Vectura at a
price of 140 pence (which is substantially higher than the current price) and
the establishment of a new specialist pharmaceutical company called Phamakodex
in a joint venture with Unilever.
The second biggest contributor to performance was the positive move in the
shares of Colliers CRE, which rose by 50 per cent over the period. Colliers CRE
announced a good set of results for the year, with profits increasing by 78 per
cent to £8.2 million and an encouraging outlook for the following year.
After a strong run last year Tanfield's shares responded well to the
announcement of the acquisition of UpRight, an aerial access platform business
which places Tanfield in the number three position in the global aerial access
market. Tanfield now has strong positions in a range of growing specialist
engineering sectors including contract fabrication, where it is gaining work
from large manufacturers keen to contract out non-core activities, zero-emission
electric vehicles and powered aerial access equipment.
The top four companies within the portfolio together account for 24 per cent of
total assets and are important to the future direction of the NAV. However, I
am also pleased to say that there was encouraging news from some of the other
large holdings including Straight and Bond International Software which both
reported record full year profits and Jelf Group which made an important
consolidating acquisition backed by a further investment from AiM VCT2.
Whilst most of the larger holdings made progress there were some inevitable
disappointments which held back the Net Asset Value. The most significant fall
in valuation came from specialist engineer Widney, which lost a significant
proportion of its turnover when its largest customer decided to move its
business to France. Widney have had some success in replacing this lost revenue
with new orders and anticipate more contracts being won in the future but the
main positive impact will not come for another eighteen months. 1st Dental, the
largest UK provider of laboratory services to the dental industry, released
results which were behind forecast, being affected by integration problems and
higher costs associated with the acquisition last year of Benchmark. Consumer
electronics supplier Armour Group experienced a sharp fall in its share price
after announcing tough trading conditions in its automotive division which will
impact profits for the year. The Manager feels the share price fall has been
overdone and both the Chief Executive Officer and Chairman have since acquired
sizeable tranches of shares in the company. Elsewhere, the anticipated trading
statement from The Real Good Food Group was not that encouraging in the short
term, although the Manager feels the share price has also over reacted and that
the company has the capacity to grow in the medium-term.
Earnings and Dividends Revenue Earnings for the period amounted to a
loss of 0.12 pence per share and as in the recent past the Board is not in a
position to recommend an income dividend. However, buoyant market conditions at
the start of the year enabled the realisation of some investments at a profit
and as a result the Board is in a position to recommend payment of an interim
capital distribution of 1.5 pence per share. This will be paid to Ordinary
Shareholders on 1 September 2006. The total cost of this distribution will be
approximately £600,000 and will have the effect of reducing the company's assets
by 1.9 per cent. It remains the Board's opinion that the best way of returning
capital to shareholders is through the distribution of realised capital profits
being made to all shareholders. It continues to be the Board's intention to seek
to realise investments, as market conditions and the development of individual
business plans permit, in order to facilitate further capital distributions.
Since inception the Company has distributed a total of 12 pence back to
shareholders. We hope to be in a position to make further capital distributions
in the future as the market recognises the substantial progress we anticipate
being made by some of the key strategic holdings over the next twelve to
eighteen months.
The Company established a Dividend Reinvestment Scheme in 2004 to enable
shareholders to re-invest their dividends whilst, at the same time, claiming
up-front tax relief on the money invested. Due to the changes affecting VCTs
announced in the Budget, it has been decided to withdraw the Scheme, as its
costs would far outweigh any benefit to participating shareholders. In future,
any distributions paid by the Company will be received in cash.
Budget Changes In the recent Budget a number of changes were announced
to the regulations governing VCTs. These changes affect both investors in VCTs
and the way VCTs are managed. For the investor the main changes, which took
effect from 6 April 2006, are that the up-front income tax relief available on
the purchase of new shares falls from 40 per cent to 30 per cent and that these
new shares have to be held for at least five years (previously three years) in
order to retain the up-front tax reliefs.
The most significant change affecting the management of VCTs is to the Gross
Asset Test which places an upper limit on the size of qualifying company into
which a VCT is able to invest new money. This limit has been reduced from
companies with gross assets of £15 million pre investment and £16 million post
investment down to £7 million pre and £8 million post investment. This reduced
limit applies to all funds raised by VCTs after 5 April 2006. Any new funds
raised by VCTs will have to be invested in significantly smaller companies than
previously might have been the case. As a consequence, it may also result in the
reduction of available investment opportunities, as well as an increase in the
overall risk to portfolios which can only hold investments in these smaller
companies. I am relieved to say that the change in the Gross Asset Test does not
impact existing VCTs which are able to continue to invest funds raised prior to
6 April 2006 under the old rules. However, the change undoubtedly makes it
significantly less attractive for existing VCTs to raise further funds as these
will be subject to the new rules.
Results of the recent 'C' share Offer It was disappointing that the
recent 'C' share Offer only raised £2.9 million in what became a very congested
market for fundraising in the lead up to the end of the last tax year. I can
assure the Ordinary shareholders that they bore none of the costs associated
with the Offer which was self-funding up to 5 per cent of the value of funds
raised and underwritten by the Manager above this level. I welcome the new
shareholders who took part in the 'C' share offer and am pleased to say that the
Manager has started the investment programme with six promising new holdings
joining the portfolio so far. These will be reported on in more detail at the
year end.
Share Buy Backs The buy back facility has been operated in the past to
give shareholders the flexibility to sell all, or part, of their holding at a
reasonable discount to the prevailing NAV. This is seen as a benefit to selling
shareholders as well as those who continue to hold their investment. Most of
these share purchases have been transacted at an average discount of 15 per cent
thereby enhancing the NAV for the remaining shareholders. However, since the
introduction of the 40 per cent income tax relief the Company has experienced a
marked increase in the volume of shares being offered for cancellation with over
£4.9 million of shareholders' funds being used to maintain this facility in the
past two and a half years. The Board continued to exercise its buy back powers
during the past six months and a total of 1,775,000 shares were bought back and
cancelled, representing 4.1 per cent of the issued share capital, at a net cost
of £1,269,000. It would appear that over the last six months many of the
shareholders have been selling for tax reasons and this pressure may ease with
the recent changes made to VCTs.
Since the end of May the Company has been in a close period and has not been in
a position to make market purchases of its shares and for this reason the
discount between the Company's share price and its Net Asset Value per share has
widened. The close period ends on the publication of these interim results,
enabling the Board to use its buy back powers with a view to reducing the
discount. The Board will continue to keep the basis of the buy back facility
under review, with consideration to its desire to make further capital
distributions which benefit all shareholders, the general management of the
portfolio and providing some flexibility to shareholders whose circumstances
dictate the need to sell their shareholdings.
Outlook We are currently experiencing a period of more turbulent market
conditions. The associated negative sentiment often has a disproportionate
impact on the share price of smaller, less liquid companies, as shareholders
seek less risky homes for their money. Furthermore, during times such as these,
the market's direction can also outweigh positive news coming from the companies
themselves, leaving them with little to show for their efforts. AiM VCT2's
portfolio has been impacted by this in the first half, even though a good
proportion of its companies have continued to make progress with their business
plans. It is difficult to judge whether the recent correction in the markets is
just short term or whether this is the start of a longer bearish phase. Whilst
corporate earnings appear to be sound and the markets generally are not
expensive by historical standards, it must be hoped that the market will
stabilise by the autumn and that further advances can be achieved by the year
end. It is likely, however, that during the traditionally quieter summer months
the current phase of share price volatility will continue. '
Enquiries: Robert Mitchell/Bill Brown
Investment Manager
Bluehone Investors LLP Tel: 0207 496 8929
Unaudited Income Statement of the Company
Six months to 31 May Six months to 31 May Six months to 31 May
2006 2006 2006
(Ordinary shares) (C shares) (Total)
Revenue Capital Total Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Profit on realisation of investments - 65 65 - - - - 65 65
Unrealised (losses)/ gains - (360) (360) - 21 21 - (339) (339)
Income 159 - 159 15 - 15 174 - 174
Investment management fee (101) (302) (403) (3) (9) (12) (104) (311) (415)
Other expenses (109) - (109) (2) - (2) (111) - (111)
(Loss)/profit on ordinary activities
before taxation (51) (597) (648) 10 12 22 (41) (585) (626)
Tax on ordinary activities - - - - - - - - -
(Loss)/profit on ordinary activities
after
taxation (51) (597) (648) 10 12 22 (41) (585) (626)
Return per share: (0.12p) (1.41p) (1.53p) 0.53p 0.72p 1.25p (0.10p) (1.35p) (1.45p)
Unaudited Reconciliation of Movement in Shareholders' Funds
Six months to 31 May 2006
Ordinary C Total
Shares Shares
£'000 £'000 £'000
Opening shareholders' funds (as previously reported) 36,099 - 36,099
Less: Investments held at fair value changed from Mid to Bid basis (1,044) - (1,044)
Add: Dividends declared at 30 November 2005 645 - 645
Opening shareholders' funds (as restated) 35,700 - 35,700
(Loss)/profit for the period (648) 22 (626)
Increase in share capital 46 2,803 2,849
Purchase of shares (1,278) - (1,278)
Dividends paid (645) - (645)
Closing shareholders' funds 33,175 2,825 36,000
Unaudited Income Statement of the Company
Six months to 31 May 2005
Revenue Capital Total
Restated Restated
£'000 £'000 £'000
Profit on realisation of investments - 448 448
Unrealised losses - (529) (529)
Income 215 - 215
Investment management fee (116) (348) (464)
Other expenses (132) - (132)
Loss on ordinary activities
before taxation (33) (429) (462)
Tax on ordinary activities - - -
Loss on ordinary activities after
taxation (33) (429) (462)
Return per ordinary share: (0.08p) (0.99p) (1.07p)
Unaudited Reconciliation of Movement in Shareholders' Funds
Total
£'000
Opening shareholders' funds (as previously reported) 38,110
Less: Investments held at fair value changed from Mid to Bid basis (1,201)
Add: Dividends declared at 30 November 2004 868
Opening shareholders' funds (as restated) 37,777
Loss for the period (462)
Increase in share capital 1,943
Purchase of shares (954)
Dividends paid (861)
Closing shareholders' funds 37,443
Unaudited Income Statement of the Company
Year to 30 November 2005
Revenue Capital Total
Restated Restated
£'000 £'000 £'000
Profit on realisation of investments - 270 270
Unrealised gains - 20 20
Income 291 - 291
Investment management fee (227) (681) (908)
Other expenses (285) - (285)
Loss on ordinary activities
before taxation (221) (391) (612)
Tax on ordinary activities - - -
Loss on ordinary activities after
taxation (221) (391) (612)
Return per ordinary share: (0.51p) (0.89p) (1.40p)
Unaudited Reconciliation of Movement in Shareholders' Funds
Total
£'000
Opening shareholders' funds (as previously reported) 38,110
Less: Investments held at fair value changed from Mid to Bid basis (1,201)
Add: Dividends declared at 30 November 2004 868
Opening shareholders' funds (as restated) 37,777
Loss for the year (612)
Increase in share capital 1,985
Purchase of shares (1,930)
Dividends paid (1,520)
Closing shareholders' funds 35,700
Unaudited Balance Sheet
As at 31 May 2006 As at As at
31 May 30 Nov
2005 2005
Ord. shares C Total Restated Restated
Shares
£'000 £'000 £'000 £'000 £'000
Fixed Assets
Quoted on AiM 28,795 318 29,113 31,259 29,870
Quoted on OFEX 990 - 990 1,373 1,563
Listed investments - - - 137 -
Unquoted investments 3,012 70 3,082 3,134 3,280
32,797 388 33,185 35,903 34,713
Net current assets 378 2,437 2,815 1,540 987
Total assets less current liabilities 33,175 2,825 36,000 37,443 35,700
Financed by:
Shareholders' funds 33,175 2,825 36,000 37,443 35,700
Net asset value per share: 80.37p 95.76p - 84.64p 83.03p
Shares in issue 41,280,023 2,950,085 - 44,236,479 42,994,382
Summarised Unaudited Statement of Cash Flows
Six months to 31 May 2006 Six months Year to
to 31 May 30 Nov
2005 2005
restated restated
£'000 £'000 £'000 £'000 £'000
Net cash outflow from operating activities (546) 23 (523) (449) (912)
Tax paid - - - (2) -
Capital expenditure and financial investment 1,414 (166) 1,248 238 1,739
Equity dividends paid (645) - (645) (861) (1,520)
Net cash inflow/(outflow) before financing 223 (143) 80 (1,074) (693)
Financing (1,180) 2,803 1,623 789 255
(Decrease)/increase in cash (957) 2,660 1,703 (285) (438)
Reconciliation of net cash flow to movement in net cash
(Decrease)/increase in cash (957) 2,660 1,703 (285) (438)
Opening net cash 1,457 - 1,457 1,895 1,895
Net cash at 31 May/30 November 500 2,660 3,160 1,610 1,457
Reconciliation of operating profit to net cash flow from operating activities
(Loss)/profit on ordinary activities after taxation (648) 22 (626) (462) (612)
Profit on realisation of investments (65) - (65) (448) (270)
Unrealised losses/(gains) on investments 360 (21) 339 529 (20)
(Increase)/decrease in debtors (18) (11) (29) 7 (3)
(Decrease)/increase in creditors (175) 33 (142) (75) (7)
Net cash flow from operating activities (546) 23 (523) (449) (912)
Notes
1. The unaudited interim results, which cover the six months to 31 May
2006, have been prepared in accordance with applicable accounting standards and
adopting the accounting policies set out in the statutory accounts of the
Company for the year ended 30 November 2005, apart from the following.
• Under FRS 25/26, applicable for accounting periods commencing on or
after 1 January 2005, the unrealised gain in fair value designated investments
has been recognised through the income statement. In line with revised GAAP,
quoted investments have been valued at bid, rather than mid market price. As a
result of this change, the Company's net asset value as at 31 May 2006 has
reduced by £971,000. As at 31 May 2005, the Company's net asset value had
reduced by £1,208,000. As at 30 November 2005, the Company's net asset value had
reduced by £1,044,000.
• Under FRS 21, applicable for accounting periods commencing on or after
1 January 2005, dividends payable by the Company are now recognised in the
period in which they are paid. As a result of this change, the Company's net
asset value as at 31 May 2005 was increased by £664,000 (being the interim
capital dividend of 1.5pence per share paid on 9 September 2005). The Company's
net asset value as at 30 November 2005 was increased by £645,000 (being the
final capital dividend of 1.5 pence per share, paid on 3 April 2006).
2. There were 41,280,023 ordinary shares in issue at 31 May 2006 (31 May
2005 - 44,236,479; 30 November 2005 - 42,994,382). During the six months ended
31 May 2006 the Company issued 60,641 ordinary shares and bought back for
cancellation 1,775,000 ordinary shares at a cost of £1,278,000. During the six
months ended 31 May 2006 the Company also issued 2,950,085 C Shares.
3. Returns per share are based on the weighted average shares
in issue over the six months to 31 May 2006 of 42,279,173 (12 months to 30
November 2005 - 43,706,543; 31 May 2005 - 43,541,592) Ordinary Shares and
1,780,552 C Shares.
4. Earnings for the first six months should not be taken as a
guide to results for the full year.
5. Income for the period is derived from:
Six months
to 31 May Year to
2005 30 Nov
Six months to 31 May 2006 2005
Ord C shares Total
shares
£'000 £'000 £'000 £'000 £'000
Equity investments 128 - 128 104 153
Fixed interest investment 4 - 4 62 64
Deposit Interest 27 15 42 49 74
159 15 174 215 291
6. These are not statutory accounts in terms of Section 240 of the
Companies Act 1985 and are unaudited. The full audited accounts for the period
to 30 November 2005, which are unqualified, have been lodged with the Registrar
of Companies.
7. The interim capital dividend of 1.5p per share will be paid on 1
September 2006 to Ordinary Shareholders on the register on 21 July 2006.
8. Copies of the Interim Report will be mailed to shareholders shortly and
will be available from the Registered Office of the Company at Exchange House,
Primrose Street, London, EC2A 2NY.
This information is provided by RNS
The company news service from the London Stock Exchange
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