Annual Financial Report

RNS Number : 2303A

Montanaro European Smaller C.TstPLC

06 June 2016

 

MONTANARO EUROPEAN SMALLER COMPANIES TRUST PLC

 

Date:                6 June 2016

RESULTS FOR THE YEAR ENDED 31 MARCH 2016

 

Investment Objective

Montanaro European Smaller Companies Trust plc aims to achieve capital growth by investing principally in Continental European quoted smaller companies.

Highlights

·      Net asset value ('NAV') per Ordinary Share +11.1%

·      Share price +4.9%

·      Benchmark index (capital return) +7.6%

·      Total assets +18.6% (£126.5 million)

Chairman's Statement

Results

The twelve month period to 31 March 2016 was good for investors in European smaller companies and particularly good for those invested with us.

 

The MSCI Europe SmallCap (ex UK) Index increased by 7.6%: your Company's net asset value ('NAV') per share rose by 11.1% to 636.0p per share. That's an outperformance of 3.5 percentage points. The share price increased by less than the NAV - it rose by only 4.9% to 540.0p, something that reflects a widening of the discount from 10.0% to 15.1% over the year. The discount is wider than the average for the year, but a movement which was also seen in other European smaller companies trusts which experienced a widening of discounts in the first part of the calendar year. 

Last year our returns were held back by the weakness of the underlying currencies, whereas this year we benefitted from the strength of them. The Euro, for instance, which accounted for over two thirds of our currency exposure, rose by 9.5% against sterling.  It is worth noting that our benchmark actually fell in local currency terms but, after the appreciation of currencies, rose in sterling terms by 7.6%.  Our own portfolio rose in value in both local currency and sterling terms.

The three and five year NAV relative performance is behind that of the benchmark index. While disappointing, as discussed in previous reports, this is primarily a function of the headwinds faced by our style of investing during the financial year to 31 March 2014. It is thus reassuring to see a return to good performance this year as these headwinds have dissipated. We also take comfort from the longer term performance: since the appointment of Montanaro Asset Management Limited ('Montanaro') in September 2006, the NAV per share has increased by 84.9% compared with an increase of 68.4% in the benchmark index. We are happy that the portfolio is still meeting its objective of achieving long-term capital growth.

A review of the market, investment approach and an analysis of performance is set out in the Manager's Report in the Annual Report.

Earnings

Revenue earnings per share for the year were 6.0p (2015: 9.0p). This was lower than 2015 primarily because last year the Company received proceeds from a withholding tax reclaim. That was a one off payment.

Dividends

The Company's primary aim is to deliver capital growth to its shareholders, rather than dividend income. However, the high quality of the companies in which we have been invested and substantial revenue reserves have allowed us to maintain a consistent and robust dividend policy. An interim dividend of 1.75p per share was paid on 8 January 2016. The Board recommends the payment of a final dividend of 5.75p per share payable on 3 August 2016 to shareholders on the register on 24 June 2016. This brings the total dividends for the year to 7.50p per share.

Despite the additional costs from regulation such as AIFMD, we continue to manage costs closely and ongoing charges, expressed as a percentage of average net assets, have fallen from 1.5% to 1.4%.

Borrowings

Towards the end of the year, and given the low interest rate environment, the Company took the opportunity to enter into a further fixed rate secured loan amounting to €10 million, which reflects both the higher asset base of the Company and our positive outlook for the portfolio. This will mature and become repayable in September 2018 at the same time as the existing €15 million loan.

The Board, in discussion with the Manager, regularly reviews the gearing strategy of the Company and the level of borrowings. The Board also approves the arrangement of any gearing facility to support the strategy. This is a key feature of investment trusts that we believe offers a strong competitive advantage over alternative open-ended investment funds. The ability to gear can significantly enhance investment returns to the shareholders. Therefore the Board strongly encourages active use of the gearing facility by the Manager.

The Board has set a maximum limit on borrowing, net of cash, of 30% of shareholders' funds at the time of borrowing. At the end of the year, the Company had net borrowings of 11.2% of net assets compared to 6.8% at the beginning of the year.

Treasury Shares

During the year, the Company did not buy shares into, or sell shares from, Treasury. The Board's stated Treasury shares policy is included in the Annual Report.

The Board will seek to renew the Company's share buyback and share issuance authorities at the forthcoming Annual General Meeting.

Directors

As I explained in my Chairman's Statement in last year's Annual Report, we have embarked upon a period of Board refreshment.

A recruitment process was undertaken by the Nomination Committee. As a first step, effective 2 November 2015, Richard Curling was appointed to the Board. Richard has over 30 years of experience as a Fund Manager and also has considerable experience of investment trusts.

Effective 12 November 2015, Richard Martin retired from the Board. I wish to thank Richard for his outstanding contribution and firm commitment to the Board since his appointment in 2006. We will be making further appointments and changes to the board in the next two years.

Biographical details of the Directors, all of whom are independent and non-executive, can be found in the Annual Report.

 

Annual General Meeting

The Annual General Meeting will be held on Thursday 28 July 2016 at 80 George Street, Edinburgh. Shareholders are encouraged to attend the Meeting where there will be an opportunity to meet and ask questions of the Board and the Manager.

Outlook

The outlook for our portfolio remains encouraging, supported by record low interest rates, an improving employment situation and a benign inflation outlook. Historically, such a backdrop has proven to be positive for smaller companies, which tend to derive a greater portion of their profits from the domestic economy than larger companies.

As always, there will be a number of geopolitical and economic events this year that will drive headlines and move markets. But it is important not to let these divert attention away from long-term investment decisions. Smaller companies have delivered outstanding long-term returns to those who have adopted a "buy-and-hold" approach.

We continue to believe that valuations are not obviously cheap. However, the P/E premium of smaller companies versus large companies remains well below average. Moreover, compared to other developed markets, such as the US, stocks in Europe do appear to offer relatively good value. We are invested in a portfolio of exceptionally high quality companies which we think our Manager has bought at the right price - this gives us great confidence for the future.

A R IRVINE

Chairman

3 June 2016

Statement of Comprehensive Income

For the Year Ended 31 March 2016

	Revenue	Capital	Total
	£'000	£'000	£'000
Capital gains on investments
Gains on investments held at fair value	-	12,916	12,916
Exchange losses	-	(1,213)	(1,213)
	-	11,703	11,703
Revenue
Investment income	2,277	-	2,277
Other operating income	26	-	26
Total income	2,303	11,703	14,006
Expenditure
Management expenses	(298)	(553)	(851)
Other expenses	(510)	-	(510)
Total expenditure	(808)	(553)	(1,361)
Profit before finance costs and taxation	1,495	11,150	12,645
Finance costs	(128)	(238)	(366)
Profit before taxation	1,367	10,912	12,279
Taxation	(357)	-	(357)
Total comprehensive income	1,010	10,912	11,922
Return per share (note 2)	6.0p	65.2p	71.2p

The total column of this statement represents the Company's Income Statement and Statement of Comprehensive Income, prepared in accordance with IFRS. The supplementary revenue return and capital return columns are both prepared under guidance published by the Association of Investment Companies.

All revenue and capital items in the above statement derive from continuing operations.

No operations were acquired or discontinued in the year.

All of the profit and total comprehensive income for the year is attributable to the owners of the Company.

 Statement of Comprehensive Income

For the Year Ended 31 March 2015

	Revenue	Capital	Total
	£'000	£'000	£'000
Capital losses on investments
Losses on investments held at fair value	-	(3,511)	(3,511)
Exchange gains	-	505	505
	-	(3,006)	(3,006)
Revenue
Investment income	2,522	-	2,522
Other operating income	1	-	1
Total income	2,523	(3,006)	(483)
Expenditure
Management expenses	(277)	(514)	(791)
Other expenses	(588)	-	(588)
Total expenditure	(865)	(514)	(1,379)
Profit/(loss) before finance costs and taxation	1,658	(3,520)	(1,862)
Finance costs	(124)	(230)	(354)
Profit/(loss) before taxation	1,534	(3,750)	(2,216)
Taxation	(40)	-	(40)
Total comprehensive income	1,494	(3,750)	(2,256)
Return per share (note 2)	9.0p	(22.5)p	(13.5)p

Balance Sheet

As at 31 March 2016

		2016		2015
		£'000		£'000
Non-current assets
Investments held at fair value through profit and loss		118,380		102,239
Current assets
Trade and other receivables		798		592
Cash and cash equivalents		7,326		3,876
		8,124		4,468
Total assets		126,504		106,707
Current liabilities
Trade and other payables		(348)		(179)
Non-current liabilities
Interest-bearing bank loan		(19,738)		(10,777)
Total liabilities		(20,086)		(10,956)
Net assets		106,418		95,751
Capital and reserves
Called-up share capital		8,724		8,724
Share premium account		5,283		5,283
Capital redemption reserve		2,212		2,212
Capital reserve		87,140		76,228
Revenue reserve		3,059		3,304
Shareholders' funds		106,418		95,751
Net asset value per share (note 4)		636.0p		572.2p

Statement of Changes in Equity

For the year ended 31 March 2016

	Share Capital	Share Premium Account	Capital Redemption Reserve	Capital Reserve	Revenue Reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 1 April 2015	8,724	5,283	2,212	76,228	3,304	95,751
Total comprehensive income	-	-	-	10,912	1,010	11,922
Dividends paid	-	-	-	-	(1,255)	(1,255)
Balance at 31 March 2016	8,724	5,283	2,212	87,140	3,059	106,418

Statement of Changes in Equity

For the year ended 31 March 2015

	Share Capital	Share Premium Account	Capital Redemption Reserve	Capital Reserve	Revenue Reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 1 April 2014	8,724	5,178	2,212	79,595	2,974	98,683
Total comprehensive income	-	-	-	(3,750)	1,494	(2,256)
Shares issued out of treasury	-	105	-	383	-	488
Dividends paid	-	-	-	-	(1,164)	(1,164)
Balance at 31 March 2015	8,724	5,283	2,212	76,228	3,304	95,751

Cash Flow Statement

For the Year Ended 31 March 2016

	2016		2015
	£'000		£'000
Cash flows from operating activities
Profit/(loss) before finance costs and taxation	12,645		(1,862)
Investment (gains)/losses	(12,916)		3,511
Withholding tax	(190)		(328)
Exchange losses/(gains)	1,213		(505)
Interest income	(26)		(1)
Interest received	26		1
Investment income	(2,277)		(2,522)
Dividends received	2,421		2,514
Decrease in payables	-		(63)
Purchases of investments	(34,241)		(24,338)
Sales of investments	30,659		21,651
Net cash outflow from operating activities	(2,686)		(1,942)
Cash flows from financing activities
Dividends paid	(1,255)		(1,164)
Interest paid	(367)		(333)
Shares issued out of treasury	-		488
Draw down of bank loans, net of costs	7,882		-
Net cash inflow/(outflow) from financing activities	6,260		(1,009)
Net increase/(decrease) in cash and cash equivalents	3,574		(2,951)
Exchange losses	(124)		(1,044)
Increase/(decrease) in cash and cash equivalents	3,450		(3,995)
Cash and cash equivalents at beginning of year	3,876		7,871
Cash and cash equivalents at end of year	7,326		3,876

Certain comparative figures have been dis-aggregated to provide more detailed information in line with the current presentation adopted.  There was no impact on the comparative net profit as a result of the new presentation.

Principal Risks and Uncertainties and Risk Mitigation

In accordance with the Guidance on Risk Management, Internal Control and Related Financial and Business Reporting, issued by the Financial Reporting Council, the Board has established an ongoing process for identifying, evaluating and managing the significant risks faced by the Company. It has also regularly reviewed the effectiveness of the Company's risk management and internal control systems for the period.

The principal risks and uncertainties faced by the Company, and the Board's mitigation approach are described below.

Investment and Strategic risk. Inappropriate strategy, including country and sector allocation and stock selection could lead to poor returns for shareholders.

Mitigation: At each Board Meeting the Manager discusses portfolio performance and strategy with the Directors. The Manager also provides the Board with monthly reports. The portfolio is well diversified with typically 40-60 holdings, thereby reducing stock-specific risk. The Board formally reviews the performance of the Manager and its terms of appointment annually.

Gearing. One of the benefits of an investment trust is its ability to use borrowings, which can enhance returns to shareholders in a rising stock market. However, gearing exacerbates movements in the NAV both positively and negatively and will exaggerate declines in NAV when share prices of investee companies are falling.

Mitigation: The Board is responsible for setting the gearing range within which the Manager may operate and has set a maximum limit on borrowing, net of cash, of 30% of shareholders' funds at the time of borrowing.  The Company currently has loans totaling €25 million that mature in September 2018. The Board receives recommendations on gearing levels from the Manager, and monitors and discusses with the Manager the appropriate level of gearing at each Board Meeting.

Other financial risks. The Company invests principally in Continental European quoted smaller companies and its principal risks are therefore market related with risk arising from the volatility in the prices of the Company's investments.  Events such as terrorism, disease, protectionism, inflation or deflation, changes in regulation and taxation, excessive stock market speculation, economic recessions, political instability and movements in interest rates and exchange rates could affect share prices in particular markets.

As with all small company investment trusts, there is liquidity risk at times when the liquidity of the underlying portfolio is poor, such as when smaller companies are out of favour or during periods of adverse financial conditions. The Manager focuses on smaller companies where the opportunities may be more attractive but this can decrease overall underlying liquidity.  This may result in the Manager being unable to buy or sell individual holdings within the portfolio.  In addition, illiquid stock markets may impact the discount of the Company's share price to the NAV per share.

Mitigation: Portfolio diversification, both geographical and sectoral, can mitigate the consequences of such risky events and the Board reviews the portfolio with the Manager on a regular basis.  The Board has also set investment restrictions and guidelines which are adhered to and reported on by the Manager. If required, it is also possible to raise the level of cash held, thereby reducing the risk of declining share prices and the effect of gearing on lower portfolio valuations. However, the portfolio's liquidity is not managed on the basis of timing short-term market fluctuations.

One of the benefits of an investment trust is that the Manager is rarely forced to buy or sell individual holdings at inopportune times.  The Manger constantly reviews the underlying liquidity of the portfolio, which is well diversified, and deals with a wide range of brokers to enhance its ability to execute and minimise liquidity risk.

Discount volatility.  As with all small company investment trusts, discounts can fluctuate significantly both in absolute terms and relative to their peer group.

Mitigation: The Board and Manager actively monitor the discount of share price to NAV per share and seek to influence this through liasing closely with the Company's Broker, share buybacks and effective marketing.  The Board has stated its commitment to an active discount management policy, such that it will consider a buyback of shares if the discount of share price to the NAV per share is greater than 10% for a sustained period of time.  The Board encourages the Manager to market the Company to new investors to increase demand for the Company's shares, which may help to reduce the discount.

Regulatory. The Company carried on business as an investment trust and has been approved as such by HM Revenue & Customs subject to it continuing to meet eligibility conditions and ongoing requirements.  As a result it is not liable to corporation tax on capital gains. Breach of Section 1158 of the Corporation Tax Act 2010 could lead to the Company being subject to tax on chargeable gains. Breach of regulatory rules could lead to suspension of the Company's Stock Exchange listing, financial penalties or a qualified audit report.

Mitigation: The Administrator monitors the Company's compliance with Section 1158 of the Corporation Tax Act 2010 including revenue forecasts and the amount of proposed dividends to ensure the rules are not breached and the results are reported to the Board at each meeting. The Administrator monitors compliance with the Listing Rules of the UK Listing Authority and Compliance with the principal rules is reviewed by the Directors at each Board Meeting.  The Board and AIFM also monitor changes in legislation which may have an impact on the Company.

Operational.  In common with most other investment trust companies, the Company has no employees.  The Company is therefore reliant on the services provided by the third parties such as the Manager, the Administrator and the Custodian.  Disruption or failure of the Manager's or Administrator's systems, or those of third party service providers could lead to an inability to provide accurate reporting and monitoring of the Company's financial position or a breach of regulatory and legal regulations.

Mitigation: The Board and the Audit Committee receives regular reports on the operation of internal controls to mitigate against the risk of failure, including those at the Manager, the Administrator and the Custodian.  These have been tested and monitored throughout the year which is evidenced from their control reports regarding their internal controls which are reported on by their reporting accountants.

Manager. Should the Manager not be in a position to continue to manage the Company, performance may be impacted.

Mitigation: Montanaro has one of the largest specialist teams in the UK focussing on quoted European smaller companies. The Manager keeps the Board informed of developments within its business.

Statement of Directors' Responsibilities in Relation to the Financial Statements

In accordance with Chapter 4 of the Disclosure and Transparency Rules, the Directors confirm, in respect of the Annual Report and financial statements for the year ended 31 March 2016 of which this statement of results is an extract, that to the best of his or her knowledge:

·      the financial statements prepared in accordance with IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company;

·      the Strategic Report and the Report of the Directors include a fair review of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties that it faces;

·      the financial statements include details on related party transactions; and

·      having assessed the principal risks and other matters discussed in connection with the Viability Statement, it is appropriate to adopt the going concern basis in preparing the financial statements.

On behalf of the Board

A R Irvine

Director

3 June 2016

Notes:

1.         Accounting Policies

The financial statements of the Company have been prepared in accordance with the Companies Act 2006, International Financial Reporting Standards ('IFRS'), which comprise standards and interpretations approved by the International Accounting Standards Board ('IASB'), and International Accounting Standards and Standing Interpretations Committee interpretations approved by the International Accounting Standards Committee ('IASC') that remain in effect, and to the extent that they have been adopted by the European Union.

Where presentational guidance set out in the Statement of Recommended Practice ('SORP') for investment companies issued by the Association of Investment Companies ('AIC') in November 2014 is consistent with the requirements of IFRS, the Directors have sought to prepare the financial statements on a basis compliant with the recommendations of the SORP. 

The accounting policies adopted are consistent with those of the previous financial year, except that the following new standards have been adopted in the current year:

·      Annual Improvements to IFRSs 2010-2012 Cycle and 2011-2013 Cycle.  The adoption of these amendments did not have any impact on the current period or any prior periods and is not likely to affect future periods.

The following new standards have been issued but are not effective for this accounting period and have not been adopted early:

·    In July 2014, the IASB issued the final version of IFRS 9 'Financial Instruments' which reflects all phases of the financial instruments project and replaces IAS 39 'Financial Instruments: Recognition and Measurements'. The standard introduces new requirements for classification and measurement of financial instruments, a new expected credit loss model for calculating impairment on financial assets, and hedge accounting.  IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application permitted.  Retrospective application is required with some exceptions. The adoption of IFRS 9 is unlikely to have a material effect on the classification and measurement of the Company's financial assets or financial liabilities.

·    IASB has issued 'Annual Improvements to IFRSs 2012-2014 Cycle' which will be effective for annual periods beginning on or after 1 January 2016.  The adoption of these improvements is unlikely to have a material effect on the classification and measurement of the Company's financial position and performance.

·    IASB has issued a new standard for the recognition of revenue, IFRS 15 'Revenue from Contracts with Customers'. This will replace IAS 18 which covers contracts for goods and services.  The new standard is based on the principle that revenue is recognised when control of a good or service transfers to a customer - so the notion of control replaces the existing notion of risks and rewards.  The standard permits a modified retrospective approach for the adoption.  Under this approach entities will recognise transitional adjustments in retained earnings on the date of initial application (eg 1 January 2017), ie without restating the comparative period.  They will only need to apply the new rules to contracts that are not completed as of the date of initial application.  The standard will be effective for annual periods beginning on or after 1 January 2018.  The Company is yet to assess IFRS 15's full impact but it is not currently anticipated that this standard will have any material impact on the Company's financial statements as presented for the current year.

The Company does not consider that the future adoption of any new standards, in the form currently available, will have any material impact on the financial statements as presented except for changes to disclosures.

2.         Return per Ordinary Share is based on a weighted average of 16,733,260 Ordinary Shares in issue during the year (2015: 16,646,137).

3.         The proposed final dividend of 5.75p per Ordinary Share, will be paid on 3 August 2016 to ordinary shareholders on the register at close of business on 24 June 2016.

4.         Excluding shares bought back and held in treasury there were 16,733,260 Ordinary Shares in issue at 31 March 2016 (2015: 16,733,260). 

5.         This announcement is not the Company's statutory accounts.  Statutory accounts for the year to 31 March 2015, which were unqualified, have been lodged with the Registrar of Companies.  The statutory accounts for the year to 31 March 2016 will be delivered to the Registrar of Companies.

6.         The Annual Report and Accounts for the year ended 31 March 2016 will be posted to shareholders and are available for inspection at 80 George Street, Edinburgh EH2 3BU, the registered office of the Company, and on the Manager's website www.montanaro.co.uk. 

For further information please contact:

Montanaro Asset Management Limited

Tel: [phone]

 

END

 

 

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