Final Results

RNS Number : 1892I

Montanaro European Smaller C.TstPLC

09 June 2011

 



MONTANARO EUROPEAN SMALLER COMPANIES TRUST PLC

 

Date:                9 June 2011

RESULTS FOR THE YEAR ENDED 31 MARCH 2011

 

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 +25%

·      Share price + 25%

·      Benchmark index +14%

·      Total assets +26% (£102.5 million)

Chairman's Statement

During the year ended 31 March 2011, the Company's NAV per share increased by 25.0% to 536.0p. This compares favourably with an increase of 14.2% in the benchmark index, the MSCI Europe SmallCap (ex UK) Index. The Company also benefited from the outperformance of smaller companies in Europe compared to large companies - the MSCI Europe LargeCap (ex UK) Index increased by only 1.3% during the year.

On the back of the increase in the NAV per share during the year, the share price rose by 25.2% to 467.0p, a little better than the improvement in the NAV per share on account of a small decline in the discount which fell from 13.0% to 12.9%.

This strong absolute and relative performance is not only reflected in the results for the year, but also during the period since the appointment of Montanaro Asset Management Limited as Manager in September 2006. During this time, the NAV per share increased by 55.7% compared to an increase of 29.0% in the benchmark index. Furthermore, the Company has outperformed the benchmark index in three out of the last four years. This strong performance can be attributed to the Manager's sound portfolio management generally and excellent stock selection which is driven by rigorous due diligence processes and a detailed knowledge of investee companies.

Economic indicators in Europe generally showed signs of improvement as the year progressed and there was also an improvement in corporate profitability. However, stock markets were volatile and sensitive to poor economic data. Markets were also unsettled by events in the Middle East and North Africa and by the earthquake and tsunami in Japan.

The positive indicators in Europe have mostly been confined to the stronger parts of the region, in particular Germany and Scandinavia where export growth is strong. However, problems have persisted in some of the weaker European countries, with Ireland and Portugal seeking emergency funding from the European Central Bank during the year, following Greece in the previous financial year. This has been, and continues to be, of concern to investors.

Earnings and Dividends

Revenue earnings per share for the year were 3.9p (2010: 4.8p). An interim dividend of 1.75p per share was paid on 7 January 2011 and the Board recommends the payment of a final dividend of 2.75p per share, payable on 29 July 2011 to shareholders on the register on 1 July 2011. This brings the total dividend for the year to 4.5p per share, unchanged from the previous year.

Borrowings

Reflecting a degree of caution by the Manager towards the end of the financial year, the level of net gearing as at 31 March 2011 was 1.9%. 

The Board receives recommendations on borrowing levels on a regular basis from the Manager and reviews this matter formally at all Board meetings. The Company's borrowings are represented by a flexible €15 million revolving credit facility which enables gearing to be increased or decreased as considered appropriate.

Board Composition

The Board was pleased to announce the appointment of Merryn Somerset Webb as a non-executive Director in March 2011. Merryn is Editor-in-Chief of MoneyWeek, the UK personal finance magazine, and a columnist for the Financial Times. I am confident that Merryn will make a significant contribution to the governance of the Company.

Merryn will stand for election at the Annual General Meeting. The rest of the Board will stand for re-election as it has been our policy for some years now that all Directors will retire and seek re-election from shareholders on an annual basis.

Outlook

As the economies of the major European countries continue to recover this should re-build investor confidence. However, stock markets are likely to remain volatile as austerity measures take effect and concerns continue over the health of some of the weaker European countries and events in the Middle East.

Notwithstanding these uncertainties the Board believes that there are attractive investment opportunities within the European smaller companies market and, by continuing with its approach of investing in high quality quoted small companies with strong management teams, the Company is well placed to make further progress in the year ahead.

A R IRVINE

Chairman

Consolidated Statement of Comprehensive Income

For the Year Ended 31 March 2011

	Revenue	Capital	Total
	£'000	£'000	£'000
Capital gains on investments
Gains on investments held at fair value	-	19,045	19,045
Exchange gains	-	417	417
	-	19,462	19,462
Revenue
Investment income	1,676	-	1,676
Other operating income	10	-	10
Total income	1,686	19,462	21,148
Expenditure
Management expenses	(241)	(1,358)	(1,599)
Other expenses	(477)	-	(477)
Total expenditure	(718)	(1,358)	(2,076)
Profit before finance costs and taxation	968	18,104	19,072
Finance costs	(120)	(223)	(343)
Profit before taxation	848	17,881	18,729
Taxation	(205)	-	(205)
Total comprehensive income	643	17,881	18,524
Return per share (note 2)	3.9p	107.9p	111.8p

The total column of this statement represents the Group'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.

Consolidated Statement of Comprehensive Income

For the Year Ended 31 March 2010

	Revenue	Capital	Total
	£'000	£'000	£'000
Capital gains on investments
Gains on investments held at fair value	-	29,246	29,246
Exchange losses	-	(135)	(135)
	-	29,111	29,111
Revenue
Investment income	1,747	-	1,747
Other operating income	13	-	13
Total income	1,760	29,111	30,871
Expenditure
Management expenses	(176)	(328)	(504)
Other expenses	(497)	-	(497)
Total expenditure	(673)	(328)	(1,001)
Profit before finance costs and taxation	1,087	28,783	29,870
Finance costs	(68)	(126)	(194)
Profit before taxation	1,019	28,657	29,676
Taxation	(229)	-	(229)
Total comprehensive income	790	28,657	29,447
Return per share (note 2)	4.8p	172.9p	177.7p

Group Balance Sheet

As at 31 March 2011

			2011			2010
			£'000			£'000
Non-current assets
Investments held at fair value through profit and loss			90,483			79,114
Current assets
Trade and other receivables			244			375
Cash and cash equivalents			11,786			1,563
			12,030			1,938
Total assets			102,513			81,052
Current liabilities
Trade and other payables			(13,676)			(9,993)
Total liabilities			(13,676)			(9,993)
Net assets			88,837			71,059
Capital and reserves
Called-up share capital			8,724			8,724
Share premium account			3,935			3,935
Capital redemption reserve			2,212			2,212
Capital reserve			71,736			53,855
Revenue reserve			2,230			2,333
Shareholders' funds			88,837			71,059
Net asset value per share (note 4)			536.0p			428.8p

Consolidated Statement of Changes in Equity

For the year ended 31 March 2011

	Share capital	Share premium account	Capital redemption reserve	Capital reserve	Revenue reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 1 April 2010	8,724	3,935	2,212	53,855	2,333	71,059
Total comprehensive income	-	-	-	17,881	643	18,524
Dividends paid	-	-	-	-	(746)	(746)
Balance at 31 March 2011	8,724	3,935	2,212	71,736	2,230	88,837

Consolidated Statement of Changes in Equity

For the year ended 31 March 2010

	Share capital	Share premium account	Capital redemption reserve	Capital reserve	Revenue reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 1 April 2009	8,724	3,935	2,212	25,198	2,584	42,653
Total comprehensive income	-	-	-	28,657	790	29,447
Dividends paid	-	-	-	-	(1,041)	(1,041)
Balance at 31 March 2010	8,724	3,935	2,212	53,855	2,333	71,059

Consolidated Cash Flow Statement

For the Year Ended 31 March 2011

	2011			2010
	£'000			£'000
Cash flows from operating activities
Profit before finance costs and taxation	19,072			29,870
Investments gains	(19,045)			(29,246)
Withholding tax	(185)			(199)
Exchange (gains)/losses	(417)			135
Decrease/(increase) in receivables	57			(154)
Increase/(decrease) in payables	934			(12)
Purchases of investments	(21,276)			(34,217)
Sales of investments	30,505			24,971
Net cash inflow/(outflow) from operating activities	9,645			(8,852)
Cash flows from financing activities
Dividends paid	(746)			(1,041)
Interest paid	(345)			(212)
Drawdowns of borrowings	1,250			7,056
Net cash inflow from financing activities	159			5,803
Net increase/(decrease) in cash and cash equivalents	9,804			(3,049)
Exchange gains	419			121
Increase/(decrease) in cash and cash equivalents	10,223			(2,928)
Cash and cash equivalents at beginning of year	1,563			4,491
Cash and cash equivalents at end of year	11,786			1,563

Principal Risks and Risk Mitigation

The Board carefully considers the Company's principal risks and seeks to mitigate these risks through continued and regular review, policy setting, compliance with and enforcement of contractual obligations and active communication with the Manager, the Administrator and shareholders.

The Board applies the principles and recommendations of The UK Corporate Governance Code and the AIC's Code of Corporate Governance.  It also applies the principles detailed in the internal control guidance issued by the Financial Reporting Council.

The principal risk faced by the Company is that it fails to produce the capital appreciation stated as its objective, and the Company's net asset value ('NAV') does not rise over the longer-term. The risks which might give rise to this event are summarised below. Mitigation of these risks is sought and achieved in many ways as described in italics below.

External: events such as terrorism, disease, protectionism, inflation or deflation, changes in taxation, excessive stock market speculation, economic recessions, political instability and movements in interest rates and exchange rates could affect share prices in particular markets.

Portfolio diversification, both geographical and sectoral, can mitigate the consequences of such risky events. It is also possible to raise the level of cash, 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 market timing short term fluctuations.

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

Montanaro is believed to have the largest specialist Continental European smaller company team in the UK. The Manager keeps the Board informed of developments within its business.

Investment and strategy:inappropriate strategy, including country and sector allocation, stock selection and the use of gearing could all lead to poor returns for shareholders.

At each Board Meeting the Manager discusses portfolio performance and strategy with the Directors and provides the Board and shareholders 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.

Portfolio liquidity: as with all small company investment trusts, there are times when the liquidity of the underlying portfolio is poor, such as when smaller companies are out of favour or during periods of adverse economic 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 stockmarkets may impact the discount of the Company's share price to the NAV per share.

One of the benefits of an investment trust is that the Manager is not forced to buy or sell individual holdings at inopportune times. The Manager 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.

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.

The Board is responsible for setting the gearing range within which the Manager may operate. It receives recommendations on gearing levels from the Manager, and monitors and discusses with the Manager the appropriate level of gearing at each Board Meeting.

Liquidity of the Company's shares: as with many small company investment trusts, there are times when the liquidity of the Company's shares is low. In the case of the Company, many of the shareholders are large financial institutions with a long term investment horizon.  Unlike other investment trusts, where private individuals form a larger part of the share register, this may result in fewer shares being traded in the Company on a daily basis and make it difficult at times for investors to buy or sell shares.

The Manager is encouraged by the Board to market the Company to private client wealth managers and other potential new investors. The goal is to widen the shareholder base to enhance liquidity. In addition, the ability to buy back shares to be held in treasury for subsequent re-issue may enhance the liquidity of the Company's shares.

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

The Board and Manager actively monitor the discount of share price to NAV per share and seek to manage this through liaising closely with the Company's Broker, share buy-backs and effective marketing. The Board has stated

its commitment to an active discount management policy, such that it will consider a buy back of shares if the discount of share price to NAV 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: breach of regulatory rules could lead to suspension of the Company's Stock Exchange listing, financial penalties or a qualified audit report. Breach of Section 1158 of the Corporation Tax Act 2010 could lead to the Company being subject to tax on chargeable gains.

The Administrator monitors the Company's compliance with the Listing Rules of the UK Listing Authority and Section 1158 of the Corporation Tax Act 2010. Compliance with the principal rules is reviewed by the Directors at each Board Meeting.

Operational: 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 or a breach of Section 1158 of the Corporation Tax Act 2010.

The Board reviews operational issues in detail at each Board Meeting and the Audit Committee receives reports on the operation of internal controls.

Financial: inadequate controls by the Manager or Administrator or other third party service providers could lead to misappropriation of assets or a breach of Section 1158 of the Corporation Tax Act 2010.  Inappropriate accounting policies or failure to comply with accounting standards could lead to misreporting or breaches of regulations.

The Board reviews financial reports in detail at each Board Meeting.

Banking: a breach of the Company's loan covenants might lead to funding being summarily withdrawn.

At each Board Meeting the Board reviews compliance with the banking covenants.

Reputational:inadequate or deficient controls of the Manager or Administrator or other third party providers might result in breaches of regulations and damage the trust and confidence of shareholders in the Company and lead to an increase in the discount.

The Board continually monitors and reviews issues that may impact the standing of the Company and lead to an increase in the discount.

Statement of Directors' Responsibilities in Respect of the Annual Financial Report

In accordance with Chapter 4 of the Disclosure and Transparency Rules, we confirm that to the best of our knowledge, in respect of the Annual Report and Accounts for the year ended 31 March 2011, of which this statement of results is an extract:

·      The financial statements have been prepared in accordance with IFRS as adopted by the European Union, on a going concern basis, and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and the Company;

·      The Annual Report includes a fair review of the important events that have occurred during the financial year and their impact on the financial statements;

·      The Annual Report includes a description of the Company's principal risks and uncertainties; and

·      The Annual Report includes details of related party transactions that have taken place during the financial year.

On behalf of the Board

A R Irvine

Director

Notes:

1.         Accounting Policies

The financial statements of the Group 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.

The financial statements have been prepared on a going concern basis. Where presentational guidance set out in the Statement of Recommended Practice ('SORP') for investment companies issued by the Association of Investment Companies ('AIC') in January 2009 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.

2.         Return per Ordinary Share is based on a weighted average of 16,573,260 Ordinary Shares in issue during the year (2010 - 16,573,260).

3.         The proposed final dividend of 2.75p per Ordinary Share, will be paid on 29 July 2011 to ordinary shareholders on the register at close of business on 1 June 2011.

4.         Excluding shares bought back and held in treasury there were 16,573,260 Ordinary Shares in issue at 31 March 2011 (2010 - 16,573,260). 

5.         This announcement is not the Company's statutory accounts.  Statutory accounts for the year to 31 March 2010, which were unqualified, have been lodged with the Registrar of Companies.  The statutory accounts for the year to 31 March 2011 will be delivered to the Registrar of Companies following the Company's Annual General Meeting.

6.         The Annual Report and Accounts for the year ended 31 March 2011 will be posted to shareholders and is 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:

Charles Montanaro

Montanaro Asset Management Limited

Tel: [phone]

 

END

 

 

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