Half-year report

Half-year report

12 NOVEMBER 2018

NORTHERN 3 VCT PLC

UNAUDITED HALF-YEARLY FINANCIAL REPORT
FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2018

Northern 3 VCT PLC is a Venture Capital Trust (VCT) managed by NVM Private Equity LLP.  It invests mainly in unquoted venture capital holdings and aims to provide high long-term tax-free returns to shareholders through a combination of dividend yield and capital growth.

Financial highlights (comparative figures as at 30 September 2017 and 31 March 2018)

 

 

 

 
Six months to
30 September
 2018
Six months to
30 September
 2017
Year to
31 March
 2018
Net assets

 
£84.8m£68.7m£84.3m
Net asset value per share

 
94.6p98.0p94.0p
Return per share:
Revenue
Capital
Total

 

0.8p
3.3p
4.1p

1.5p
(1.2)p
0.3p

1.9p
(4.0)p
(2.1)p
Dividend declared
in respect of the period


 

2.0p

2.0p

5.5p
Cumulative return to shareholders
since launch:
Net asset value per share
Dividends paid per share*
Net asset value plus dividends paid per share

 


94.6p
89.4p
184.0p


98.0p
83.9p
181.9p


94.0p
85.9p
179.9p
Mid-market share price at end of period

 
87.0p93.0p89.5p
Share price discount to net asset value

 
8.0%5.1%4.8%
Tax-free dividend yield (based on the net asset value per share)**5.6%5.1%5.2%

*Excluding interim dividend not yet paid
**The annualised dividend yield is calculated by dividing the dividends in respect of the 12 month period ended on each reference date by the net asset value per share at the start of the period

For further information, please contact:

NVM Private Equity LLP
Simon John/James Bryce                    0191 244 6000
Website:  www.nvm.co.uk

HALF-YEARLY MANAGEMENT REPORT TO SHAREHOLDERS

The unaudited net asset value (NAV) per share at 30 September 2018 was 94.6 pence (31 March 2018 (audited) 94.0 pence).  The September figure is stated after deducting the final dividend totalling 3.5 pence per share in respect of the year ended 31 March 2018, which was paid in July 2018 and therefore recognised in the September 2018 half-yearly accounts. 

The return per share for the half year as shown in the income statement, before deducting the dividend, was 4.1 pence, compared with 0.3 pence in the six month period ended 30 September 2017.

The directors have declared an interim dividend of 2.0 pence per share for the year ending 31 March 2019, which will be paid on 25 January 2019 to shareholders on the register at the close of business on 4 January 2019. 

We are continuing to build a portfolio of investments in innovative earlier stage UK companies with significant growth potential, which are typically structured with a view to achieving a capital return rather than income generation.  The potential returns are attractive, however the timing of realisations may be less predictable, giving rise to greater fluctuations in annual results.  Paying regular dividends whilst seeking to sustain the NAV per share is a priority for your board and future distributions will continue to have regard to the level of returns generated.  Our medium term aim, subject to regular review, is to provide a dividend yield of not less than 4% per annum, which if achieved, would equate to a total dividend for the current year of around 4 pence per share.

Investment portfolio

Six new investments were completed during the period for a total consideration of £4.0m:

  • Clarilis (£981,000) – automated document preparation solutions for the legal sector, Leamington Spa
  • Grip-UK (£952,000) – indoor climbing wall facility operator, Liverpool
  • Ridge Pharma (£870,000) – provider of branded generic prescription medicines, Reading
  • Seahawk Bidco (£433,000) – business-to-business energy cost comparison and procurement service, Bolton
  • Newcells Biotech (£478,000) – specialist testing services for the drug development sector, Newcastle upon Tyne
  • Ablatus Therapeutics (£318,000) – developer of tissue ablation technology for the treatment of tumours, Cambridge

             
Many of the entrepreneurial businesses we are backing will require multiple rounds of funding in order to deliver their business plans and the level of follow-on investment activity is increasing as expected.  Growth capital totalling £0.7 million was invested in three existing portfolio businesses during the period to support their continued development. 

Proceeds from investment sales and repayments from the venture capital portfolio amounted to         £5.8 million during the period, producing a gain of £1.7 million over the 31 March 2018 carrying values.  Love Saving Group was the subject of a secondary management buy-out financed by Lloyds Development Capital (LDC), delivering a return of over 3.5 times the original cost over the life of the investment. The opportunity was taken to re-invest £0.4 million alongside LDC in the newly formed acquisition vehicle, Seahawk Bidco, which will continue the group’s activities.  Wear Inns was sold to Aprirose, a specialist investment fund, delivering over two times the original cost over the life of the investment.  In the quoted venture capital portfolio, Cityfibre Infrastructure Holdings was the subject of an agreed takeover by a consortium of institutional investors, resulting in sales proceeds of approximately two times the carrying value as at 31 March 2018.

The venture capital portfolio has generally made progress during the period.  In the quoted venture capital portfolio the valuation of Sinclair Pharma increased sharply following the announcement of an agreed takeover by a Chinese corporate acquirer. However, both our AIM and quoted equity portfolios have been affected by the recent market weakness since the end of the period under review. The valuations of unquoted investments have increased modestly overall as a result of positive underlying trading trends reported by a number of portfolio companies. The unquoted portfolio is well-diversified comprising over 60% by value of investments in mature businesses acquired under the previous VCT rules, complemented by investments in earlier stage innovative companies operating in a range of high growth sectors. 

Shareholder issues
NVM currently reports a healthy flow of attractive opportunities both to invest in new innovative businesses and to support our existing portfolio with follow-on capital.  Recent legislative changes mean that VCTs will be required to invest 30% of new funds by the end of the year following the year in which they are raised, which is likely to lead us to make smaller and more frequent share offers.  Shareholders will recall that we last launched a public offer of new shares in September 2017 to raise up to £20m, which was fully subscribed.  Having reviewed the likely cash requirements over the coming years, we do not see any need for a significant public share offer in the 2018/19 tax year.  However in order to maintain a comfortable margin of liquidity for future investment activity, we intend in conjunction with Northern Venture Trust and Northern 2 VCT to launch a ‘top-up’ share issue in January 2019 which will raise up to approximately £6.6 million for each VCT, without the requirement for a prospectus.

It remains our policy to buy back the company’s shares in the market at a discount of 5% to NAV, and 513,945 shares were re-purchased for cancellation during the six months ended 30 September 2018 at a cost of £454,000.

VCT qualifying status
The company has continued to comply with the conditions laid down by HM Revenue & Customs for the maintenance of approved venture capital trust status.  Our manager monitors the position closely and the board also receives regular reports from our taxation advisers, Philip Hare & Associates LLP.

VCT legislation
The Finance Bill 2018 was enacted in March 2018 confirming amendments to the VCT legislation announced last autumn.  As previously reported, the main change in the short term is that the minimum proportion of investments required to be held in VCT-qualifying holdings will increase from 70% to 80%.  This new threshold will apply to Northern 3 VCT from April 2020. The VCT industry continues to play a vital role in supporting smaller companies in need of capital and following recent changes, we hope that the current regime will now be stable.

Prospects
In recent months financial markets have been affected by continued uncertainty surrounding the nature of Britain’s future relationship with the EU and international trade disputes further afield.  Our venture capital portfolio is diversified across a broad range of sectors and our manager has a good record of navigating periods of change.

On behalf of the Board

James Ferguson
Chairman

The unaudited half-yearly financial statements for the six months ended 30 September 2018 are set out below.

INCOME STATEMENT
(unaudited) for the six months ended 30 September 2018

 Six months ended
30 September 2018
Six months ended
30 September 2017
 Revenue 
£000 
Capital 
£000 
Total 
£000 
Revenue 
£000 
Capital 
£000 
Total 
£000 
Gain on disposal of investments 1,868  1,868   580  580  
Movements in fair value of investments   1,563   1,563  (986)(986)
 ---------- ---------- ---------- ---------- ---------- ---------- 
    3,431   3,431  (406)(406)
Income1,161   1,161  1,525   1,525  
Investment management fee(188)(563)(751)(187)(562)(749)
Other expenses(186) (186)(156) (156)
 ---------- ---------- ---------- ---------- ---------- ---------- 
Return on ordinary activities before tax787  2,868 3,655  1,182  (968)214  
Tax on return on ordinary activities(94)94  (152)152   
 ---------- ---------- ---------- ---------- ---------- ---------- 
Return on ordinary activities after tax693  2,962 3,655  1,030  (816)214  
 ---------- ---------- ---------- ---------- ---------- ---------- 
Return per share0.8p3.3p4.1p1.5p(1.2)p 0.3p 
Dividends paid/proposed in respect of the period0.5p1.5p 2.0p1.0p1.0p 2.0p 


  Year ended 31 March 2018
    Revenue 
£000 
Capital 
£000 
Total 
£000 
Gain on disposal of investments    698  698  
Movements in fair value of investments    (2,892)(2,892)
    ---------- ---------- ---------- 
     (2,194)(2,194)
Income   2,436   2,436  
Investment management fee   (384)(1,150)(1,534)
Other expenses   (335)(11)(346)
    ---------- ---------- ---------- 
Return on ordinary activities before tax   1,717  (3,355)(1,638)
Tax on return on ordinary activities   (209)209   
    ---------- ---------- ---------- 
Return on ordinary activities after tax   1,508  (3,146 )(1,638)
    ---------- ---------- ---------- 
Return per share   1.9p(4.0)p(2.1)p
Dividends paid/proposed in respect of the period   1.5p4.0p5.5p

BALANCE SHEET
(unaudited) as at 30 September 2018

 30 September 2018 
£000 
30 September 2017 
£000 
31 March 2018 
£000 
    
Fixed asset investments68,829  58,867  62,770  
 ---------- ---------- ---------- 
Current assets:   
Debtors117  560  167  
Cash and cash equivalents15,903  9,324  21,458  
 ---------- ---------- ---------- 
 16,020  9,884  21,625  
Creditors (amounts falling due   
 within one year)(84)(76)(135)
 ---------- ---------- ---------- 
Net current assets15,936  9,808  21,490  
 ---------- ---------- ---------- 
    
Net assets84,765  68,675  84,260  
 ---------- ---------- ---------- 
Capital and reserves:   
Called-up equity share capital4,482  3,502  4,483  
Share premium624  7,011  214  
Capital redemption reserve197  141  171  
Capital reserve68,536  46,051  69,721  
Revaluation reserve9,416  10,345  8,463  
Revenue reserve1,510  1,625  1,208  
 ---------- ---------- ---------- 
Total equity shareholders’ funds84,765  68,675  84,260  
 ---------- ---------- ---------- 
Net asset value per share94.6p98.0p94.0p

STATEMENT OF CHANGES IN EQUITY

(unaudited) for the six months ended 30 September 2018

   -----------------Non-distributable reserves-----------------Distributable reservesTotal 
 Called up share 
capital 
 

Share 
premium 
Capital 
redemption 
reserve 
 

Revaluation
reserve 
 

Capital 
reserve 
 

Revenue 
reserve 
 
 £000  £000 £000 £000 £000  £000  £000  
At 1 April 2018 4,483   214  171  8,463  69,721   1,208   84,260 
Return on ordinary activities after tax     953 2,009   693   3,655 
Dividends paid      (2,741) (391) (3,132)
Net proceeds of share issues 25   410        435 
Shares purchased for cancellation  

(26


)
  

  

26 
  

  

(453


)
  

   

(453


)
 ---------- ---------- ---------- ---------- ---------- ---------- ---------
At 30 September 2018 4,482   624  197  9,416  68,536   1,510   84,765 
 ---------- ---------- ---------- ---------- ---------- ---------- --------- 

STATEMENT OF CHANGES IN EQUITY

(unaudited) for the six months ended 30 September 2017

   -----------------Non-distributable reserves-----------------Distributable reservesTotal 
 Called up share 
capital 
 

Share 
premium 
Capital 
redemption 
reserve 
 

Revaluation 
reserve 
 

Capital 
reserve 
 

Revenue 
reserve 
 
 £000  £000 £000 £000  £000  £000  £000  
At 1 April 2017 3,290   2,223  113  12,124   50,850   1,292   69,892  
Return on ordinary activities       
after tax     (1,779) 963   1,030   214  
Dividends paid       (5,232) (697) (5,929)
Net proceeds of share issues 240   4,788         5,028  
Shares purchased       
for cancellation (28)  28    (530)   (530)
 ---------- ---------- ---------- ---------- ---------- ---------- ---------- 
At 30 September 2017 3,502   7,011  141  10,345   46,051   1,625   68,675  
 ---------- ---------- ---------- ---------- ---------- ---------- ---------- 

STATEMENT OF CHANGES IN EQUITY

for the year ended 31 March 2018

   -----------------Non-distributable reserves-----------------Distributable reservesTotal 
 Called up share 
capital 
 

Share 
premium 
Capital 
redemption 
reserve 
 

Revaluation 
reserve 
 

Capital 
reserve 
 

Revenue 
reserve 
 
 £000  £000  £000 £000  £000  £000  £000  
At 1 April 2017 3,290   2,223   113  12,124   50,850   1,292   69,892  
Return on ordinary activities       
after tax      (3,661 ) 515   1,508   (1,638)
Dividends paid        (6,127) (1,592) (7,719)
Net proceeds of share issues 1,251   23,560          24,811  
Shares purchased       
for cancellation (58)   58    (1,086)   (1,086)
Cancellation of share premium reserve -  (25,569) -   25,569   -  - 
 ---------- ---------- ---------- ---------- ---------- ---------- ---------- 
At 31 March 2018 4,483   214   171  8,463   69,721   1,208   84,260  
 ---------- ---------- ---------- ---------- ---------- ---------- ---------- 

STATEMENT OF CASH FLOWS
(unaudited) for the six months ended 30 September 2018

 Six months ended Six months ended Year ended  
 30 September 2018 30 September 201731 March 2018 
 £000  £000  £000   
Cash flows from operating activities:    
Return on ordinary activities before tax 3,655   214   (1,638 ) 
Adjustments for:    
Gain on disposal of investments (1,868) (580) (698) 
Movement in fair value of investments (1,563) 986   2,892  
Decrease in debtors 50   92     485  
Decrease in creditors (51) (932) (872 ) 
 ---------- ---------- ----------  
Net cash inflow/(outflow) from operating activities 223  (220) 169   
 ---------- ---------- ----------  
Cash flows from investing activities:    
Purchase of investments (11,378) (3,703) (10,117) 
Sale/repayment of investments 8,750   7,146   7,870   
 ---------- ---------- ----------  
Net cash (outflow)/inflow from investing activities (2,628) 3,443   (2,247 ) 
 ---------- ---------- ----------  
Cash flows from financing activities:    
Issue of ordinary shares 447   5,117   25,357   
Share issue expenses (12) (87) (546) 
Share subscriptions held pending allotment -  (4,281) (4,281 ) 
Purchase of ordinary shares for cancellation (453) (530) (1,086) 
Equity dividends paid (3,132) (5,929) (7,719) 
 ---------- ---------- ----------  
Net cash (outflow)/inflow from financing activities (3,150) (5,710) 11,725
 ---------- ---------- ----------  
Net (decrease)/increase in cash and cash equivalents (5,555) (2,487) 9,647   
Cash and cash equivalents at beginning of period 21,458   11,811   11,811   
 ---------- ---------- ----------  
Cash and cash equivalents at end of period 15,903   9,324   21,458   
 ---------- ---------- ----------  

INVESTMENT PORTFOLIO SUMMARY
as at 30 September 2018

 Cost
£000
Valuation
£000
% of net assets
by value
    
    
Lineup Systems9742,9103.4
No 1 Lounges1,7482,8003.4
Agilitas IT Holdings1,4482,7643.3
Sorted Holdings1,8222,6723.2
MSQ Partners Group1,4782,5463.0
Ideagen*5412,3852.8
Closerstill Group1,5202,2382.6
Entertainment Magpie Group1,3601,6932.0
It’s All Good1,1311,5661.8
Volumatic Holdings1,2511,5431.8
Biological Preparations Group1,9151,5351.8
Idox*5301,5341.8
Medovate1,4321,4321.7
Graza1,3751,3751.6
Channel Mum8401,3291.6
 ---------------------------
Fifteen largest venture capital investments19,36530,32235.8
Other venture capital investments29,57527,61932.6
 ---------------------------
Total venture capital investments48,94057,94168.4
Listed equity investments10,47210,88812.8
 ---------------------------
Total fixed asset investments59,41268,82981.2
 ----------  
Net current assets 15,93618.8
  -----------------
Net assets 84,765100.0
  -----------------
*Quoted on AIM   

BUSINESS RISKS

The board carries out a regular and robust review of the risk environment in which the company operates.  The principal risks and uncertainties identified by the board which might affect the company’s business model and future performance, and the steps taken with a view to their mitigation, are as follows:

Investment and liquidity risk:  investment in smaller and unquoted companies, such as those in which the company invests, involves a higher degree of risk than investment in larger listed companies because they generally have limited product lines, markets and financial resources and may be more dependent on key individuals.  The securities of smaller companies in which the company invests are typically unlisted, making them illiquid, and this may cause difficulties in valuing and disposing of the securities.  The company may invest in businesses whose shares are quoted on AIM - the fact that a share is quoted on AIM does not mean that it can be readily traded and the spread between the buying and selling prices of such shares may be wide.  Mitigation:  the directors aim to limit the risk attaching to the portfolio as a whole by careful selection, close monitoring and timely realisation of investments, by carrying out rigorous due diligence procedures and maintaining a wide spread of holdings in terms of financing stage and industry sector.  The board reviews the investment portfolio with the manager on a regular basis.

Financial risk:  most of the company’s investments involve a medium to long-term commitment and many are relatively illiquid.  Mitigation:  the directors consider that it is inappropriate to finance the company’s activities through borrowing except on an occasional short-term basis.  Accordingly they seek to maintain a proportion of the company’s assets in cash or cash equivalents in order to be in a position to pursue new unquoted investment opportunities and to make follow-on investments in existing portfolio companies.  The company has very little direct exposure to foreign currency risk and does not enter into derivative transactions.

Economic risk:  events such as economic recession or general fluctuation in stock markets, exchange rates and interest rates may affect the valuation of investee companies and their ability to access adequate financial resources, as well as affecting the company’s own share price and discount to net asset value.  Mitigation:  the company invests in a diversified portfolio of investments spanning various industry sectors, and maintains sufficient cash reserves to be able to provide additional funding to investee companies where appropriate.

Stock market risk:  some of the company’s investments are quoted on the London Stock Exchange or AIM and will be subject to market fluctuations upwards and downwards.  External factors such as terrorist activity can negatively impact stock markets worldwide.  In times of adverse sentiment there may be very little, if any, market demand for shares in smaller companies quoted on AIM.  Mitigation:  the company’s quoted investments are actively managed by specialist managers, including NVM in the case of AIM-quoted investments, and the board keeps the portfolio and the actions taken under ongoing review.

Credit risk:  the company holds a number of financial instruments and cash deposits and is dependent on the counterparties discharging their commitment.  Mitigation:  the directors review the creditworthiness of the counterparties to these instruments and cash deposits and seek to ensure there is no undue concentration of credit risk with any one party.

Legislative and regulatory risk:  in order to maintain its approval as a VCT, the company is required to comply with current VCT legislation in the UK, which reflects the European Commission’s State-aid rules.  Changes to the UK legislation or the State-aid rules in the future could have an adverse effect on the company’s ability to achieve satisfactory investment returns whilst retaining its VCT approval.  Mitigation:  the board and the manager monitor political developments and where appropriate seek to make representations either directly or through relevant trade bodies.

Internal control risk:  the company’s assets could be at risk in the absence of an appropriate internal control regime.  Mitigation:  the board regularly reviews the system of internal controls, both financial and non-financial, operated by the company and the manager.  These include controls designed to ensure that the company’s assets are safeguarded and that proper accounting records are maintained.

VCT qualifying status risk:  while it is the intention of the directors that the company will be managed so as to continue to qualify as a VCT, there can be no guarantee that this status will be maintained.  A failure to continue meeting the qualifying requirements could result in the loss of VCT tax relief, the company losing its exemption from corporation tax on capital gains, to shareholders being liable to pay income tax on dividends received from the company and, in certain circumstances, to shareholders being required to repay the initial income tax relief on their investment.  Mitigation:  the investment manager keeps the company’s VCT qualifying status under continual review and its reports are reviewed by the board on a quarterly basis.  The board has also retained Philip Hare & Associates LLP to undertake an independent VCT status monitoring role.

OTHER MATTERS

The unaudited half-yearly financial statements for the six months ended 30 September 2018 do not constitute statutory financial statements within the meaning of Section 434 of the Companies Act 2006, have not been reviewed or audited by the company’s independent auditor and have not been delivered to the Registrar of Companies.  The comparative figures for the year ended 31 March 2018 have been extracted from the audited financial statements for that year, which have been delivered to the Registrar of Companies.  The auditor’s report on those financial statements (i) was unqualified, (ii) did not include any reference to matters to which the auditor drew attention by way of emphasis without qualifying the report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006.  The half-yearly financial statements have been prepared on the basis of the accounting policies set out in the annual financial statements for the year ended 31 March 2018.

Each of the directors confirms that to the best of his knowledge the half-yearly financial statements have been prepared in accordance with the Statement “Half-yearly financial reports” issued by the UK Accounting Standards Board and the half-yearly financial report includes a fair review of the information required by (a) DTR 4.2.7R of the Disclosure Rules and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year, and (b) DTR 4.2.8R of the Disclosure Rules and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period, and any changes in the related party transactions described in the last annual report that could do so.

The directors of the company at the date of this statement were Mr J G D Ferguson (Chairman), Mr C J Fleetwood, Mr T R Levett and Mr J M O Waddell.

The calculation of the revenue and capital return per share is based on the return on ordinary activities after tax for the period and on 89,776,911 (2017 69,893,045) ordinary shares, being the weighted average number of shares in issue during the period.

The calculation of the net asset value per share is based on the net assets at 30 September 2018 divided by the 89,642,232 (2017 70,043,146) ordinary shares in issue at that date.

The interim dividend of 2.0 pence per share for the year ending 31 March 2019 will be paid on 25 January 2019 to shareholders on the register at the close of business on 4 January 2019.

A copy of the half-yearly financial report for the six months ended 30 September 2018 is expected to be posted to shareholders by 27 November 2018 and will be available to the public at the registered office of the company at Time Central, 32 Gallowgate, Newcastle upon Tyne NE1 4SN and on the NVM Private Equity LLP website, www.nvm.co.uk.

Neither the contents of the NVM Private Equity LLP website nor the contents of any website accessible from hyperlinks on the NVM Private Equity LLP website (or any other website) is incorporated into, or forms part of, this announcement.

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