Interim Results- 1 April 1999 to 30 September 1999
MONTANARO UK SMALLER COMPANIES INVESTMENT TRUST PLC
15 October 1999
PRELIMINARY ANNOUNCEMENT OF INTERIM RESULTS
The Directors announce the unaudited statement of interim results
for the period 1 April 1999 to 30 September 1999 as follows:-
SUMMARISED STATEMENT OF TOTAL RETURN
(incorporating the revenue account*) of the Company
1 April 1999 1 April 1998
to 30 September 1999 to 30 September 1998
Revenue Capital Total Revenue Capital Total
#'000 #'000 #'000 #'000 #'000 #'000
Gains/(losses) on
investments - 6,440 6,440 - (20,478)(20,478)
Dividends and interest 1,192 - 1,192 1,496 - 1,496
Investment Management
fee (258) - (258) (366) - (366)
Other expenses (119) - (119) (156) - (156)
----- ----- ----- ----- ------ ------
Return before interest
and taxation 815 6,440 7,255 974 (20,478)(19,504)
Interest payable and
similar charges (320) - (320) (577) - (577)
----- ----- ----- ----- ----- -----
Return on ordinary
activities
before taxation 495 6,440 6,935 397 (20,478)(20,081)
Taxation on
ordinary activities (110) - (110) (228) - (228)
----- ----- ----- ----- ------ ------
Return on ordinary
activities after
taxation 385 6,440 6,825 169 (20,478)(20,309)
===== ===== ===== ===== ===== =====
Return per ordinary share**
- basic 0.82p 13.67p 14.49p 0.36p (43.48)p(43.12)p
- diluted 0.81p 13.56p 14.37p 0.34p (41.59)p(41.25)p
* The revenue column of this statement is the revenue account of the Company.
** The accounts have been prepared using accounting standards and policies
adopted at the year end. Returns per share have been calculated in accordance
with the recently issued Financial Reporting Standard No. 14: Earnings Per
Share and consequently the comparatives have been restated to reflect this
change.
These accounts are unaudited and are not the Company's statutory accounts.
SUMMARISED BALANCE SHEET:
As at As at As at
30 September 1999 31 March 1999 30 September 1998
#'000 #'000 #'000
Fixed asset investments 83,139 81,411 63,872
Net current assets/(liabilities) 3,647 (243) 5,687
Long term credit facility (7,500) (7,500) (7,500)
------ ----- ------
Total assets 79,286 73,668 62,059
Less:current period revenue (385) - (169)
------ ------ ------
Net assets for the purpose
of calculating the net asset
value per ordinary share 78,901 73,668 61,890
====== ====== ======
Net asset value per
ordinary share
- basic 167.5p 156.4p 131.4p
- fully diluted* 167.1p 153.4p 126.2p
*The fully diluted net asset values per ordinary share assumes that all
existing warrants are exercised at a subscription price of #1.
The unaudited interim financial information which does not constitute
statutory accounts has been prepared on the basis of the accounting policies
set out in the statutory accounts of the Company for the year ended 31 March
1999. Those statutory accounts received an unqualified audit opinion and have
been filed with the Registrar of Companies.
Performance
Over the six month period to 30 September 1999, the Trust's diluted net asset
value ('NAV') increased by over 9% in comparison with its benchmark, the FTSE
SmallCap Index (excluding investment trusts) (the 'SmallCap'), which rose by
almost 12%. This period saw an unusually strong performance by 'value' stocks
in contrast to 'growth' companies, which impacted performance in the first
quarter. However, outperformance was restored in the second quarter when the
Trust exceeded its benchmark by 1.5%. By way of perspective, the Trust
outperformed last year by 5% and cumulatively has outperformed by 13% since
its launch in March 1995.
The discount of the Trust has narrowed over the past six months from 22% to
16% which is currently slightly below the average of the sector as a whole.
This is the result of improving sentiment towards UK small companies and
strong NAV performance, combined with pro-active steps taken by the Board
aimed at managing the discount.
As a result of the increase in the NAV and the narrowing of the discount, the
Trust's share price has risen by more than 17% over this period and by over
52% during the past twelve months.
Review
Supported by a cut in interest rates to 5% and numerous take over bids, the UK
small companies market enjoyed a strong second quarter in calendar 1999,
gaining more than 10%. In the second half of last year, UK small companies
underperformed over six consecutive months by a total of 23%. In the first
half of 1999, we saw the mirror image as they outperformed both consistently
and by a similar amount, returning to the same level as a year before. Had
Rip van Winkel awoken after a year's sleep, he would have assumed (wrongly!)
that he had missed nothing.
Apart from a remarkable roller coaster of a market, 1999 has seen a dramatic
recovery in the performance of 'value' stocks. As recessionary fears faded
and take-over activity among industrial companies increased, economically
sensitive, cyclical sectors did particularly well. Strength in 'value' stocks
combined with several take-overs accounted for much of the gains, neither of
which feature heavily in the portfolio.
The strength of the first half of 1999 continued into the third quarter of the
year. The SmallCap outperformed the FTSE-100 for the third consecutive
quarter and reached a new all time high of 2844 on 7 September 1999. At this
point, the SmallCap had risen by more than 40% from the start of the year,
having outperformed the FTSE-100 Index by an impressive 33% - a far cry from
1998 when many investors had given up on small companies and unit trust fund
managers faced redemptions. Indeed, some were forced to sell their higher
quality holdings that closed-end funds such as the Trust were in a position to
buy.
On 8 September 1999, the Bank of England surprised the markets by increasing
base rates by 0.25% to 5.25%, the first rise since 4 June 1998. This was in
response to buoyant house prices and stronger economic data. Consensus
forecasts for GDP are now 1.4% this year and 2.5% for next, a dramatic change
from the widespread recessionary fears at the start of the year. Concerns
over further rate increases led to profit taking in cyclical sectors, such as
housing and construction, and a market correction of over 6%. In September,
small companies and 'value' stocks underperformed for the first time in 1999.
Outlook
The final quarter heralds a new millennium and the Y2K day of reckoning, two
events which have created unusual market distortions. Technology companies
have enjoyed strong demand for their services throughout the year which, in
many cases, has now come to an abrupt halt. This sector is likely to
experience short-term weakness as companies come to terms with reduced order
books and the task of communicating an unclear position to the City. We
regard weakness in this sector as a buying opportunity.
On the other hand, possible economic weakness from information technology is
being offset by a build up in inventory ahead of the year end. Although
providing a boost to the economy in the second half of 1999, we would not be
surprised to see a weaker start to the year 2000 as stocks are run down to
more normal levels. Therefore, the gilt market may already be discounting the
economic strength that we are seeing. Although further interest rate
increases are possible over the near term, it is unlikely that rates will rise
significantly. The inflation rate currently stands at its lowest level in 36
years, suggesting that inflation remains under control.
With inflation subdued and the interest rate outlook seemingly benign, the
prospects for UK small companies remain positive. Valuations relative to
large companies are among the most attractive in years, allowing investment
trust managers to take advantage of prudent gearing. Dividend yields are
higher and faster dividend growth is forecast. Many investors have learned to
their cost the risks of being underweight in UK small companies, which have
outperformed by 28% so far this year. We expect new investment to be directed
towards small companies in the New Year.
On 5 October 1999 the Board announced proposals to appoint a trustee to
exercise the subscription rights in respect of the outstanding warrants. The
shareholder authority for the Board to buy back up to 7 million shares of the
Trust was renewed at the Annual General Meeting in July 1999, when
shareholders voted unanimously for the Trust to continue as an authorised
investment trust. Investment trusts are an effective and appropriate vehicle
for investing in UK small companies where liquidity may, at times, be limited.
In line with guidelines determined by the Board, we will utilise the buy back
facility as appropriate for the maximum possible benefit to shareholders.
The interim report will be despatched to shareholders in late November 1999
and will be available from the registered office of the company, 23 Cathedral
Yard, Exeter, EX1 1HB.
.........................................
Brandon Gough
Chairman
15 October 1999
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