Final Results - Year Ended 29 February 2000
3i Smaller Quoted Co's Trust PLC
20 April 2000
Press Information
Aldermary House
15 Queen Street
London EC4N 1TX
Facsimile: 020 7329 6009
Telephone: 020 7329 0096
Issued on behalf of: Date:
3i Smaller Quoted Companies 20 April 2000
Trust plc
3i Smaller Quoted Companies Trust plc
A Decade of Outperformance
Preliminary Announcement of Final Results 2000
3i Smaller Quoted Companies Trust plc today announces preliminary results for
the year ended 29 February 2000.
Highlights
* NAV per share increased by 68.0% to 336.3p, outperforming the
benchmark FTSE Small Cap Index excluding Investment Companies
by 21.3% over the period
* The Trust has outperformed its benchmark, the FTSE All Share
Index and the FTSE 100 Index over the last 1, 3, 5 and 10
years. It was awarded first place in the Standard and Poor's
Ten Year UK Investment Trusts Smaller Companies UK Sector
reflecting consistency of performance over 10 years
* Earnings per share of 4.46p (before receipt of special
dividends of 0.51p per share) up from underlying earnings of
4.33p for the comparable period last year
* Total dividend increased 5% to 4.20p
* 44.5% of investment in companies backed by 3i
* Several new issues have recently been purchased direct from
3i
Commenting on the results, Bill Govett, Chairman, said: 'The Trust has
outperformed its benchmark again over the last year and can now point to
outperformance over 1, 3, 5 and 10 years against all the main UK indices.
Two factors suggest that smaller companies can continue to outperform in the
current year. Firstly, smaller companies continue to offer value compared to
larger companies. Secondly, the new issue market has been very active. This
has provided an influx of dynamic rapidly growing companies to the universe of
stocks in which the Trust invests.
The major correction that is taking place in world stock markets, particularly
in technology shares, will present an opportunity to buy into companies with
strong management and proven growth records.'
For further information, please contact:
Henrietta Marsh, 3i Asset Management Limited 020 7975 3531
Issued by:
Philip Robinson, Shandwick 020 7329 0096
Chairman's statement
Performance
The year to 29 February 2000 has been a rewarding one for smaller companies
with the benchmark FTSE Small Cap Index excluding Investment Companies
producing a return of 46.7% compared to 5.8% for the FTSE All Share Index.
Furthermore, the Trust strongly outperformed its benchmark producing a return
of 68.0% giving net assets per share at the year end of 336.3p.
The excellent outcome for the Trust over the last year has more than made up
for a longer period of underperformance by smaller companies in general and it
is pleasing to note that, in addition to outperforming its benchmark, the
Trust has also outperformed both the FTSE All Share and the FTSE 100 Indices
over the last one, three, five and ten years. In recognition of its record for
consistency of performance, the Trust was recently awarded first place in the
Standard and Poor's Ten Year UK Investment Trusts Smaller Companies UK Sector.
Earnings and dividends
Earnings per share for the year were 4.97p which includes 0.51p from special
dividend receipts. In the previous year there were no such receipts and
earnings per share were 4.33p. Special dividends are generally unpredictable
often being received from companies which are restructuring. Against this
background the directors are recommending an increase in the total dividend
for the year of 5% to 4.20p. At the time of the interim results I announced
that the interim and final dividends would be rebalanced with a greater
proportion being paid out at the interim stage. As a result the final dividend
will be 2.52p compared with 3.01p in the previous year.
Discount and share buy-backs
The Board pays close attention to the discount to net assets at which the
Trust's shares trade. In general, the Trust's shares have traded at a discount
lower than the average for the AITC sector, which the Board believes is
appropriate given the strong track record of the Trust. During the year the
discount widened slightly from 14.7% at 1 March 1999 to 16.6% at 29 February
2000 - this compares to a sector average of 20% at both the beginning and the
end of the year. Shareholders will be aware that the Trust now has the power
to buy-back its shares. The primary purpose of share buy-backs is to enhance
net asset value for all continuing shareholders, although a secondary aim is
to reduce the discount. The Board has established a framework for evaluating
such buy-backs and a process for implementing them. However, during the last
year it was felt that the Trust's resources were better invested in the
market.
Recent changes to the Companies Act 1985 have made it possible for investment
companies to repurchase their shares without surrendering Investment Company
status. At the Annual General Meeting shareholders will be asked to approve
certain amendments to the Trust's Articles of Association which will allow the
Trust to take advantage of these legislative changes.
Gearing
Gearing levels are set by the Board, in consultation with the Manager, with a
view to increasing the long term returns to shareholders. By the year end, the
Trust's Debenture proceeds were for practical purposes fully invested with
gearing at 7%. We believe the Trust needs greater flexibility and are
examining options to increase potential gearing.
Risk management
The Board seeks to identify and monitor all the significant risks to which the
Trust is exposed. As to portfolio risk, the Board reviews exposures to sectors
as well as individual investments at every Board meeting. The policy of the
Board is that risks should be managed in a fashion appropriate for a broadly
diversified general smaller companies trust.
Market conditions
Despite near term uncertainty over interest rates, there is the likelihood
these will peak at levels that are low in the context of historical
comparisons. The outlook for company profits therefore remains positive.
Furthermore, most of last year's market price rises were focused in a narrow
range of shares leaving many others attractively rated. At the same time, an
active new issue market has refreshed the universe of smaller company stocks
with a number of dynamic rapidly growing businesses.
At the time of writing, considerable volatility has developed in the world
stock markets and a major correction is under way in technology shares. This
inevitably has had an impact on the Trust's net asset value, but it will
provide opportunities to buy into companies with strong management and proven
growth records, at levels not seen for several months. I remain confident that
attractive returns can be achieved in the longer term.
W J R Govett
19 April 2000
Investment manager's review
Strategy
The Manager aims to select and manage a diversified portfolio of shares which
will outperform the FTSE Small Cap Index excluding Investment Companies in the
medium term.
The Trust is distinguished from others in the smaller companies sector by the
use which is made of 3i Group's personnel and information base. The latter
includes extensive non-confidential historical information concerning
companies prior to their flotation which helps in the appraisal of recently
floated companies. In certain circumstances the Manager has the ability to buy
shares directly from 3i Group in companies which are being floated. This can
provide the Trust with a larger allocation of stock which might otherwise be
in short supply.
This strategy tends to lead to the Trust being overweight in those sectors in
which 3i Group has particular knowledge or experience and for the Trust to
follow a growth orientated style although investment in value or cyclical
stocks is not precluded.
The risk in the portfolio is managed through owning a broadly diversified
portfolio, with a maximum of 5% of net assets being held in any one stock, and
sector exposures carefully compared to those of the benchmark (FTSE Small Cap
Index excluding Investment Companies).
Overall performance
Investment performance has been good during the year to 29 February 2000 with
the net asset value per ordinary share increasing by 68.0%. This exceeds the
benchmark by 21.3%. After an initial quarter when value stocks and cyclicals
performed well, equity markets in general were characterised by strong price
rises in an increasingly narrow range of growth stocks, particularly
technology stocks. It was therefore important to be geared into the rising
market and to have appropriate sector weightings, in particular overweight
positions in information technology, media, telecommunications and
biotechnology going into the fourth quarter of calendar 1999. Furthermore,
within the strongly performing sectors there were a small number of
spectacular performances which are quite unusual in a historical context.
Gearing
Gearing was increased from 4.7% at 1 March 1999 to 7.3% at 29 February 2000.
Given the strong growth in share prices of UK smaller companies the increased
gearing helped the Trust's performance.
Stocks and sector performance
The weightings of the Trust by sector have, during the last year, proved less
important than the weightings in the key sub-sectors going into the fourth
quarter of 1999. At the end of September, the Trust was 3.6% overweight in
Software & Computer Services and 1.5% overweight in Media. It was broadly
weighted in line in Telecommunications Services and Pharmaceuticals (which in
the FTSE Small Cap Index largely comprised biotechnology stocks).
The Information Technology sector performed strongly as concerns evaporated
about the slowdown in IT spending ahead of the new millennium and investors
began to appreciate the sector's continued long term growth potential and the
high levels of spend likely to arise as businesses focus on the internet. The
Trust's holdings in NSB Retail and royalblue performed exceptionally well -
both are suppliers of software which have leading positions with their
customer bases - the retail and investment banking businesses respectively.
In Cyclical Services the key sub-sector was Media. An excellent performance
was seen from Bloomsbury Publishing which achieved very good sales of its
Harry Potter children's books, several of which have featured regularly in the
top 10 sales lists. It also published the Encarta World English Dictionary,
the result of many years' work - the CD Rom version is published in
conjunction with Microsoft. In the Distributors sub-sector, Abacus Polar
finally saw a good result after three years of share price decline. The
semiconductor cycle has moved to one of shortage of supply.
The Non-Cyclical Services sector includes Telecommunications Services which
performed excellently. The Trust's holdings included IMS which owned a
business called Teamtalk. This business specialises in sports information on
the internet and was recently demerged from the parent. Fibernet, a holding
bought during the year, produced a good return. The company provides high
speed digital networks for the interconnection of computers, telephones and
video devices.
The key sub-sector in Non-Cyclical Consumer Goods was Pharmaceuticals. An
excellent uplift was seen in Oxford GlycoSciences where the stock market
attributed greater value to the company's proteomics technology which has
allowed the company to apply for more than 800 patents for different protein
and use combinations especially for breast cancer and neurological disorders.
Shire Pharmaceuticals appreciated well with continued good results. This
sector also included some of the poorer performing sub-sectors, notably Food
Producers where the Trust held Brake Brothers. This company has produced
reasonable results but perception towards the sector is poor. The Trust also
held Robert Wiseman which saw its share price halve following announcements on
the competitive market conditions and a Monopolies and Mergers Commission
investigation. In the Printing and Packaging sub-sector, the Trust held
British Polythene whose results have been hit by higher input prices.
In the General Industrials sector, the Trust has for some time sought new
holdings in companies with a technological edge. In manufacturing businesses
these can be a source of long term competitive advantage and barriers to
entry. Excellent performances were seen by the Trust's holdings in IQE which
makes epitaxial wafers used in opto-electronic components and the holding in
Gooch and Housego which makes acousto-optic devices and has developed a switch
for use in telecommunications applications. However, Firth Rixson had a
disappointing performance with depressed conditions in the aerospace market.
The Trust's holdings in the Resources sector produced an uninspiring
performance but exceeded that of the equivalent sector in the benchmark index.
Abbott Group fell with reduced activity levels in the North Sea resulting from
last year's low oil price. In the Basic Industries sector of the portfolio
there were no individual stock performances which had a significant impact on
the results as a whole. Holdings in the Cyclical Consumer Goods sector
produced a mediocre performance held back in particular by Cornwell Parker
where bid talks fell through.
The main underweight sector position continued to be Financials (particularly
the Real Estate sub-sector). This proved to be an appropriate asset
allocation. The holding in Brewin Dolphin performed well as rising stock
markets have been beneficial to private client brokers. In addition, the
company was one of the first to launch an internet broking arm and this has
helped market perception of the stock.
Takeovers
Activity in the portfolio was high with 12 companies taken over in the period
and a further two (BTP and Critchley) in progress at the year end. Since the
year end offers for City Technology, Joseph Holt, British Borneo and Border TV
have been announced. Examples of takeovers by financial buyers include Denby,
Wardle Storeys, Hozelock and Joseph Holt but the remainder have been by trade
buyers.
New issues
The new issues market started the year quietly but it became increasingly
receptive to technology new issues. The Trust participated in 16 new issues of
which four were companies where 3i was a selling shareholder. Consequent new
holdings include IQE, Glotel, and Authorizsor and, bought from 3i, Morse and
Just2clicks.
Market capitalisation breakdown
The normal universe in which the Trust invests comprises those stocks in the
bottom 10% of the market capitalisation of the London Stock Exchange. In
addition, investments may be made in UK based companies listed on AIM, EASDAQ
or NASDAQ and, by exception, on OFEX and other OTC markets. At 31 March 2000,
the smallest constituent of the FTSE Small Cap Index excluding Investment
Companies had a market capitalisation of £27m, and the largest a
capitalisation of £437m. At that date, 69% of the Trust's portfolio by value
was comprised of stocks within this market capitalisation range, 29% was above
the range and 2% below it. The Manager will continue to make new investments
above this range from time to time where a stock is regarded as attractive and
the market capitalisation does not exceed £740m. It would be rare for the
Manager to make a new investment in a company with a market capitalisation of
less than £30m.
Conclusion and outlook
The performance of the Trust and the UK Smaller Companies sector over the last
year has been strong both in actual terms and relative to other main UK
indices. Nevertheless, smaller companies continue to offer good relative value
- on 31 March 2000 the FTSE 100 Index traded at an average price earnings
ratio and yield of 30.4 and 2.0% respectively compared to 14.9 and 3.2%
respectively for the FTSE Small Cap Index excluding Investment Companies.
The Trust is positioned to take advantage of a continuation of the trends
which have been prevalent last year in the smaller companies market, being
geared and having a growth style and an overweight position in the Information
Technology sector. The Manager continues to believe that good quality growing
companies with the potential for upgrades in their forecast earnings will
outperform over the medium term.
The benchmark index (the FTSE Small Cap excluding Investment Companies)
underwent significant re-balancing at the end of March 2000 with the result
that the benchmark's weighting in the Information Technology sector fell from
14.9% at the end of February to 7.0% at the end of March as some constituents
were promoted to the FTSE 250. Conversely, some poor performers in the FTSE
250 were demoted to the FTSE Small Cap - these included some companies in the
Building and Construction sector where the benchmark weightings increased.
Although most of the Trust's holdings in the Information Technology sector are
unchanged since the year end, the Trust is more overweight in the sector than
it was as a result of the changes to the benchmark.
In the weeks since the year end the flow of new issues has been strong and the
Trust has participated in several including Bookham Technology, Profile
Therapeutics, Beeson Gregory and Netstore which were bought direct from 3i.
Henrietta Marsh
3i Asset Management Limited
19 April 2000
Statement of total return for the year ended 29 February 2000
(incorporating the Revenue Account)
Year ended Year ended
29 February 2000 28 February 1999
(as restated)*
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Gains on investments
Net realised gains
over previous 12,631 12,631 4,962 4,962
valuation
Net unrealised
appreciation/ 67,490 67,490 (6,504) (6,504)
(depreciation) ------- ------- ------- ------- ------- -------
80,121 80,121 (1,542) (1,542)
Income 4,107 4,107 3,572 3,572
Investment management
fee (378) (1,135) (1,513) (221) (661) (882)
Other expenses (253) (253) (251) (251)
------- ------- ------- ------- ------- -------
Net return before
finance costs 3,476 78,986 82,462 3,100 (2,203) 897
Interest payable and
similar charges (599) (578) (1,177) (595) (582) (1,177)
------- ------- ------- ------- ------- -------
Return on ordinary
activities for the
financial year 2,877 78,408 81,285 2,505 (2,785) (280)
Dividends (2,433) (2,433) (2,316) (2,316)
------- ------- ------- ------- ------- -------
Transfer to reserves 444 78,408 78,852 189 (2,785) (2,596)
Return per ordinary
share 4.97p 135.37p 140.34p 4.33p (4.81p) (0.48p)
* In accordance with Financial Reporting Standard 16 - Current Tax,
dividends receivable have been recognised at an amount that excludes
attributable tax credits. This represents a change in accounting policy
from previous years, when dividends receivable included attributable tax
credits. This change in accounting policy has been reflected by
restating the revenue column for the year ended 28 February 1999. No
change in the brought forward revenue reserves results from this change
in accounting policy.
All revenue and capital items in the above statement derive from continuing
operations.
Balance sheet as at 29 February 2000
2000 1999
£'000 £'000
Fixed assets
Investments 210,558 124,020
---------- ----------
Current assets
Debtors 1,716 382
Cash and short term deposits 576 9,263
---------- ----------
2,292 9,645
Creditors: amounts falling due within
one year (3,379) (3,061)
---------- ----------
Net current (liabilities)/assets (1,087) 6,584
---------- ----------
Total assets less current liabilities 209,471 130,604
Creditors: amounts falling due after
more than one year (14,674) (14,659)
---------- ----------
Net assets 194,797 115,945
---------- ----------
Capital and reserves
Called-up share capital 14,480 14,480
Share premium 38,952 38,952
Capital reserve
- realised 48,742 34,883
- unrealised 90,359 25,810
Revenue reserve 2,264 1,820
---------- ----------
Total shareholders' funds 194,797 115,945
====== ======
Net asset value per share 336.3p 200.2p
Approved by the Board
19 April 2000
Cash flow statement for the year ended 29 February 2000
Notes 2000 1999
£'000 £'000
Operating activities
Investment income received 3,775 3,166
Deposit interest received 313 305
Underwriting commission received 30 24
Investment management fees paid (942) (844)
Secretarial fees paid (59) (59)
Other cash receipts 8 8
Other cash payments (201) (180)
-------- -------
Net cash inflow from operating
activities 1. 2,924 2,420
-------- -------
Servicing of finance
Interest paid (1,162) (1,178)
-------- -------
Net cash outflow from servicing of
finance (1,162) (1,178)
-------- -------
Taxation
Taxation recovered - 245
-------- -------
Total taxation recovered - 245
-------- -------
Financial investment
Purchase of investments (42,324) (28,834)
Sale of investments 34,591 32,591
-------- -------
Net cash (outflow)/inflow from
financial investment (7,733) 3,757
-------- --------
Equity dividends paid (2,716) (2,264)
-------- -------
(Decrease)/increase in cash 2. (8,687) 2,980
====== ======
Notes to the Cash Flow statement
1. Reconciliation of net revenue before
finance costs to net cash inflow from
operating activities
2000 1999
(as restated)
£'000 £'000
Net revenue before finance costs 3,476 3,100
Scrip dividends (40) (68)
Investment management fee charged to
capital (1,135) (661)
Decrease/(increase) in accrued income 50 (9)
Increase in creditors 581 61
Increase in debtors (8) (3)
---------- ----------
Net cash inflow from operating activities 2,924 2,420
====== ======
2. Reconciliation of net cash flow to
movement in net debt
2000 1999
£'000 £'000
(Decrease)/increase in cash in the year (8,687) 2,980
Amortised debenture stock issue expenses (15) (14)
---------- ----------
Movement in net debt in the year (8,702) 2,966
Opening net debt (5,396) (8,362)
---------- ----------
Closing net debt (14,098) (5,396)
---------- ----------
Notes
1 A final dividend of 2.52p per ordinary share is recommended
and, subject to its approval at the Annual General Meeting in
May 2000, will be paid on 14 June 2000 to shareholders on the
register at 19 May 2000. Together with an interim dividend
of 1.68p paid in November 1999 this makes a total of 4.20p
for the year, compared with 4.00p for the year ended 28
February 1999.
2 The Report and Accounts will be posted to shareholders on 27
April 2000 and the Annual General Meeting will be held at
12.00pm on 31 May 2000 at the offices of 3i plc at 91
Waterloo Road, London SE1 8XP.
3 The statutory accounts for the year to 29 February 2000 have
not yet been delivered to the Registrar of Companies. The
report of the auditors on the statutory accounts is
unqualified and does not contain any statements under Section
237(2) or (3) of the Companies Act 1985. This announcement
does not constitute statutory accounts. The statutory
accounts for the year to 28 February 1999 were filed with the
Registrar of Companies on 14 June 1999.
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