Interim / Quarterly Report • Sep 30, 2015
Interim / Quarterly Report
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Half-yearly financial report 30 September 2015
Northern 3 VCT PLC is a Venture Capital Trust (VCT) managed by NVM Private Equity.
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.
| Six months ended 30 September 2015 |
Six months ended 30 September 2014 |
Year ended 31 March 2015 |
||
|---|---|---|---|---|
| Net assets | £66.3m | £70.3m | £71.2m | |
| Net asset value per share | 100.7p | 105.5p | 107.2p | |
| Return per share | ||||
| Revenue | 1.1p | 1.3p | 2.5p | |
| Capital | 5.8p | (1.1)p | 1.4p | |
| Total | 6.9p | 0.2p | 3.9p | |
| Dividend declared in respect of the period* |
2.0p | 2.0p | 15.5p | |
| Cumulative return to shareholders since launch |
||||
| Net asset value per share | 100.7p | 105.5p | 107.2p | |
| Dividends paid per share** | 62.9p | 47.4p | 49.4p | |
| Net asset value plus dividends | ||||
| paid per share | 163.6p | 152.9p | 156.6p | |
| Mid-market share price | ||||
| at end of period | 90.00p | 95.75p | 96.75p | |
| Share price discount | ||||
| to net asset value | 10.6% | 9.2% | 9.7% | |
| Tax-free dividend yield (based on mid-market share price) |
||||
| Including special dividend | N/A | N/A | 16.0% | |
| Excluding special dividend | 6.1% | 5.7% | 5.7% |
*Year ended 31 March 2015 includes 10.0p special dividend **Excluding interim dividend not yet paid
Half-yearly results announced 12 November 2015 Shares quoted ex dividend 7 January 2016 Record date for interim divided 8 January 2016 Interim dividend paid 29 January 2016
for the six months ended 30 September 2015
The venture capital portfolio continues to make good overall progress.
The unaudited net asset value (NAV) per share at 30 September 2015 was 100.7p (31 March 2015 107.2p). The September figure is stated after deducting the second interim and final dividends totalling 13.5p per share in respect of the year ended 31 March 2015, which were paid in July 2015. The second interim dividend of 10.0p was a special payment out of the proceeds of profitable investment sales completed in the final quarter of the 2014/15 financial year.
The return per share for the half year as shown in the income statement, before deducting the dividend, was 6.9p compared with 0.2p in the six month period ended 30 September 2014.
The directors have declared an unchanged interim dividend of 2.0p per share, which will be paid on 29 January 2016 to shareholders on the register at the close of business on 8 January 2016. It is our present objective to maintain an annual dividend of at least 5.5p per share.
In July we suspended the dividend investment scheme (DRIS) under which shareholders had been able to re-invest their dividends in new ordinary shares in the company. We reluctantly took this step because of the uncertainty caused by the Government's proposed changes to the VCT legislation. Although we are making some progress in absorbing the implications of these changes, we do not yet feel that it is appropriate to re-instate the DRIS and so it remains suspended until further notice.
Total additions to the venture capital portfolio in the half year amounted to £11.3 million. Two new holdings in unquoted trading companies and two AIM-quoted holdings were acquired at a cost of £3.1 million, as follows:
In addition £8.2 million was invested in six companies formed with a view to acquiring trading businesses.
Proceeds from investment sales and repayments amounted to £3.0 million, producing a gain of £0.7 million over 31 March 2015 carrying values. The majority shareholder in Tinglobal Holdings purchased our remaining holding for £0.7 million and the investment in Direct Valeting was sold to a trade acquirer for £0.4 million, realising a satisfactory profit in each case. The AIM-quoted investments in Accumuli and Nationwide Accident Repair Services were sold at a profit following recommended bids. Warmseal Windows (Newcastle), which had previously been written down to nil value, went into administration after a long period of difficult trading. Several other investee companies are currently in discussions with a view to possible exits.
The venture capital portfolio continues to make good overall progress and this is reflected in a number of individual valuation uplifts. A small number of companies have performed less well than expected and are receiving close attention and support from our investment manager.
James Ferguson Chairman
The company has enjoyed a strong cash position following the successful £20 million public share offer in the 2013/14 tax year. Your board did not consider it appropriate to launch a further share issue in the 2014/15 tax year and indeed we were able to declare a special dividend totalling £6.6 million from the proceeds of investment realisations. With funds still available for future investment, and a reasonable prospect of more realisations over the next six months, we do not envisage raising funds from investors in the 2015/16 tax year.
In May it was announced that the discount to NAV at which the company buys back shares in the market would be reduced from 10% to 5%. 520,000 shares were re-purchased during the six months ended 30 September 2015 at a cost of £466,000.
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 managers monitor the position closely and the board also receives regular reports from our taxation advisers at Robertson Hare LLP.
The Government introduced new legislation in the Summer Finance Bill 2015 which will have a significant impact on the investment activities of most VCTs. I wrote to shareholders in July 2015 to inform you that the directors were assessing the effect of the new provisions, which at the time were subject to further clarification and amendment by the Government.
The Finance Bill is expected to receive Royal Assent shortly and it is clear that the range of potential investments open to generalist VCTs such as your company will be reduced, as the Government seeks to implement the European Commission's State aid guidelines which require VCTs to focus more sharply on the provision of growth capital to younger companies.
Your directors are working closely with NVM and our other professional advisers to understand the full implications of the new rules for our future investment activities, and to adapt our approach to the new regime as we seek to maintain our strong long-term investment performance. We will report the outcome of our review to shareholders in due course.
Financial markets have been adversely affected over the past six months by concerns about a slowdown in the Chinese economy, as well as specific sector issues such as those resulting from the fall in the oil price. This will present challenges to our investee companies, but the portfolio has shown an encouraging degree of resilience and we expect to see some profitable exits in the second half of the year.
On behalf of the Board
James Ferguson
Chairman 12 November 2015
as at 30 September 2015
| Cost £000 |
Valuation £000 |
% of net assets by value |
|
|---|---|---|---|
| Fifteen largest private equity investments | |||
| Buoyant Upholstery | 1,294 | 2,721 | 4.1 |
| Lineup Systems | 974 | 2,467 | 3.7 |
| MSQ Partners Group | 1,477 | 2,296 | 3.4 |
| IDOX* | 600 | 2,006 | 3.0 |
| Biological Preparations Group | 1,915 | 1,915 | 2.9 |
| Volumatic Holdings | 1,929 | 1,901 | 2.9 |
| Kitwave One | 1,001 | 1,900 | 2.9 |
| Silverwing | 1,272 | 1,673 | 2.5 |
| Axial Systems Holdings | 1,293 | 1,569 | 2.4 |
| Closerstill Group | 1,520 | 1,520 | 2.3 |
| Wear Inns | 1,406 | 1,461 | 2.2 |
| Control Risks Group Holdings | 746 | 1,461 | 2.2 |
| No 1 Traveller | 1,441 | 1,454 | 2.2 |
| Agilitas IT Holdings | 1,448 | 1,452 | 2.2 |
| It's All Good | 1,131 | 1,411 | 2.1 |
| 19,447 | 27,207 | 41.0 | |
| Other private equity investments | 27,761 | 26,297 | 39.7 |
| Total private equity investments | 47,208 | 53,504 | 80.7 |
| Listed equity investments | 7,951 | 7,582 | 11.4 |
| Total fixed asset investments | 55,159 | 61,086 | 92.1 |
| Net current assets | 5,204 | 7.9 | |
| Net assets | 66,290 | 100.0 |
*Quoted on AIM
30 September 2015 30 September 2014
(unaudited) for the six months ended 30 September 2015
| Six months ended 30 September 2015 | |||
|---|---|---|---|
| Revenue | Capital | Total | |
| £000 | £000 | £000 | |
| Gain on disposal of investments | – | 639 | 639 |
| Movements in fair value of investments | – | 3,678 | 3,678 |
| – | 4,317 | 4,317 | |
| Income | 1,148 | – | 1,148 |
| Investment management fee | (183) | (550) | (733) |
| Other expenses | (173) | – | (173) |
| Return on ordinary activities before tax | 792 | 3,767 | 4,559 |
| Tax on return on ordinary activities | (67) | 67 | – |
| Return on ordinary activities after tax | 725 | 3,834 | 4,559 |
| Return per share | 1.1p | 5.8p | 6.9p |
| Dividends paid/proposed in respect of the period | 1.0p | 1.0p | 2.0p |
The total column of this statement is the profit and loss account of the company. The supplementary revenue return and capital return columns have been prepared under guidance published by the Association of Investment Companies.
There are no recognised gains or losses other than those disclosed in the income statement.
All items in the above statement derive from continuing operations.
(unaudited) for the six months ended 30 September 2015
| Six months ended 30 September 2015 £000 |
|
|---|---|
| Equity shareholders' funds at 1 April 2015 | 71,155 |
| Return on ordinary activities after tax | 4,559 |
| Dividends recognised in the period | (8,958) |
| Net proceeds of share issues | – |
| Shares purchased for cancellation | (466) |
| Equity shareholders' funds at 30 September 2015 | 66,290 |
| Year ended 31 March 2015 | Six months ended 30 September 2014 | ||||
|---|---|---|---|---|---|
| Total | Capital | Revenue | Total | Capital | Revenue |
| £000 | £000 | £000 | £000 | £000 | £000 |
| 3,429 | 3,429 | – | 97 | 97 | – |
| (1,693) | (1,693) | – | (369) | (369) | – |
| 1,736 | 1,736 | – | (272) | (272) | – |
| 2,676 | – | 2,676 | 1,328 | – | 1,328 |
| (1,458) | (1,094) | (364) | (735) | (551) | (184) |
| (376) | – | (376) | (185) | – | (185) |
| 2,578 | 642 | 1,936 | 136 | (823) | 959 |
| – | 261 | (261) | – | 113 | (113) |
| 2,578 | 903 | 1,675 | 136 | (710) | 846 |
| 3.9p | 1.4p | 2.5p | 0.2p | (1.1)p | 1.3p |
| 15.5p | 13.0p | 2.5p | 2.0p | 1.0p | 1.0p |
| Six months ended 30 September 2015 |
Six months ended 30 September 2014 |
Year ended 31 March 2015 |
|---|---|---|
| £000 | £000 | £000 |
| Equity shareholders' funds at 1 April 2015 71,155 |
71,297 | 71,297 |
| Return on ordinary activities after tax 4,559 |
136 | 2,578 |
| Dividends recognised in the period (8,958) |
(2,322) | (3,654) |
| Net proceeds of share issues – |
1,296 | 1,416 |
| Shares purchased for cancellation (466) |
(147) | (482) |
| Equity shareholders' funds at 30 September 2015 66,290 |
70,260 | 71,155 |
(unaudited) as at 30 September 2015
| 30 September 2015 £000 |
30 September 2014 £000 |
31 March 2015 £000 |
|
|---|---|---|---|
| Fixed assets Investments |
61,086 | 60,226 | 50,371 |
| Current assets | |||
| Debtors | 169 | 223 | 255 |
| Cash and deposits | 5,158 | 9,979 | 20,726 |
| Creditors (amounts falling | 5,327 | 10,202 | 20,981 |
| due within one year) | (123) | (168) | (197) |
| Net current assets | 5,204 | 10,034 | 20,784 |
| Net assets | 66,290 | 70,260 | 71,155 |
| Capital and reserves | |||
| Called-up equity share capital | 3,292 | 3,329 | 3,318 |
| Share premium | 1,348 | 1,235 | 1,348 |
| Capital redemption reserve | 61 | 17 | 35 |
| Capital reserve | 54,754 | 52,489 | 62,884 |
| Revaluation reserve | 5,927 | 12,176 | 2,393 |
| Revenue reserve | 908 | 1,014 | 1,177 |
| Total equity shareholders' funds | 66,290 | 70,260 | 71,155 |
| Net asset value per share | 100.7p | 105.5p | 107.2p |
(unaudited) for the six months ended 30 September 2015
| Six months ended 30 September 2015 £000 |
Six months ended 30 September 2014 £000 |
Year ended 31 March 2015 £000 |
|
|---|---|---|---|
| Net cash inflow/(outflow) from operating activities |
254 | (361) | 70 |
| Taxation Corporation tax paid |
– | – | – |
| Financial investment Purchase of investments Sale/repayment of investments |
(11,937) 5,539 |
(7,694) 5,639 |
(12,986) 22,794 |
| Net cash (outflow)/inflow from financial investment |
(6,398) | (2,055) | 9,808 |
| Equity dividends paid | (8,958) | (2,322) | (3,654) |
| Net cash (outflow)/inflow before financing |
(15,102) | (4,738) | 6,224 |
| Financing Issue of ordinary shares |
– | 1,330 | 1,463 |
| Share issue expenses | – | (34) | (47) |
| Purchase of ordinary shares for cancellation | (466) | (147) | (482) |
| Net cash (outflow)/inflow from financing | (466) | 1,149 | 934 |
| (Decrease)/increase in cash and deposits | (15,568) | (3,589) | 7,158 |
| Reconciliation of return before tax to net cash flow from operating activities Return on ordinary activities before tax Gain on disposal of investments Movements in fair value of investments Decrease in debtors (Decrease) in creditors |
4,559 (639) (3,678) 86 (74) |
136 (97) 369 65 (834) |
2,578 (3,429) 1,693 33 (805) |
| Net cash inflow/(outflow) from operating activities |
254 | (361) | 70 |
| Analysis of movement in net funds | 1 April 2015 £000 |
Cash flows £000 |
30 September 2015 £000 |
| Cash and deposits | 20,726 | (15,568) | 5,158 |
(unaudited) for the six months ended 30 September 2015
The board carries out a regular review of the risk environment in which the company operates. The principal risks and uncertainties identified by the board are as follows:
Investment and liquidity risk: many of the company's investments are in small and medium-sized unquoted and AIM-quoted companies which are VCT qualifying holdings, and which by their nature entail a higher level of risk and lower liquidity than investments in large quoted companies. 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 take advantage of new unquoted investment opportunities. 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 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 can 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 and the board keeps the portfolio 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: the company is required at all times to observe the conditions laid down in the Income Tax Act 2007 for the maintenance of approved VCT status. The loss of such approval could lead to the company losing its exemption from corporation tax on capital gains, to investors being liable to pay income tax on dividends received from the company and, in certain circumstances, to investors being required to repay the initial income tax relief on their investment. Mitigation: the 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 Robertson Hare LLP to undertake an independent VCT status monitoring role.
James Ferguson (Chairman) Chris Fleetwood Tim Levett John Waddell
Time Central 32 Gallowgate Newcastle upon Tyne NE1 4SN
T 0191 244 6000 E [email protected] www.nvm.co.uk
NVM Private Equity LLP Time Central 32 Gallowgate Newcastle upon Tyne NE1 4SN
Equiniti Limited Aspect House Spencer Road Lancing BN99 6DA
Equiniti shareholder helpline: 0800 028 2349
Time Central 32 Gallowgate Newcastle upon Tyne NE1 4SN
T 0191 244 6000 E [email protected]
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