AAM.L Regulatory News (AAM)

ARTEMIS VCT PLC

Half-Yearly Report (unaudited) for the six months ended 31 March 2017

This announcement contains regulated information

Chairman's statement

Performance

The Company's net asset value total return was 19.0% for the six months to 31 March 2017. This return, and consistent good performance over the longer term, placed the Company first in the AIC VCT AIM Quoted sector over the period as well as over one, three, five and ten years to 31 March 2017.

Portfolio

Over the period the Investment Manager made disposals of £7.7m. The most material sale was that of Gear4music, which followed a period of very strong share price performance. Almost £3.5m was sold, realising a gain of £2.4m. Overall the Company realised total gains of £4.1m during the period under review.

One new investment was made in the period. ECSC is a cyber security company which provides consulting and managed security services.

Further details of the Company's investment activities are provided in the Investment Manager's review which follows.

Dividend

The strong cash generation from disposals during the reporting period has continued since the period end with encouraging performances by a number of companies in the portfolio. The Manager's investment discipline, which remains central to the running of the portfolio, has again resulted in profits being realised on investments. Against a background of limited attractively priced investment opportunities and the VCT rules no longer allowing follow-on investments, this has resulted in the Company now having a significant cash balance.

The Board has discussed with the Investment Manager the use of this cash for potential investments in the near term, but as there are limited attractive opportunities in which to invest the cash, the Board has decided, in line with its objective of returning funds to shareholders where appropriate, to declare an interim dividend of 2.00p per share and a special dividend of 10.00p per share which will be paid on 30 June 2017, to those shareholders on the register on 9 June 2017.

In aggregate this will result in a payment of approximately £6.4m, which represents almost 15% of the latest net assets of the Company. It should be noted that whilst this payment is a significant proportion of the Company's current net assets, continued strong performance since the period end means that net assets, after payment of the interim dividends, are likely to remain at around the same level as at the Company's last year end (c£38m).

As I have mentioned in previous statements, it remains the Board's view that new investments should take priority over special dividends and should suitable opportunities arise at acceptable valuations, special dividends may not be paid in future.

Share buybacks

During the six months to 31 March 2017 the Company bought back and cancelled 209,301 shares at a cost of £140,658. These shares were bought back at an average discount of 10.1%.

Share buybacks will continue to be made within the guidelines set by the Board, which are reviewed regularly. Under the current policy, the Company will buy back shares at a discount of 10.0% to the last published net asset value. Share buybacks remain subject to the Company having the necessary shareholder authorities in place and having sufficient cash available for this purpose, taking into account the ongoing cash requirements for investment activities and the payment of dividends and operating expenses.

Outlook

The Board and Investment Manager are monitoring, and will continue to monitor, the effects that the impact the UK leaving the European Union may have on businesses and stockmarkets. It remains too early to know what the eventual outcome of the Brexit discussions will be, but as time passes things will inevitably start to become clearer and allow companies to assess what it means for their businesses. Also, it is likely there will be more volatility in stockmarkets, as the wider global political environment evolves following recent elections in France, tensions mounting over North Korea and the establishment of the administration in the US.

A further complication to an already uncertain landscape is the Government's decision to call a general election on the 8 June 2017. From a UK perspective there remains much uncertainty - this is not something that stockmarkets like. That said, while there are many reasons that make investing particularly challenging at this time, the Company has a portfolio of sound businesses that carry on producing good performance. It is to be hoped that these companies can adapt and prosper in the difficult times ahead.

And finally …

I look forward to providing further updates on your Company's performance in the Annual Financial Report published in December.

In the meantime, shareholders can keep up to date with developments between formal reports by visiting the Company's website at artemisvct.co.uk. In addition, the Board is always keen to hear from shareholders. Should you wish to, you can e-mail me at vctchairman@artemisfunds.com.

Fiona Wollocombe

Chairman

30 May 2017

Investment Manager's review

Performance

Against a backdrop of strong equity markets, we are pleased to be able to report further progress with growth of 19.0% in the Company's net asset value on a total return basis. This adds to the Company's longer-term record: total returns over one, three and five years are now 35.4%, 70.2% and 161.5% respectively.

Five largest stock contributors

Five largest stock detractors

Review

We have frequently written about the concentrated nature of the portfolio. We entered the period with 11 holdings each representing 4% or more of the Company's net asset value; together they accounted for just over half of the total assets. Perhaps unsurprisingly, these drove performance with eight performing strongly, two broadly neutral and one material detractor. In aggregate they contributed 16.6% to the Company's net asset value.

Our largest holding, Gear4music, was also the best performing with the shares more than doubling over the six-month period. Having reported sales growth of 73% in the first half of its financial year, we were encouraged yet wary of the critical Black Friday/Christmas trading period. A positive trading update in early January put our minds at ease. Not only did it provide reassurance of the company's growth potential but also - just as importantly - gave us renewed confidence in the management's ability to manage that growth. The final result of £56.0m sales in the year to February 2017 sits well ahead of the expectation of £46.3m set at the time of the IPO, despite the decision not to proceed with a London showroom.

This conservative approach to managing investors' expectations is an attribute we look for in managers so it is no coincidence that our other large holdings are building a similar performance record.

Fulcrum Utility Services' profit before tax ("PBT") forecasts for their financial year to March 2017 rose to £6.6m. A year ago, we were expecting around £5.2m. The company is demonstrating continued momentum in the turnaround we discussed in last year's annual report with margins further improved. Visibility is also improved with an order book of £29.0m - up from £21.8m this time last year.

Keywords Studios has just reported adjusted PBT of €14.9m for the year ended 31 December 2016. At the start of the year, analysts were expecting just €9.6m. Part of this difference has come from the eight acquisitions completed in the year but cautious initial forecasting also played its part. We would expect forecasts to follow a similar path during 2017 although this is now, at least in part, reflected in the valuation of the shares.

Sensible managers are realistic in recognising when market conditions have become more difficult and reflect that in conversations with their investors. Take the UK mortgage market, for example, on which changes to the taxation of buy-to-let properties and depressed housing transactions since the EU referendum have had an impact. When your largest customer in that market is also purposefully ceding market share it makes a difficult situation worse. In that environment, credit must go to ULS Technology for managing to grow first-half profits. While the uplift in operating profits was only modest at 4% we were pleasantly surprised there was any growth at all. Its acquisition of competitor Conveyancing Alliance in December adds scale and further diversifies the customer base, leaving the company well placed for when conditions improve.

When companies fail to manage investors' expectations and miss profit forecasts, the stockmarket can treat them harshly. Instem is a case in point. It raised £5m from investors in February 2016 to fund a number of acquisitions, only to issue a profit warning nine months later. Contract deferrals led it to downgrade profit forecasts for 2016 from £2.2m to an eventual outcome of £0.7m. The shares fell 24% on the day of the warning. They have drifted off further since, as forecasts for 2017 and beyond have been downgraded in recognition that further investment will be required. We are confident this will be the right decision for the long-term health of the business - but it was a surprise to us and to others.

Investment activity

The last six months have been a busy period for transactions. Once again, however, this activity has been more heavily weighted towards disposals - we made just one new qualifying investment.

We invested £850,000 in ECSC, a UK-based cyber security company that provides consulting and managed security services to over 200 clients. The recent proliferation of high-profile security breaches has made cyber security a strategic issue for companies so ECSC's market is growing strongly. With a long record of profitable growth, the IPO raised £5m to allow the company to recruit additional staff and scale the business further to meet the growing demand for its services. Although the investment was only recently completed, the early signs are encouraging. We look forward to updating shareholders on ECSC's progress.

Disposals, meanwhile, totalled £7.7m and included the proceeds from exiting four investments during the period.

We began selling Kalibrate Technologies in September 2016 and concluded our disposal in November. We had become concerned about the company's ability to meet future profit forecasts. Those concerns proved well-founded: a significant profit warning arrived in January 2017. We realised a (very) modest gain on the investment we made in 2013 and, more importantly, averted a material loss by selling when we did - the shares are down 35% from our disposal price.

The other notable disposal was of Belvoir Lettings. This time last year, we mentioned changes in buy-to-let legislation. This was followed in November 2016 by an announcement in the chancellor's Autumn Statement that letting agents would no longer be allowed to charge fees to tenants. As a result, the shares fell. And, with the company having recently taken on debt for acquisitions, we still feel the risks outweigh the potential reward so have sold our holding, generating a realised gain of £146,000.

We also sold our small positions in Photonstar and Imaginatik, as we continue to tidy up the tail of the portfolio. These four disposals totalled £1m, with the remaining £6.7m being generated from our continued profit taking as a result of strong performance across the portfolio.

The most material sale was of Gear4music. This came in response to the good performance mentioned earlier. We sold almost £3.5m, realising a gain of £2.4m while retaining a holding worth £1.0m at the end of the period. All this from an initial investment of £1.3m less than two years ago. Other significant sales included Cohort (£0.8m), Keywords Studios (£0.7m) and Fulcrum Utility Services (£0.6m).

Outlook

Having cautioned on valuations for the last 12 months, we remain wary. If nothing else, the rise in valuations has increased the importance of companies at least meeting - if not beating - profit expectations. There is little margin of safety for those companies that fall short.

Returns over the long term will be determined by the progress of the underlying businesses in which the Company invests - continued outperformance by the majority of our holdings strengthens our confidence in this regard.

Andy Gray

Fund Manager

30 May 2017

Responsibility statement of the Directors in respect of the Half-Yearly Financial Report

The Directors confirm that to the best of their knowledge in respect of the Half-Yearly Financial Report for the six months ended 31 March 2017:

- the condensed set of financial statements has been prepared in accordance with the Financial Reporting Standard ('FRS') 104: 'Interim Financial Reporting';

- having considered the expected cash flows and operational costs of the Company for the 18 months from the period end, the Directors are satisfied that the Company has adequate resources to continue in operational existence for the foreseeable future. For this reason the going concern basis of accounting continues to be used in the preparation of the Half-Yearly Financial Report;

- the Chairman's statement to shareholders and Investment Manager's review includes a fair review of the information required by:

(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of the important events that have occurred during the first six months of the financial year and their impact on the 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 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 financial report that could do so.

The Half-Yearly Financial Report for the six months ended 31 March 2017 was approved by the Board and the above responsibility statement has been signed on its behalf by:

Fiona Wollocombe

Chairman

30 May 2017

Condensed income statement

For the six months ended 31 March 2017

Notes:

The total column of this statement represents the profit and loss account of the Company.

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the period.

The net return for the periods disclosed above represents the Company's total comprehensive income.

Condensed balance sheet

As at 31 March 2017

Condensed statement of changes in equity

For the six months ended 31 March 2017

* The aggregate of these reserves, being £14,558,000, represents the distributable reserves of the Company at 31 March 2017 (31 March 2016: £20,310,000; 30 September 2016: £17,422,000).

Condensed statement of cash flows

For the six months ended 31 March 2017

Notes to the Half-Yearly Financial Report

1. Accounting policies

The financial statements for the six months to 31 March 2017 have been prepared in accordance with the Company's accounting policies as set out in the Annual Financial Report for the year ended 30 September 2016 and are presented in accordance with the Companies Act 2006 (the 'Act'), FRS 104 and the requirements of the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' ('SORP') issued by the Association of Investment Companies (the 'AIC') in November 2014 and updated in January 2017.

The financial information contained within this Half-Yearly Financial Report does not constitute statutory accounts as defined in Sections 434 to 436 of the Act. The financial information for the year ended 30 September 2016 has been extracted from the statutory accounts which have been filed with the Registrar of Companies. The Auditor's report on those accounts was not qualified and did not contain statements under sections 498(2) or (3) of the Act.

2. (Loss)/return per share

(Loss)/return per ordinary share has been calculated based on the weighted average number of ordinary shares in issue for the six months ended 31 March 2017 being 53,254,260 ordinary shares (31 March 2016: 53,878,544; 30 September 2016: 53,694,808).

3. Dividends

An interim dividend for the six months ended 31 March 2017 of 2.00 pence per ordinary share (2016: 2.00 pence) has been declared along with a special dividend of 10.00 pence per ordinary share (2016: 4.00 pence). Both dividends will be paid on 30 June 2017 (2016: 24 June 2016) to those shareholders on the register at close of business on 9 June 2017 (2016: 10 June 2016).

4. Fair value hierarchy

All investments are designated at fair value through profit or loss on initial recognition in accordance with FRS 102. The following table provides an analysis of these investments based on the fair value hierarchy as described below which reflects the reliability and significance of the information used to measure their fair value.

The disclosure is split into the following categories:

Level 1 - Investments with unadjusted quoted prices in an active market;

Level 2 - Investments whose fair value is based on inputs other than quoted prices that are either directly or indirectly observable;

Level 3 - Investments whose fair value is based on inputs that are unobservable (i.e. for which market data is unavailable).

5. Share capital

The net asset value per ordinary share has been calculated based on 53,150,516 ordinary shares in issue (31 March 2016: 53,704,508; 30 September 2016: 53,359,817).

In the six months ended 31 March 2017: 209,301 ordinary shares were bought back and cancelled at a total cost of £141,000 (six months ended 31 March 2016: 269,829 ordinary shares were bought back and cancelled at a total cost of £168,000; year ended 30 September 2016: 614,520 ordinary shares were bought back and cancelled at a total cost of £381,000).

6. Related party transactions

There were no related party transactions during the period.

7. Transactions with the Investment Manager

The investment management fee payable to Artemis Fund Managers Limited for the six months ended 31 March 2017 was £314,000 (31 March 2016: £292,000; 30 September 2016: £580,000) of which £154,000 (31 March 2016: £137,000; 30 September 2016: £141,000) was outstanding at the period end.

8. Principal risks and uncertainties

Pursuant to DTR 4.2.7R of the Disclosure and Transparency Rules, the principal risks faced by the Company include general market price risk, liquidity risk, regulatory risk and operational risk.

These risks, which have not materially changed since the Annual Financial Report for the year ended 30 September 2016, and the way in which they are managed, are described in more detail in the Annual Financial Report which is available on the Company's website at artemisvct.co.uk.

Copies of the Half-Yearly Financial Report will be posted to shareholders shortly and may also be obtained from the Company's website at artemisvct.co.uk.

For further information, please contact:

Artemis Fund Managers Limited

Company Secretary

0131 225 7300