31 May 2016 10:57
ARTEMIS VCT PLC
Half-Yearly Report (unaudited) for the six months ended 31 March 2016
This announcement contains regulated information
Chairman's statement
Performance
The Company's net asset value total return was 12.4% over the six months to 31 March 2016. This return placed it first out of the nine VCTs in the AIC VCT AIM Quoted sector. Consistently good performance over the longer term means that the Company is also placed first in the sector over the three and five years to 31 March 2016.
Portfolio
Over the period the Investment Manager continued to realise gains on a number of the Company's larger holdings. In addition, the takeover of Vision Direct by Essilor International realised a £2.4 million gain. Overall the Company realised total gains for the six months of £5.6 million.
There was one new investment in the period. Yu Group supplies gas and electricity to small and medium-sized businesses. It was the first investment the Company made under the new VCT rules which passed into legislation in November 2015. While it is difficult at this stage to gauge what effect the new rules have had on deal flow, new investment opportunities at appropriate valuations remained scarce during the period.
Further details of the Company's investment activities are provided in the Investment Manager's review that follows.
Dividend
Against the background of strong cash generation from disposals, as highlighted above, the Board discussed with the Investment Manager the use of this cash for potential investment opportunities in the near term. On the basis that there were no planned new investments, the Board has decided to declare an interim dividend of 2.00 pence per share, along with a special dividend of 4.00 pence per share. In aggregate, this will result in the payment of £3.2 million on 24 June 2016 to those shareholders on the register on 10 June 2016. The payment of the special dividend largely reflects the significant gain the Company made on its investment in Vision Direct.
While the Company recently invested in Yu Group, attractively priced VCT qualifying deals like this remain quite scarce. It is hoped that as the new legislation becomes more widely understood, companies will look to VCTs for capital. The Board, in conjunction with the Investment Manager, will continue to monitor the level of new investment opportunities and this will remain a key factor in determining the level of dividends paid. The position will be reviewed again after the year end, when a decision on the final dividend for the year will be taken.
Share buybacks
During the six months to 31 March 2016 the Company bought and cancelled 269,829 shares at a cost of £168,000. It bought these shares at an average discount of 10.0%.
Share buybacks will continue to be made within the guidelines set by the Board. These guidelines 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. As always, share buybacks will 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
As the UK deals with the slowdown in the global economy, we expect the recent volatility in markets to continue. Added to this is the uncertainty regarding the outcome of the EU referendum and all it means for the UK economy. This is something the Board and the Investment Manager will monitor closely.
Despite these external factors, the majority of the Company's investments are meeting, and sometimes beating, forecasts for growth and profits. It is hoped that, while there may be more volatility in the short term, investors will ultimately see the potential in our portfolio of companies, resulting in further positive returns for shareholders.
And finally …
I look forward to reporting further on the performance of your Company and its portfolio in the Annual Financial Report.
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 fiona.wollocombe@artemisfunds.com.
Fiona Wollocombe
Chairman
31 May 2016
Investment Manager's review
Performance
The last six months have seen investors grappling with concerns over the impact of slowing growth in China on both commodity prices and the wider global economy. The result has been pronounced volatility across financial markets. Meanwhile, worries over the prospect of a Greek exit from the eurozone have given way, for now, to concerns over the coming EU referendum in the UK.
Given this background, we are pleased to report solid progress over the last six months, with a net asset value total return of 12.4%. Of particular interest to us is how the Company's consistent performance translates into its long-term record: total returns over the last three and five years are 78.1% and 86.0%, respectively.
Five largest stock contributors
Company | % of net assets | Contribution (%) |
Fulcrum Utility Services | 6.6 | 4.5 |
Vision Direct | - | 4.2 |
Proactis Holdings | 5.6 | 3.5 |
AB Dynamics | 5.1 | 2.7 |
Dods Group | 5.8 | 2.4 |
Five largest stock detractors
Company | % of net assets | Contribution (%) |
Anpario | 4.3 | (1.2) |
Cambridge Cognition Holdings | 0.8 | (1.1) |
Belvoir Lettings | 2.1 | (0.9) |
MyCelx Technologies | 0.2 | (0.6) |
Rosslyn Data Technologies | 0.6 | (0.6) |
Review
As long-term investors in smaller companies we must accept that their progress rarely follows a straight line, much as we might like it to be otherwise. We wrote on this topic in our annual report in 2013 and believe it is worth revisiting.
Taking Fulcrum Utility Services and Dods Group as examples, both have been strong contributors to performance over the past six months. In both cases this represents a marked change from where they were just three years ago.
In March 2013, Fulcrum Utility Services issued a profit warning, prompting the departure of John Spellman, its chief executive. His successor, Martin Donnachie, initiated a restructuring process with the intention of returning the business to profit. Jump forward three years and expectations are that profits for the year to March 2016 will be more than £4 million. The shares have risen eightfold from their 2013 low and have more than doubled in the last six months alone.
The story with Dods has been similar. In 2013 it reported disappointing results and a sharp decline in profits. After a series of management changes a new chairman, Cheryl Jones, was appointed in September 2014. She set about returning the company to profit, something that was achieved for the six months ended 30 September 2015. That its directors have continued buying even as the share price has risen gives us confidence that Dods' recovery is sustainable.
One company whose progress has followed a straighter line is Vision Direct, which sells contact lenses online. GetLenses, as it was formerly known, has gone from strength to strength since buying Vision Direct, whose name it then adopted. Under the stewardship of chief executive Michael Kraftman, it has established itself as the leader in the UK market, with strong growth in sales and excellent customer service driving high levels of repeat business. In February 2016, just over two years since our initial investment, the company received a takeover approach from Essilor International. The bid was recommended by Vision Direct's board and concluded later the same month. We received disposal proceeds of £3.2 million, realising a sizeable gain on our investment of £750,000.
AB Dynamics has also risen steadily since its IPO three years ago. The company has built its success by developing and marketing test and measurement systems for car manufacturers. A recent trading update confirmed that the momentum continues, justifying the doubling of the share price in the period.
Elsewhere, Proactis Holdings has been among the Company's three largest holdings since August 2014 and has been a consistently strong performer in that time. We have long considered its shares to be undervalued. A rise of almost 53% in its share price during the period begins, in our view, to recognise the progress the company and its management team have made.
Turning to the underperformers, one of Cambridge Cognition Holdings' major customers in the pharmaceutical industry deferred a contract, pushing it into a loss. This is the latest setback in what has been a volatile period for the company since its IPO in 2013.
Aside from Cambridge Cognition, the other largest sources of underperformance were two companies who, while remaining profitable, have yet to deliver what we consider to be their full potential. In recent years, Anpario has refocused its business on high-margin natural feed additives. Growth in its top line has, however, been elusive. The chairman, Richard Edwards, has now stepped in as chief executive with a renewed focus on increasing revenues. Although this will require some investment upfront, we consider it a necessary step if the business is to be developed further. Belvoir Lettings, meanwhile, has recently embarked on a 'multi-brand' strategy, having acquired the Newton Fallowell and Goodchilds franchised networks in 2015. While the early results have been encouraging, we are mindful that recent legislative changes may have an impact on the buy-to-let market.
Investment activity
Activity in the last six months has mirrored previous periods. Although new investments were limited, we continued to make disposals to manage the Company's exposure to individual holdings.
There has been considerable uncertainty surrounding the prospects for new investments across the VCT industry since the introduction of new rules in November. We are, therefore, pleased to be able to report having made our first new investment under the new regulations. In March, we invested in Yu Group, an independent supplier of gas and electricity focused on servicing small and medium-sized ('SME') businesses in the UK. The UK energy market continues to be dominated by the 'big six' suppliers who command approximately 90% of the SME market. As such there is a substantial opportunity for new entrants, such as Yu Group, to win market share. It has grown quickly and entered 2016 with booked sales of £8.4 million. We believe that the funds it raised through its IPO leave it well positioned to exploit this opportunity and achieve significant growth.
The largest single disposal resulted from Essilor International's aforementioned takeover of Vision Direct. We would like to thank Michael Kraftman and his team for their efforts and wish them every success in the future.
The balance of our disposals represented profit taking across a number of the Company's best-performing investments. Proactis and Cohort were our largest investments at the start of the period and, although we remain optimistic about their prospects, we felt that their weightings (each accounted for over 7% of net assets) were too high. Despite disposal proceeds of £2.25 million and £1.1 million respectively, both remain large holdings. Similarly, thanks to its strong performance Fulcrum Utility Services ended the period as our largest holding. We sold a further £1 million of shares during the reporting period and have continued to actively reduce the holding since the period end.
Our only outright sale in the period was Amino Technologies. At the start of 2015, it was one of our top five holdings, representing 4.6% of net assets. Management had done a terrific job rebuilding the business but we did worry that the characteristics of the industry, with high levels of competition and low earnings visibility, were no longer being reflected in the rating of the shares. The profit warning it announced in October bore out those concerns. So although we had reduced the holding to 1.6% of assets, we clearly had not gone far enough. We have now sold our remaining shares.
Outlook
The portfolio has ridden out the recent volatility in global financial markets well, delivering consistent returns. But with the EU referendum looming we are braced for a tougher six months ahead. The fundamentals of our holdings remain strong. In some cases, however, this has come to be reflected in their valuations, potentially making them more vulnerable to negative sentiment.
On the whole we feel the portfolio remains well positioned, with a decent spread of profitable, growing and well financed companies. Although we do not think they will be entirely immune, we remain confident that our companies and their management teams are capable of continuing to build their businesses even amid the wider uncertainty.
Andy Gray
Fund Manager
31 May 2016
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 2016:
(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 2016 was approved by the Board and the above responsibility statement has been signed on its behalf by:
Fiona Wollocombe
Chairman
31 May 2016
Condensed income statement
For the six months ended 31 March 2016
| Six months ended | Six months ended | Year ended | ||||||
| 31 March 2016 | 31 March 2015 | 30 September 2015 | ||||||
| (unaudited) | (unaudited) | (audited) | ||||||
| Revenue | Capital | Total | Revenue | Capital | Total | Revenue | Capital | Total |
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
Gains on investments | - | 4,773 | 4,773 | - | 1,200 | 1,200 | - | 5,017 | 5,017 |
Investment income | 249 | - | 249 | 175 | - | 175 | 430 | - | 430 |
Other income | 11 | - | 11 | 6 | - | 6 | 15 | - | 15 |
Investment management fee | (73) | (219) | (292) | (76) | (228) | (304) | (152) | (456) | (608) |
Other expenses | (110) | - | (110) | (116) | - | (116) | (253) | (1) | (254) |
Return/(loss) on ordinary activities before taxation | 77 | 4,554 | 4,631 | (11) | 972 | 961 | 40 | 4,560 | 4,600 |
Taxation on ordinary activities | -
| -
| -
| -
| -
| -
| -
| -
| -
|
Return/(loss) on ordinary activities after taxation | 77
| 4,554
| 4,631
| (11)
| 972
| 961
| 40
| 4,560
| 4,600
|
Return/(loss) per ordinary share | 0.15p | 8.45p | 8.60p | (0.02)p | 1.77p | 1.75p | 0.07p | 8.35p | 8.42p |
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 Company has no recognised gains and losses other than those shown above and therefore no separate Statement of Comprehensive Income has been presented.
Condensed balance sheet
As at 31 March 2016
| As at 31 March 2016 (unaudited) £'000 | As at 31 March 2015 (unaudited) £'000 | As at 30 September 2015 (audited) £'000 |
Fixed assets |
|
|
|
Investments held at fair value through profit or loss | 31,588
| 34,643
| 35,071
|
Current assets |
|
|
|
Cash and cash equivalents | 5,411 | 5,059 | 4,129 |
Debtors | 247 | 34 | 38 |
| 5,658 | 5,093 | 4,167 |
Creditors (amounts failing due within one year) | (246) | (226) | (236) |
Net assets | 37,000 | 39,510 | 39,002 |
Capital and reserves |
|
|
|
Share capital | 5,371 | 5,450 | 5,398 |
Share premium | 2,828 | 2,828 | 2,828 |
Special reserve | 2,890 | 13,630 | 9,523 |
Capital reserve - realised | 17,343 | 9,398 | 12,004 |
Capital reserve - unrealised | 5,978 | 5,781 | 6,763 |
Capital redemption reserve | 2,513 | 2,434 | 2,486 |
Revenue reserve | 77 | (11) | - |
Shareholders' funds | 37,000 | 39,510 | 39,002 |
Net asset value per ordinary share | 68.90p | 72.49p | 72.26p |
Condensed statement of changes in equity
For the six months ended 31 March 2016
| For the six months ended 31 March 2016 (unaudited) | ||||||||
| Share capital £'000 | Share premium £'000 | Special reserve* £'000 | Capital reserve - realised* £'000 | Capital reserve - unrealised £'000 | Capital redemption reserve £'000 | Revenue reserve* £'000 | Total £'000 | |
At 30 September 2015 | 5,398 | 2,828 | 9,523 | 12,004 | 6,763 | 2,486 | - | 39,002 | |
Repurchase of ordinary shares | (27) | - | (168) | - | - | 27 | - | (168) | |
Return on ordinary activities after taxation | - | - | - | 2,171 | 2,383 | - | 77 | 4,631 | |
Transfer on disposal of investments | - | - | - | 3,168 | (3,168) | - | - | - | |
Dividends paid | - | - | (6,465) | - | - | - | - | (6,465) | |
At 31 March 2016 | 5,371 | 2,828 | 2,890 | 17,343 | 5,978 | 2,513 | 77 | 37,000 | |
|
|
|
|
|
|
|
|
| |
| For the six months ended 31 March 2015 (unaudited) | ||||||||
| Share capital £'000 | Share premium £'000 | Special reserve* £'000 | Capital reserve - realised* £'000 | Capital reserve - unrealised £'000 | Capital redemption reserve £'000 | Revenue reserve* £'000 | Total £'000 | |
At 30 September 2014 | 5,546 | 2,828 | 15,349 | 7,881 | 6,326 | 2,338 | - | 40,268 | |
Repurchase of ordinary shares | (96) | - | (617) | - | - | 96 | - | (617) | |
Return/(loss) on ordinary activities after taxation | - | - | - | 432 | 540 | - | (11) | 961 | |
Transfer on disposal of investments | - | - | - | 1,085 | (1,085) | - | - | - | |
Dividends paid | - | - | (1,102) | - | - | - | - | (1,102) | |
At 31 March 2015 | 5,450 | 2,828 | 13,630 | 9,398 | 5,781 | 2,434 | (11) | 39,510 | |
|
|
|
|
|
|
|
|
| |
| For the year ended 30 September 2015 (audited) | ||||||||
| Share capital £'000 | Share premium £'000 | Special reserve* £'000 | Capital reserve - realised* £'000 | Capital reserve - unrealised £'000 | Capital redemption reserve £'000 | Revenue reserve* £'000 | Total £'000 | |
At 30 September 2014 | 5,546 | 2,828 | 15,349 | 7,881 | 6,326 | 2,338 | - | 40,268 | |
Repurchase of ordinary shares | (148) | - | (966) | - | - | 148 | - | (966) | |
Return on ordinary activities after taxation | - | - | - | 1,747 | 2,813 | - | 40 | 4,600 | |
Transfer on disposal of investments | - | - | - | 2,376 | (2,376) | - | - | - | |
Dividends paid | - | - | (4,860) | - | - | - | (40) | (4,900) | |
At 30 September 2015 | 5,398 | 2,828 | 9,523 | 12,004 | 6,763 |
2,486 | - | 39,002 | |
* The aggregate of these reserves, being £20,310,000, represents the distributable reserves of the Company at 31 March 2016 (31 March 2015: £23,017,000; 30 September 2015: £21,527,000).
Condensed statement of cash flows
For the six months ended 31 March 2016
| Six months ended 31 March 2016 (unaudited) £'000 | Six months ended 31 March 2015 (unaudited) £'000 | Year ended 30 September 2015 (audited) £'000 |
Operating activities |
|
|
|
Return on ordinary activities before taxation | 4,631 | 961 | 4,600 |
Gains on investments | (4,773) | (1,200) | (5,017) |
Decrease in other debtors | 11 | 11 | 1 |
Decrease in other creditors | (40) | (20) | (10) |
Net cash outflow from operating activities | (171) | (248) | (426) |
Investing activities |
|
|
|
Purchase of investments | (881) | (855) | (2,263) |
Sale of investments | 8,917 | 4,929 | 9,732 |
Net cash inflow from investing activities | 8,036 | 4,074 | 7,469 |
Financing activities |
|
|
|
Dividends paid | (6,465) | (1,102) | (4,900) |
Repurchase of ordinary shares | (118) | (742) | (1,091) |
Net cash outflow from financing activities | (6,583) | (1,844) | (5,991) |
Net increase in cash and cash equivalents | 1,282 | 1,982 | 1,052 |
Cash and cash equivalents at the start of the period | 4,129 | 3,077 | 3,077 |
Cash and cash equivalents at the end of the period | 5,411 | 5,059 | 4,129 |
Notes to the Half-Yearly Financial Report
1. Accounting policies
The financial statements 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 2015 and are presented in accordance with the Companies Act 2006 (the 'Act') and the requirements of the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' ('SORP') issued by the AIC in November 2014. The updated SORP reflects the changes arising from the adoption of FRS 102, which the Company is required to comply with for the first time for the year ending 30 September 2016. The Company has also adopted the requirements of FRS 104 for the first time in the production of this Half-Yearly Financial Report.
Aside from the additional disclosure of the fair value hierarchy of the Company's investments (see note 4) and a change to the presentation of the condensed statement of cash flows, no other material changes have arisen from the adoption of the new standards above.
In addition to these changes, on 3 March 2016 an amendment was made to the fair value hierarchy requirements of FRS 102, which is effective for accounting periods beginning on or after 1 January 2017. This change has been adopted early, as permitted, for the financial statements for the six months ended 31 March 2016.
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 2015 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. Return/(loss) per ordinary share
The return/(loss) per ordinary share has been calculated based on the weighted average number of ordinary shares in issue for the six months ended 31 March 2016 being 53,878,544 ordinary shares (31 March 2015: 54,990,117; 30 September 2015: 54,602,633).
3. Dividends
An interim dividend for the six months ended 31 March 2016 of 2.00 pence per ordinary share (2015: 2.00 pence) has been declared along with a special dividend of 4.00 pence per ordinary share (2015: 5.00 pence). Both dividends will be paid on 24 June 2016 (2015: 26 June 2015) to those shareholders on the register at close of business on 10 June 2016 (2015: 5 June 2015).
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).
|
31 March 2016 £'000 |
31 March 2015 £'000 | 30 September 2015 £'000 |
Level 1 | 31,092 | 31,364 | 32,713 |
Level 3 | 496 | 3,279 | 2,358 |
Total value of investments | 31,588 | 34,643 | 35,071 |
5. Share capital
The net asset value per ordinary share has been calculated based on 53,704,508 ordinary shares in issue (31 March 2015: 54,502,596; 30 September 2015: 53,974,337).
In the six months ended 31 March 2016 269,829 ordinary shares were bought back and cancelled at a total cost of £168,000 (six months ended 31 March 2015: 956,277 ordinary shares were bought back and cancelled at a total cost of £617,000; year ended 30 September 2015: 1,484,536 ordinary shares were bought back and cancelled at a total cost of £966,000).
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 2016 was £292,000 (31 March 2015: £304,000; 30 September 2015: £608,000) of which £137,000 (31 March 2015: £150,000; 30 September 2015: £149,000) 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 2015, 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