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12 Nov 2019 16:00
Half-year report
12 NOVEMBER 2019
NORTHERN 3 VCT PLC
UNAUDITED HALF-YEARLY FINANCIAL REPORTFOR THE SIX MONTHS ENDED 30 SEPTEMBER 2019
Northern 3 VCT PLC is a Venture Capital Trust (VCT) managed by NVM Private Equity LLP. 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.
Financial highlights (comparative figures as at 30 September 2018 and 31 March 2019)
| Six months ended 30 September 2019 | Six months ended 30 September 2018 | Year ended 31 March 2019 | |
| Net assets | £86.6m | £84.8m | £82.7m |
| Net asset value per share | 92.1p | 94.6p | 94.2p |
| Return per share: Revenue Capital Total | 0.3p (0.1)p 0.2p | 0.8p 3.3p 4.1p | 1.8p 3.8p 5.6p |
| Dividend declared in respect of the period | 2.0p | 2.0p | 4.0p |
| Cumulative return to shareholders since launch: Net asset value per share Dividends paid per share* Net asset value plus dividends paid per share | 92.1p 93.4p 185.5p | 94.6p 89.4p 184.0p | 94.2p 91.4p 185.6p |
| Mid-market share price at end of period | 86.5p | 87.0p | 86.0p |
| Share price discount to net asset value | 6.1% | 8.0% | 8.7% |
| Tax-free dividend yield (based on the net asset value per share)** | 4.2% | 5.6% | 4.3% |
*Excluding interim dividend not yet paid*\* The annualised dividend yield is calculated by dividing the dividends in respect of the 12 month period ended on each reference date by the net asset value per share at the start of the period
For further information, please contact:
NVM Private Equity LLPSimon John/James Bryce 0191 244 6000Website: www.nvm.co.uk
HALF-YEARLY MANAGEMENT REPORT TO SHAREHOLDERS
Results and dividend The unaudited net asset value (NAV) per share at 30 September 2019 was 92.1 pence (31 March 2019 (audited) 94.2 pence). The September figure is stated after deducting the final dividend totalling 2.0 pence per share in respect of the year ended 31 March 2019, which was paid in July 2019 and therefore recognised in the September 2019 half-yearly accounts.
The return per share for the half year as shown in the income statement, before deducting the dividend, was 0.2 pence, compared with a return of 4.1 pence in the six month period ended 30 September 2018.
The profile of the unquoted portfolio is evolving as we continue to acquire investments in earlier stage innovative UK companies with high growth potential. These investments represent 50% by value of the venture capital portfolio, with the remainder constituting investments in more mature businesses. The potential returns from early stage investing are attractive, however the investment holding period required will typically be longer and there may be greater fluctuations in short term results. Paying regular dividends and seeking to sustain the NAV per share are priorities for your board and we have confidence in the potential of the current portfolio to achieve these objectives in the medium to long term.
The directors have declared an unchanged interim dividend of 2.0 pence per share for the year ending 31 March 2020, which will be paid on 24 January 2020 to shareholders on the register at the close of business on 3 January 2020.
Investment portfolioThree new investments were completed during the period for a total consideration of £2.0 million:
Voxpopme (£877,000) – video based consumer insight software, BirminghamQuotevine (£704,000) – asset and automotive management software platform provider, BedfordDuke & Dexter (£382,000) – supplier of premium men’s footwear, London
We continue to allocate a significant proportion of our annual investment activity to providing additional growth capital to our existing portfolio companies. A total of £2.6 million was invested in nine existing portfolio businesses during the period to support their continued development.
Proceeds from investment sales and repayments from the venture capital portfolio amounted to £4.1 million during the period, producing a realised gain over cost of £1.7 million. The most significant transaction related to MSQ Partners Group which was the subject of a secondary management buy-out financed by LDC. This represented an excellent result for Northern 3 VCT, delivering a return of over 2.5 times the original cost over the life of the investment. The transaction was close to completion as at the date of announcement of our last annual report and consequently the level of exit proceeds was reflected in the valuation which had been marked up as at 31 March 2019.
Share offers and liquidityThe board and NVM have undertaken a strategic review of the venture capital portfolio, assessing the progress of each investee company to date. The review considered the potential quantum and timing of capital required in each case to support further growth. We have concluded that there is a significant pipeline of attractive follow-on investment opportunities available to the company. NVM also reports a healthy flow of new businesses seeking capital to develop innovative products or services. In light of the expected strong investment rate in the coming years, your directors plan to launch a share offer in January 2020 to raise up to £13.3 million. If approved, it is intended that all shares to be issued under the offer will be allotted in the 2019-20 tax year.
Share buy-backsWe have maintained our policy of buying back our shares in the market, where necessary to maintain market liquidity, at a discount of 5% to NAV. During the period 1,218,000 shares, were re-purchased for cancellation at a total cost of £1,072,000.
VCT qualifying statusThe company has continued to comply with the conditions laid down by HM Revenue & Customs for the maintenance of approved venture capital trust status. Our manager monitors the position closely and the board also receives regular reports from our specialist taxation advisers.
VCT legislationAmendments to the VCT scheme rules announced in 2017 are still being implemented on a phased basis and as previously reported, from April 2020 your company will be required to hold at least 80% of its funds in VCT qualifying assets (previously 70%). The board and our investment manager are monitoring progress towards this target closely. Having grown accustomed to frequent legislative change in recent years, we were also encouraged that no further amendments to the VCT scheme rules proposed in the most recent Autumn Budget Statement.
ProspectsWe have been operating for some time against a backdrop of political and economic uncertainty and these conditions look set to continue for the time being as the deadline for the UK to leave the European Union has been further extended to accommodate a general election in December.
The earlier stage portfolio represents an increasingly important component of the company’s asset allocation and will take time to mature. Our manager has a good record of dealing with periods of change and we remain confident in their ability to deliver good results for shareholders in the medium to long term.
On behalf of the Board
James FergusonChairman
The unaudited half-yearly financial statements for the six months ended 30 September 2019 are set out below.
INCOME STATEMENT(unaudited) for the six months ended 30 September 2019
| Six months ended30 September 2019 | Six months ended30 September 2018 | |||||||
| Revenue £000 | Capital £000 | Total £000 | Revenue £000 | Capital £000 | Total £000 | |||
| Gain on disposal of investments | - | 45 | 45 | - | 1,868 | 1,868 | ||
| Movements in fair value of investments | - | 448 | 448 | - | 1,563 | 1,563 | ||
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | |||
| - | 493 | 493 | - | 3,431 | 3,431 | |||
| Income | 680 | - | 680 | 1,161 | - | 1,161 | ||
| Investment management fee | (208) | (623) | (831) | (188) | (563) | (751) | ||
| Other expenses | (195) | - | (195) | (186) | - | (186) | ||
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | |||
| Return on ordinary activities before tax | 277 | (130) | 147 | 787 | 2,868 | 3,655 | ||
| Tax on return on ordinary activities | - | - | - | (94) | 94 | - | ||
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | |||
| Return on ordinary activities after tax | 277 | (130) | 147 | 693 | 2,962 | 3,655 | ||
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | |||
| Return per share | 0.3p | (0.1)p | 0.2p | 0.8p | 3.3p | 4.1p | ||
| Dividends paid/proposed in respect of the period | 0.5p | 1.5p | 2.0p | 0.5p | 1.5p | 2.0p | ||
| Year ended 31 March 2019 | ||||||
| Revenue £000 | Capital £000 | Total £000 | ||||
| Gain on disposal of investments | - | 3,204 | 3,204 | |||
| Movements in fair value of investments | - | 1,195 | 1,195 | |||
| ---------- | ---------- | ---------- | ||||
| - | 4,399 | 4,399 | ||||
| Income | 2,541 | - | 2,541 | |||
| Investment management fee | (397) | (1,190) | (1,587) | |||
| Other expenses | (373) | - | (373) | |||
| ---------- | ---------- | ---------- | ||||
| Return on ordinary activities before tax | 1,771 | 3,209 | 4,980 | |||
| Tax on return on ordinary activities | (219) | 219 | - | |||
| ---------- | ---------- | ---------- | ||||
| Return on ordinary activities after tax | 1,552 | 3,428 | 4,980 | |||
| ---------- | ---------- | ---------- | ||||
| Return per share | 1.8p | 3.8p | 5.6p | |||
| Dividends paid/proposed in respect of the period | 1.5p | 2.5p | 4.0p | |||
BALANCE SHEET(unaudited) as at 30 September 2019
| 30 September 2019 £000 | 30 September 2018 £000 | 31 March 2019 £000 | |
| Fixed asset investments | 70,730 | 68,829 | 69,811 |
| ---------- | ---------- | ---------- | |
| Current assets: | |||
| Debtors | 1,067 | 117 | 211 |
| Cash and cash equivalents | 15,177 | 15,903 | 19,405 |
| ---------- | ---------- | ---------- | |
| 16,244 | 16,020 | 19,616 | |
| Creditors (amounts falling due | |||
| within one year) | (330) | (84) | (6,696) |
| ---------- | ---------- | ---------- | |
| Net current assets | 15,914 | 15,936 | 12,920 |
| ---------- | ---------- | ---------- | |
| Net assets | 86,644 | 84,765 | 82,731 |
| ---------- | ---------- | ---------- | |
| Capital and reserves: | |||
| Called-up equity share capital | 4,705 | 4,482 | 4,393 |
| Share premium | 7,198 | 624 | 840 |
| Capital redemption reserve | 360 | 197 | 299 |
| Capital reserve | 64,931 | 68,536 | 65,665 |
| Revaluation reserve | 8,224 | 9,416 | 9,166 |
| Revenue reserve | 1,226 | 1,510 | 2,368 |
| ---------- | ---------- | ---------- | |
| Total equity shareholders’ funds | 86,644 | 84,765 | 82,731 |
| ---------- | ---------- | ---------- | |
| Net asset value per share | 92.1p | 94.6p | 94.2p |
STATEMENT OF CHANGES IN EQUITY
(unaudited) for the six months ended 30 September 2019
| -----------------Non-distributable reserves----------------- | Distributable reserves | Total | |||||
| Called up share capital | Share premium | Capital redemption reserve | Revaluationreserve* | Capital reserve | Revenue reserve | ||
| £000 | £000 | £000 | £000 | £000 | £000 | £000 | |
| At 1 April 2019 | 4,393 | 840 | 299 | 9,166 | 65,665 | 2,368 | 82,731 |
| Return on ordinary activities after tax | - | - | - | (942) | 812 | 277 | 147 |
| Dividends paid | - | - | - | - | (473) | (1,419) | (1,892) |
| Net proceeds of share issues | 373 | 6,358 | - | - | - | - | 6,731 |
| Shares purchased for cancellation | (61) | - | 61 | - | (1,073) | - | (1,073) |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | --------- | |
| At 30 September 2019 | 4,705 | 7,198 | 360 | 8,224 | 64,931 | 1,226 | 86,644 |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | --------- | |
STATEMENT OF CHANGES IN EQUITY
(unaudited) for the six months ended 30 September 2018
| -----------------Non-distributable reserves----------------- | Distributable reserves | Total | ||||||
| Called up share capital | Share premium | Capital redemption reserve | Revaluation reserve* | Capital reserve | Revenue reserve | |||
| £000 | £000 | £000 | £000 | £000 | £000 | £000 | ||
| At 1 April 2018 | 4,483 | 214 | 171 | 8,463 | 69,721 | 1,208 | 84,260 | |
| Return on ordinary activitiesafter tax | - | - | - | 953 | 2,009 | 693 | 3,655 | |
| Dividends paid | - | - | - | - | (2,741) | (391) | (3,132) | |
| Net proceeds of share issues | 25 | 410 | - | - | - | - | 435 | |
| Shares purchasedfor cancellation | (26) | - | 26 | - | (453) | - | (453) | |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | --------- | ||
| At 30 September 2018 | 4,482 | 624 | 197 | 9,416 | 68,536 | 1,510 | 84,765 | |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | --------- | ||
STATEMENT OF CHANGES IN EQUITY
for the year ended 31 March 2019
| -----------------Non-distributable reserves----------------- | Distributable reserves | Total | |||||
| Called up share capital | Share premium | Capital redemption reserve | Revaluationreserve* | Capital reserve | Revenue reserve | ||
| £000 | £000 | £000 | £000 | £000 | £000 | £000 | |
| At 1 April 2018 | 4,483 | 214 | 171 | 8,463 | 69,721 | 1,208 | 84,260 |
| Return on ordinary activities | |||||||
| after tax | - | - | - | 703 | 2,725 | 1,552 | 4,980 |
| Dividends paid | - | - | - | - | (4,512) | (392) | (4,904) |
| Net proceeds of share issues | 38 | 626 | - | - | - | - | 664 |
| Shares purchased | |||||||
| for cancellation | (128) | - | 128 | - | (2,269) | - | (2,269) |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | |
| At 31 March 2019 | 4,393 | 840 | 299 | 9,166 | 65,665 | 2,368 | 82,731 |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | |
\* The revaluation reserve is generally non-distributable other than that part of the reserve relating to gains/losses on readily realisable quoted investments, which is distributable.
STATEMENT OF CASH FLOWS(unaudited) for the six months ended 30 September 2019
| Six months ended | Six months ended | Year ended | ||
| 30 September 2019 | 30 September 2018 | 31 March 2019 | ||
| £000 | £000 | £000 | ||
| Cash flows from operating activities: | ||||
| Return on ordinary activities before tax | 147 | 3,655 | 4,980 | |
| Adjustments for: | ||||
| Gain on disposal of investments | (45) | (1,868) | (3,204) | |
| Movement in fair value of investments | (448) | (1,563) | (1,195) | |
| (Increase)/decrease in debtors | (856) | 50 | (44) | |
| Increase/(decrease) in creditors | 126 | (51) | 68 | |
| ---------- | ---------- | ---------- | ||
| Net cash (outflow)/inflow from operating activities | (1,076) | 223 | 605 | |
| ---------- | ---------- | ---------- | ||
| Cash flows from investing activities: | ||||
| Purchase of investments | (6,789) | (11,378) | (18,342) | |
| Sale/repayment of investments | 6,363 | 8,750 | 15,700 | |
| ---------- | ---------- | ---------- | ||
| Net cash outflow from investing activities | (426) | (2,628) | (2,642) | |
| ---------- | ---------- | ---------- | ||
| Cash flows from financing activities: | ||||
| Issue of ordinary shares | 6,852 | 447 | 702 | |
| Share issue expenses | (120) | (12) | (38) | |
| Share subscriptions held pending allotment | (6,493) | - | 6,493 | |
| Purchase of ordinary shares for cancellation | (1,073) | (453) | (2,269) | |
| Equity dividends paid | (1,892) | (3,132) | (4,904) | |
| ---------- | ---------- | ---------- | ||
| Net cash outflow from financing activities | (2,726) | (3,150) | (16) | |
| ---------- | ---------- | ---------- | ||
| Net decrease in cash and cash equivalents | (4,228) | (5,555) | (2,053) | |
| Cash and cash equivalents at beginning of period | 19,405 | 21,458 | 21,458 | |
| ---------- | ---------- | ---------- | ||
| Cash and cash equivalents at end of period | 15,177 | 15,903 | 19,405 | |
| ---------- | ---------- | ---------- | ||
INVESTMENT PORTFOLIO SUMMARYas at 30 September 2019
| Cost£000 | Valuation£000 | % of net assetsby value | |
| Lineup Systems | 974 | 4,502 | 5.2 |
| Agilitas IT Holdings | 1,135 | 3,817 | 4.4 |
| Sorted Holdings | 2,542 | 3,392 | 3.9 |
| Ideagen* | 541 | 2,190 | 2.5 |
| Currentbody.com | 1,270 | 2,113 | 2.4 |
| SHE Software Group | 1,850 | 2,083 | 2.4 |
| Volumatic Holdings | 906 | 2,038 | 2.4 |
| Knowledgemotion | 1,740 | 1,864 | 2.2 |
| No 1 Lounges | 1,748 | 1,685 | 1.9 |
| It's All Good | 1,131 | 1,636 | 1.9 |
| Entertainment Magpie Group | 1,360 | 1,565 | 1.8 |
| AVID Technology Group | 1,210 | 1,548 | 1.8 |
| Intelling Group | 1,118 | 1,508 | 1.8 |
| Biological Preparations Group | 1,915 | 1,496 | 1.7 |
| Soda Software Labs | 1,464 | 1,464 | 1.7 |
| ---------- | ---------- | ------- | |
| Fifteen largest venture capital investments | 20,904 | 32,901 | 38.0 |
| Other venture capital investments | 31,412 | 26,881 | 31.0 |
| ---------- | ---------- | ------- | |
| Total venture capital investments | 52,316 | 59,782 | 69.0 |
| Listed equity investments | 10,186 | 10,948 | 12.6 |
| ---------- | ---------- | ------- | |
| Total fixed asset investments | 62,502 | 70,730 | 81.6 |
| ---------- | |||
| Net current assets | 15,914 | 18.4 | |
| ---------- | ------- | ||
| Net assets | 86,644 | 100.0 | |
| ---------- | ------- | ||
| *Quoted on AIM |
BUSINESS RISKS
The board carries out a regular and robust review of the risk environment in which the company operates. The principal risks and uncertainties identified by the board which might affect the company’s business model and future performance, and the steps taken with a view to their mitigation, are as follows:
Investment and liquidity risk: investment in smaller and unquoted companies, such as those in which the company invests, involves a higher degree of risk than investment in larger listed companies because they generally have limited product lines, markets and financial resources and may be more dependent on key individuals. The securities of smaller companies in which the company invests are typically unlisted, making them illiquid, and this may cause difficulties in valuing and disposing of the securities. The company may invest in businesses whose shares are quoted on AIM - the fact that a share is quoted on AIM does not mean that it can be readily traded and the spread between the buying and selling prices of such shares may be wide. 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, within the range permitted by the VCT scheme rules. 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 pursue new unquoted investment opportunities and to make follow-on investments in existing portfolio companies. 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, exchange rates 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 may 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, including NVM in the case of AIM-quoted investments, and the board keeps the portfolio and the actions taken 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: while it is the intention of the directors that the company will be managed so as to continue to qualify as a VCT, there can be no guarantee that this status will be maintained. A failure to continue meeting the qualifying requirements could result in the loss of VCT tax relief, the company losing its exemption from corporation tax on capital gains, to shareholders being liable to pay income tax on dividends received from the company and, in certain circumstances, to shareholders being required to repay the initial income tax relief on their investment. Mitigation: the investment 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 Philip Hare & Associates LLP to undertake an independent VCT status monitoring role.
OTHER MATTERS
The unaudited half-yearly financial statements for the six months ended 30 September 2019 do not constitute statutory financial statements within the meaning of Section 434 of the Companies Act 2006, have not been reviewed or audited by the company’s independent auditor and have not been delivered to the Registrar of Companies. The comparative figures for the year ended 31 March 2019 have been extracted from the audited financial statements for that year, which have been delivered to the Registrar of Companies. The auditor’s report on those financial statements (i) was unqualified, (ii) did not include any reference to matters to which the auditor drew attention by way of emphasis without qualifying the report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The half-yearly financial statements have been prepared on the basis of the accounting policies set out in the annual financial statements for the year ended 31 March 2019.
Each of the directors confirms that to the best of his knowledge the half-yearly financial statements have been prepared in accordance with the Statement “Half-yearly financial reports” issued by the UK Accounting Standards Board and the half-yearly financial report includes a fair review of the information required by (a) DTR 4.2.7R of the Disclosure Rules and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of 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 Rules 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 report that could do so.
The directors of the company at the date of this statement were Mr J G D Ferguson (Chairman), Mr C J Fleetwood, Mr T R Levett and Mr J M O Waddell.
The calculation of return per share is based on the return on ordinary activities after tax for the six months ended 30 September 2019 and on 94,579,721 (2018: 89,776,911) ordinary shares, being the weighted average number of shares in issue during the period.
The calculation of the net asset value per share is based on the net assets at 30 September 2019 divided by the 94,101,352 (2018: 89,642,232) ordinary shares in issue at that date.
The interim dividend of 2.0 pence per share for the year ending 31 March 2020 will be paid on 24 January 2020 to shareholders on the register at the close of business on 3 January 2020.
A copy of the half-yearly financial report for the six months ended 30 September 2019 is expected to be posted to shareholders by 27 November 2019 and will be available to the public at the registered office of the company at Time Central, 32 Gallowgate, Newcastle upon Tyne NE1 4SN and on the NVM Private Equity LLP website, www.nvm.co.uk.
Neither the contents of the NVM Private Equity LLP website nor the contents of any website accessible from hyperlinks on the NVM Private Equity LLP website (or any other website) is incorporated into, or forms part of, this announcement.