FRAMLINGTON INNOVATIVE GROWTH TRUST PLC - Final Results
Sep 10, 2009 (PR Newswire Europe via COMTEX) --
Company: Framlington Innovative Growth Trust PLC (THGTF)
Framlington Innovative Growth Trust PLC
Results for the year ended 30 June 2009
Chairman's statement
In this statement covering the Company's results for the year ended 30 June
2009, I have to report on an extremely difficult period for Smaller Companies
and a disappointing year for your Company.
Smaller Companies as represented by our benchmark, the FTSE SmallCap (ex
investment companies) index, fell during the year by 24.2%. Our net asset value
per share (NAV) underperformed this, falling by 31.5% contrasting with the
previous year when our benchmark fell by 35.6% and our NAV outperformed falling
by 25.7%.
At the interim stage the benchmark had dropped by 39%, but there was a welcome,
if incomplete, element of recovery in the second half of the year, when the
index recorded a 24.1% rise from its level at 31 December 2008. The Company's
NAV, however, lagged this recovery, although in absolute terms it rose by 12.2%
during this six month period. The shortfall in performance was more than wholly
explained by market conditions in April, when despite our NAV rising 15% in a
single month it was not able to keep up with the benchmark's 31% gain. Our
investment manager describes this event in more detail later in this report.
The calendar year 2008 has been described as an "annus horribilis" for UK
Smaller Companies and as we started this financial year half way through 2008,
the economic and market conditions could hardly have been more challenging.
A global banking crisis, which has been commented on at length elsewhere,
precipitated one of the worst periods for investors in living memory. We had,
as a result, huge Government interventions globally with interest rates cut to
300 year lows close to zero, fiscal stimulus packages, state sponsored support
for bank rescues and finally quantitative easing (involving the Bank of England
"printing money" to buy assets from the private sector).
In response to these unprecedented measures, by spring 2009, the rate of
decline in activity had begun to slow and we saw a major recovery across all
equity markets.
Investors had previously bought large, liquid and defensive stocks during the
first half of our financial year, ignoring the low valuations of smaller
companies. When confidence began to turn the corner, the relative
outperformance by larger companies was reversed, as investors seized upon
opportunities in the oversold mid and small cap company sectors. This reversal
in risk aversion reopened the capital markets and allowed some of the most
financially stretched firms to raise finance from investors rather than their
unwilling bankers.
A more detailed account of how these conditions affected your Company's
investments during the financial year is contained in the investment manager's
report immediately following this statement.
Dividends
In my interim statement of 27 February 2009, I commented on the recovery of GBP
3.6 million of VAT paid by the Company on its management fees in past years and
the receipt of GBP0.67 million of interest on this recovery. These amounts have
contributed to the Company's revenue return for the year being well ahead of
last year's result.
I am pleased to report that as a result the board is recommending payment of a
special dividend of 7.50 pence per share. We are also proposing an increase of
4% in the final dividend for the year, to 6.25 pence per share, making a total
dividend for the year of 13.75 pence per share. This compares with the 8.50
pence (of which 2.50 pence was a special dividend) last year. If approved by
shareholders at the Annual General Meeting on 29 October 2009, the dividends
will be paid on 5 November to shareholders on the register on 2 October.
Share buy backs and discount management
It remains the board's policy to buy back the Company's shares when we consider
this to be in the interests of shareholders as a whole. This year, we bought
back 340,500 shares during the year, a fairly modest number compared with some
previous years. As noted in the interim statement, the board felt that, in
prevailing market conditions, large scale buy backs would be less effective in
terms of an uplift to the net asset value than in normal conditions, due to the
lack of liquidity in smaller company shares, and would not achieve a worthwhile
lasting reduction in the discount at which the Company's shares trade. I am
pleased to note that the discount has fallen from 28.1% (30.9% on a cum income
basis) at 31 December 2008 to 15.9% (20.1% on a cum income basis) at 30 June
2009 compared with the average discount for our peer group of 15.1%, but we
still consider that this level of discount is wider than is warranted by the
Company's long tem performance.
Outlook
The positive sentiment across equity markets has continued into our new
financial year. The magnitude of the rise in markets since the March lows not
only reflects the extreme levels of risk aversion at that time, exacerbated by
the illiquidity of smaller companies, but also suggests that forecasts for
corporate earnings had become too low. However, we should not forget that the
smaller company area is more dependent on domestic activity than the market
overall and the recovery in the UK is expected to be relatively anaemic, not
least because the dire state of the Government finances is likely to lead to
spending reductions and increased taxation, whichever party wins the next
General Election. This will restrain domestic consumption.
A less volatile economic backdrop is welcome and is one in which longer term
investment opportunities should arise. Therefore, a carefully chosen balanced
portfolio of quality companies having sound balance sheets and strong cash
flow, with investments made at realistic prices, should leave the Company well
placed as the economy slowly recovers.
John Cornish
Chairman
10 September 2009
Investment manager's report
In reviewing the financial year just past I have looked at some comments from
my peers. They range from "unprecedented" to "amongst the worst in half a
century". I concur with these statements; there has been nowhere to hide for
the smaller company investor. Fundamentals, valuation and management strength
counted for nothing as investors in late 2008 rushed out of smaller companies
for the perceived defensive qualities of larger companies, forgetting that the
problems were global not just UK-centric.
The Chairman has reported on the performance of the Company for the year and I
feel equally disappointed that the year ended 30 June 2009 has been a year of
underperformance of our benchmark index, only our second in the last 17 years.
The near collapse of the banking industry and creation of Government controlled
entities has created one major benefit, namely fewer companies going under than
we would have expected. Traditionally the most heavily indebted would be saved
whilst those who owed banks lesser amounts would have had their facilities
withdrawn. Instead much higher arrangement fees and higher margins are being
demanded by the banks for companies that wish to avoid the equity dilution
entailed in issuing shares at depressed levels.
The Company's fortunes were very different over the two halves of the financial
year. During the first half, preservation of cash and limitation of asset
erosion were uppermost in mind. Shareholders will remember that at the time of
our interim report our benchmark index had fallen by nearly 39% since 1 July
2008. The Company's Net Asset Value performed broadly in line over this period,
despite being predominantly invested in companies at the smaller end of the
size spectrum, which were worse affected by market liquidity factors.
During this time many pundits were talking of a "depression" rather than a
"recession" and investor appetite for risk was effectively non-existent. Poor
liquidity and constantly reducing corporate earnings forecasts became the norm,
while any share prices that were holding up were quickly hit, as investors
tried to raise cash. Our investments in Braemar Shipping Services, Aveva Group
and the aerospace stocks Umeco and Hampson Industries bore the brunt, while the
latter two were also affected by a strike at Boeing.
Although we remained fully invested through this storm believing that prices
had overshot, the second half of the year, when markets rose, was when the
Company suffered the majority of its underperformance against the benchmark.
Although the NAV rose by 18% between February and June, the index rose by an
astonishing 33%.
The shortfall in performance against the index arose from investments that the
Company did not hold rather than the ones it did. It has always been our
investment policy to purchase sound companies with strong management to create
performance for the medium term and not to speculate on short term changes in
fashion. Whilst this has proved beneficial over the long term, it was a
hindrance during April, when the market bounced strongly, led by stocks which
had recently been demoted from the mid cap universe. The effect of not holding
a number of these former FTSE 250 stocks created a performance gap that could
not be closed by the Company's year end on 30 June 2009. The share prices of
Laird, Punch Taverns, Trinity Mirror, SIG and Yell, which accounted for over
10% of the index, rose, on average, 169%, and contributed nearly 17% of the
index's 31% rise in April. This largely explains the fact that despite your
Company's NAV rising by 15% in that month, it lagged the rise in the benchmark.
The majority of these companies were well above our market capitalisation remit
and all were heavily geared, so they were not natural investment candidates for
us. Naturally, we are disappointed to have underperformed but believe that
shareholders will understand the peculiar circumstances of this period.
Outlook
Following the positive gains between March and June, the new financial year has
started positively with smaller companies' share prices moving ahead and it
would appear that the economy and markets have passed the worst. Company
forecasts are being met, albeit on the back of cost cutting, and results
statements have become less negative. Liquidity remains very tight, however,
and the increasing appetite for risk continues to cause major share prices
gyrations on little volume. In the near term, some of the rises in poorer
quality stocks which we would not want to hold in our portfolio appear
exaggerated as a result.
The future prosperity of smaller companies is linked to domestic economic
strength and we look forward to a more stable economic backdrop. We remain
committed to our prudent investment policy and view the opportunities arising
from the maelstrom of 2008-09 as exceptional from the point of view of long
term investors seeking to capitalise on lower valuations.
Brian Watson
AXA Framlington
10 September 2009
Income statement
Year ended 30 June 2009
Revenue Capital
Return Return Total
GBP000s GBP000s GBP000s
Realised losses on investments - (2,052) (2,052)
Unrealised losses on investments - (36,075) (36,075)
Income 3,458 - 3,458
Investment management fee (313) 644 331
Refund of VAT 1,259 2,390 3,649
Other expenses (395) - (395)
Net return/(loss) before finance costs 4,009 (35,093) (31,084)
and taxation
Interest payable and similar charges (283) (283) (566)
Return/(loss) on ordinary activities 3,726 (35,376) (31,650)
before taxation
Taxation on ordinary activities - - -
Return/(loss) attributable to equity 3,726 (35,376) (31,650)
shareholders
Return/(loss) per ordinary share: 14.81p (140.60)p (125.79)p
Basic
Year ended 30 June 2008
Revenue Capital
Return Return Total
GBP000s GBP000s GBP000s
Realised gains on investments - 21,823 21,823
Unrealised losses on investments - (65,637) (65,637)
Income 3,608 - 3,608
Investment management fee (519) (1,339) (1,858)
Other expenses (258) - (258)
Net return /(loss) before finance 2,831 (45,153) (42,322)
costs and taxation
Interest payable and similar charges (276) (276) (552)
Return /(loss) on ordinary activities 2,555 (45,429) (42,874)
before taxation
Taxation on ordinary activities - - -
Return /(loss) attributable to equity 2,555 (45,429) (42,874)
shareholders
Return /(loss) per ordinary share:
Basic 9.58p (170.29)p (160.71)p
All revenue and capital items in the above statement derive from continuing
operations.
The total column of this statement is the profit and loss account of the
Company.
In addition to the loss for the financial year shown above of GBP31,650,000
(2008: GBP42,874,000) there was also an unrealised loss on the interest rate swap
agreement amounting to GBP697,000 (2008: gain GBP167,000). Thus the total
recognised loss for the year was GBP32,347,000 (2008: GBP42,707,000).
Reconciliation of Movement in Shareholders' Funds
Share Capital Capital Capital
Share Premium Special Redemption Hedging Reserve Reserve Revenue
Capital Account Reserve Reserve Reserve Unrealised Realised Reserve Total
GBP000s GBP000s GBP000s GBP000s GBP000s GBP000s GBP000s GBP000s GBP000s
Balance at 7,377 37,876 - 5,569 - 74,069 40,879 4,969 170,739
30 June 2007
Dividends - - - - - - - (1,515) (1,515)
paid during
year re 2007
Movement in - - - - 167 - - - 167
fair value
of interest
rate swap
Return - - - - - (66,594) 21,165 2,555 (42,874)
attributable
to equity
shareholders
in 2008
Shares (1,070) - - 1,070 - - (18,070) - (18,070)
repurchased
by the
company in
2008
Balance at 6,307 37,876 - 6,639 167 7,475 43,974 6,009 108,447
30 June 2008
Final - - - - - - - (1,514) (1,514)
dividend
paid during
year re 2008
Special (630) (630)
dividend
paid during
year re 2008
Movement in - - - - (697) - - - (697)
fair value
of interest
rate swap
Cancellation - (37,876) 37,876 - - - - - -
of share
premium
account
Return - - - - - (35,118) (258) 3,726 (31,650)
attributable
to equity
shareholders
in 2009
Shares (85) - (467) 85 - - (247) - (714)
repurchased
by the
company in
2009
Balance at 6,222 - 37,409 6,724 (530) (27,643) 43,469 7,591 73,242
30 June 2009
Balance Sheet as at 30 June
2009 2008
GBP000s GBP000s GBP000s GBP000s
Fixed assets 75,286 106,054
Investments held at fair
value through profit or loss
Current assets
Debtors 1,829 757
Cash at bank 5,762 11,423
7,591 12,180
Creditors: amounts falling
due
within one year (1,635) (830)
Net current assets 5,956 11,350
Total assets less current 81,242 117,404
liabilities
Creditors: amounts falling
due after
more than one year (8,000) (8,957)
Net assets 73,242 108,447
Share capital and reserves
Called up share capital 6,222 6,307
Share premium account - 37,876
Special reserve 37,409 -
Other reserves
Capital redemption reserve 6,724 6,639
Capital reserve - unrealised (27,643) 7,475
Capital reserve - realised 43,469 43,974
Hedging reserve (530) 167
22,020 58,255
Revenue reserve 7,591 6,009
Total equity shareholders' 73,242 108,447
funds
Net asset value per share:
Basic 294.29p 429.86p
Cash Flow Statement for the year ended 30 June
2009 2008
GBP000s GBP000s
Net cash inflow from operating activities 6,327 1,190
Servicing of finance
Interest paid (566) (630)
Capital expenditure and financial investment
Net (purchases)/sales of investments (8,774) 29,042
Equity dividends
Dividends paid (2,144) (1,515)
Net cash (outflow)/inflow before financing (5,157) 28,087
Financing
Repurchase of shares (504) (21,601)
Net cash outflow from financing (504) (21,601)
(Decrease) /increase in cash (5,661) 6,486
Notes:
1. The financial information set out in the announcement does not constitute
the Company's statutory accounts for the years ended 30 June 2009 or 2008.
2. The statutory accounts for the year ended 30 June 2009 have been prepared
on the basis of the financial information presented by the directors in
this announcement and will be delivered to the Registrar of Companies
following the Company's annual general meeting. The financial information
for the year ended 30 June 2008 is derived from the statutory accounts for
that year which have been delivered to the Registrar of Companies. The
auditors reported on those accounts; their report was unqualified and did
not contain any emphasis of matter or a statement under s237(2) or (3)
Companies Act 1985.
3. The financial information has been prepared on the basis of the accounting
policies set out in the Company's financial statements for the year ended
30 June 2008 which are also adopted in the financial statements for the
year ended 30 June 2009.
4. The board recommend the payment of a final dividend of 6.25 pence and a
special dividend of 7.50 pence per share in respect of the year ended 30
June 2009 (2008: final dividend of 6.00 pence and special dividend of 2.50
pence per share). Subject to approval by shareholders at the annual general
meeting on 29 October 2009, the dividend will be paid on 5 November 2009 to
shareholders on the register on 2 October 2009.
5. Income
Year ended Year ended
30 June 2009 30 June 2008
GBP000s GBP000s
Income from UK investments* 2,535 3,236
Other income
Bank interest 254 370
Interest on VAT repayment 666 -
Underwriting commission 3 2
923 372
Total income 3,458 3,608
Income from investments
Listed UK 2,069 2,592
AIM listing 466 644
2,535 3,236
*Includes a special dividend of GBP415,000 received on the Company's shareholders
in Air Partners in 2008.
6. Investment management fee
Year to Year to
30 June 2009 30 June 2008
GBP000s GBP000s
Investment management fee 626 1,038
Less amount charged to capital (313) (519)
Investment management fee charged to 313 519
revenue
Investment management fee charged to 313 519
capital
Movement in the provision for (957) 957
performance-related fee charged to capital
Write-back of VAT on performance fee paid - (137)
after 30 June 2007
Total (write back)/charge to capital (644) 1,339
Total investment management fee (331) 1,858
The annual management fee and the interest cost of the fixed term bank loan
facility have been allocated 50% to revenue account and 50% to capital account.
The provision for the performance-related fee is calculated on the cumulative
performance from 1 July 2007 to 30 June 2009 and is charged 100% to capital
account. The provision amounted to GBPnil at 30 June 2009 (2008: GBP957,000). The
actual fee payable will be calculated on performance over the three years to 30
June 2010. The balance due to the Manager at the year end was GBPnil for the
performance-related fee (2008: GBPnil) and GBP156,000 for management fees (2008: GBP
230,000).
In November 2008, an amount of GBP3.6 million was received from AXA Framlington
Investment Management Limited, the investment manager, in respect of its claim
against HM Revenue and Customs ("HMRC") for the recovery of VAT paid between
1992 to 1996 and 2001 to 2007 on management fees charged to the Company. This
benefit, which on the grounds of uncertainty had not been previously recognised
as an asset by the Company, added 14.46 pence per share to the net asset value.
Interest of GBP0.67 million on this amount was received from HMRC in February
2009. The write-back of VAT of GBP137,000, in 2008, represents VAT on the part of
the performance fee for the period to 30 June 2007 which was paid after that
date, by which time confirmation had been received from HM Revenue & Customs
that investment trusts should not be liable to VAT on their management fees.
7. Return/(loss) per ordinary share
Year to Year to
30 June 2009 30 June 2008
GBP000s GBP000s
Revenue return 3,726 2,555
Capital loss (35,376) (45,429)
Total (31,650) (42,874)
Weighted average number of ordinary shares 25,160,459 26,677,117
in issue during the period
Revenue return per ordinary share 14.81p 9.58p
Capital loss per ordinary share (140.60)p (170.29)p
Total loss per ordinary share (125.79)p (160.71)p
The Company does not have any dilutive securities.
8. Called up share capital
During the year ended 30 June 2009, the Company bought back 340,500 shares for
consideration of GBP712,000 (year ended 30 June 2008: 4,280,849 for a total
consideration of GBP18,070,000). The number of ordinary shares in issue at 30
June 2009 was 24,888,001 (2008: 25,228,501).
9. Net asset value per share
The net asset value per share and the net assets attributable to the ordinary
shares at the period end calculated in accordance with the Company's Articles
of Association were as follows:
30 June 2009 30 June 2008
Net assets attributable to ordinary GBP73,242,000 GBP108,447,000
shareholders
Ordinary shares in issue 24,888,001 25,228,501
Net asset value per share 294.29p 429.86p
10. Related Parties Transactions
Under a management agreement dated 13 December 2007, AXA Framlington Investment
Management Limited ("FIM" or, to 31 May 2009, the "Manager") was appointed as
investment manager to manage and advise the Company and provide accounting,
secretarial, office and administrative services. With effect from 1 June 2009,
the contract was novated to AXA Investment Managers UK Limited ("AXA IM UK" or,
from 1 June 2009, the "Manager"), another company within the AXA Investment
Managers group. The terms of the contract were not changed.
The Manager is paid a quarterly investment management and administrative fee of
0.2% of the total assets less current liabilities. A performance fee is payable
if the change in the net asset value over a three year period exceeds the
movement in the FTSE SmallCap (excluding Investment Companies) Index by a
hurdle of 1% per annum, at the rate of 12.5% of the excess. The contract is
terminable on one year's notice.
As at 10 September 2009, the directors had the following interests in the
Company's shares:
A Bell 22,500
J Cornish 6,000
T Hempenstall 7,000
I Scott-Gall 2,190
B Watson 9,155
There have not been any other related party transactions during the year.
11. Principal risks and uncertainties
The directors consider that there are a number of principal risks to the
Company. First, a significant and/or prolonged fall in the stock market would
have a serious effect on its performance and value. Gearing within the Company
could exacerbate this effect. The board is dependent on the Manager to manage
the portfolio to minimise the impact of such a fall in the market but monitors
the Manager's performance on a regular basis, including the level of gearing.
The second major risk is that the Manager's hitherto consistent record of
outperformance deteriorates, for some reason, leading to inferior asset growth
for shareholders relative to other avenues for investment in the company's area
of specialisation. Given the importance of this issue, performance is discussed
at every Board meeting.
A further risk is that the rating on the Company's shares will fail to reflect
the good investment performance achieved, owing to poor sentiment towards
equities in general and smaller companies in particular or because of a
temporary mismatch between buying and selling interest in the Company's shares.
The Board regularly assesses the efforts of the Managers and the Company's
broker to communicate the Company's merits to existing and potential investors
as an important aspect of delivering shareholder value. The Board has also
actively used its buyback authority as a means of mitigating discount
volatility and using the opportunity to enhance NAV by purchasing shares at a
discount, for cancellation.
Finally, a breach of the requirements of section 842 of the Income and
Corporation Taxes Act 1988 could result in the Company being liable to capital
gains tax on the profits of sale of its investments, which could have a
significant effect on the Company's net asset value at times when the value of
the Company's investments exceeds the cost. The Manager reports to the board at
each meeting on the Company's compliance with section 842.
12. The 2009 annual report and accounts will be sent to all shareholders on the
share register. Copies of the annual report and accounts, the interim report
and accounts to 31 December 2008 and the interim management statements are
available from the Company's registered office, 155 Bishopsgate, London EC2M
3XJ and on the Company's website at www.figt.co.uk
Statement under the Disclosure & Transparency Rules 4.1.12
The Disclosure and Transparency Rules ("DTR") of the UK Listing Authority
require the Directors to confirm their responsibilities in relation to the
preparation and publication of the Report and Accounts.
The Directors confirm that, to the best of their knowledge:
* the financial statements, prepared in accordance with applicable accounting
standards give a true and fair view of the assets, liabilities, financial
position and profit of the Company;
* the Business Review includes a fair view of the development and performance
of the business and the position of the Company together with a description
of the principal risks and uncertainties that it faces.
END
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Company: Framlington Innovative Growth Trust PLC (THGTF)
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