Gartmore Smaller Companies Trust p.l.c.
Unaudited Results for the six months to 28 February2007
This preliminary announcement of unaudited results was approved by the Board of
Directors on 4 April 2007.
Overview
* Net Asset Value per Ordinary share (excluding revenue reserve) increased by
13.9% over the six-month period to 28 February 2007, compared with a rise of
16.2% in the FTSE SmallCap Index (excluding Investment Companies).
* Mid-market price per Ordinary share increased by 14.7% from 526.0p to 603.5p.
* Net revenue after taxation fell from �108,000 to �39,000.
* Interim dividend maintained at 1.00p per Ordinary share.
Extracts from the Chairman's Statement
Capital Performance
Over the six-month period to 28 February 2007, the Net Asset Value per Ordinary
share increased by 13.9% in capital terms, compared with a rise of 16.2% in the
FTSE SmallCap Index (excluding Investment Companies). Although disappointing
relative to the FTSE SmallCap Index, the Company's performance can be
considered satisfactory in absolute terms and relative to the broader market,
particularly given our Manager's favouring of microcap companies trading on the
Alternative Investment Market which comprise more than half of the portfolio.
Over the reporting period, the FTSE AIM All-Share Index rose by just 5.4%.
The mid-market price of the Ordinary shares increased from 526.0p to 603.5p, a
rise of 14.7%. The discount at which the Ordinary shares traded relative to the
Net Asset Value narrowed from 14.8% to 13.6%.
Revenue and Dividends
Net revenue for the year, after expenses and taxation, fell by almost 64% from
�108,000 to �39,000, which gives a revenue return of 0.28p per Ordinary share
compared with 0.78p for the corresponding period last year. This continuing
decline in revenue available for dividend, signalled to shareholders in recent
Interim and Annual Reports, is a consequence of the portfolio's ongoing
investment in lower-yielding equities.
Nevertheless, your Board has declared an unchanged interim dividend of 1.00p
per Ordinary share by drawing modestly on the Company's Revenue Reserve. The
dividend will be paid on 8 May 2007 to shareholders on the register on 20 April
2007. Shareholders should note, however, that, following payment of the
dividend, the Revenue Reserve will have fallen to �576,000, and that the final
dividend will be significantly lower than in previous years.
Economic & Market Background
The UK economy continued to grow strongly during the period under review and
this provided a very supportive environment for UK corporate earnings growth.
Gross Domestic Product grew by a robust 0.8% in the final quarter of the year
to December 2006, compared with the previous quarter. Buoyed by an impressive
1% expansion in the service sector, this represented the strongest quarterly
growth in two-and-a-half years and equated to economic growth of 3.0% on an
annualised basis.
Although oil prices slipped over the six-month period, concerns mounted that
inflationary pressures were building. These worries were exacerbated by data
from the housing market which suggested that house prices were re-gathering
momentum, with mortgage lending hitting an all-time high in November.
December's consumer price inflation figure struck 3.0%, the highest figure for
11 years, and well above the Government's target of 2.0%. Against this
backdrop, the Bank of England's Monetary Policy Committee raised interest
rates, with base rates reaching 5.25% in January. Meanwhile, the European
Central Bank continued to tighten monetary policy, lifting rates to 3.5%,
though signs emerged that the successive tightening moves by the US Federal
Reserve, which had lifted interest rates to 5.25%, were having a significant
effect in slowing the US economy.
After a brief wobble in November, amid concerns over the sudden weakness in the
US dollar, encouraging company trading updates and buoyant levels of merger &
acquisition activity helped the broader UK equity market. As measured by the
FTSE All-Share Index, it gained 6.3% over the six-month period covered by this
report. Among larger company stocks, steel maker Corus and tobacco firm
Gallaher attracted bids from overseas, while in the mid-cap arena, construction
support services group John Laing and branded-food group RHM also found
themselves the subject of takeover bids. In the smaller companies sector, a
succession of very positive company earnings updates suggested that
domestically-focused smaller companies were capitalising on the very healthy UK
economic backdrop.
Outlook
Despite the volatility witnessed by equity markets in recent weeks, there has
been little fundamental change. Our Manager has remained steadfast in his view
that many of the AIM-listed microcap stocks which slipped to exceptionally low
valuations towards the end of last year would soon begin to benefit from the
supportive economic background. This view has been vindicated so far this year,
with AIM stocks outperforming the broader smaller companies market in each of
the first three months of 2007. The Board believes therefore that the prospects
for the portfolio are positive and we look forward to reporting improved
returns to shareholders later this year.
Liam Kane
Chairman
Extracts from the Manager's Review
Portfolio Activity
The portfolio delivered a respectable absolute return over the six-month review
period, although it was disappointing relative to the FTSE SmallCap Index. The
Company's underperformance of the benchmark index can be attributed largely to
our favouring of AIM-listed companies, with microcap stocks failing to match
the gains made by smaller companies generally. Our sector allocation detracted
from performance to a limited extent, with the portfolio's relatively high
exposure to the oil & gas sector weighing on performance following a fall in
the price of crude oil. However, performance benefited from a number of stock
selection successes, particularly in the underperforming financials sector,
although these were partly offset by disappointing stock selection in the
technology and consumer services sectors.
We maintained our relatively high exposure to technology companies as the
sector generally performed well on signs that software & computer services
stocks in particular were benefiting from the increasingly supportive earnings
backdrop. However, stock selection in the sector was disappointing, as holdings
such as mobile phone software firm Emblaze performed poorly, after reporting a
half-year loss, despite the firm revealing that demand for its handset services
remained strong. Among selected hardware stocks, we increased our holding in
broadband service & equipment firm BATM Advanced Communications, which
performed well following confirmation that it was trading in line with its
raised performance forecast. The company also announced that it had recently
landed a potentially lucrative contract with a major telecommunications network
equipment firm. However, our holding in peer Calyx took some of the gloss off
returns from selections in the sector after the provider of networked IT
services reported that year-end results would be towards the lower end of
forecasts. Since the end of the review period, the Calyx share price has risen
sharply following confirmation that the founder and chief executive and certain
members of the senior management team are considering a possible takeover of
the company.
We were rewarded for our generally cautious stance towards the financials
sector, and stock selection provided a positive contribution. We trimmed the
holding in property company Terrace Hill following several months of strong
performance from the stock in response to the company's very positive trading
outlook. We also disposed of the holding in insurance consultant Charles Taylor
after the stock climbed on news of a healthy jump in first-half profits. Our
holding in Cardpoint also provided a useful contribution following a rise in
the share price after the fee-charging cash machine network operator unveiled
an increase of 135% in full-year underlying pre-tax profits. The company's
encouraging trading outlook also predicted further cost synergies from its
acquisition of peer Moneybox.
Although a relatively low exposure to the consumer services sector worked in
our favour, the effect was more than offset by poor stock selection. The
performance of our relatively large holding in entertainment producer DCD Media
was disappointing as the AIM-listed company reported widening full-year losses,
although much of this was attributed to the group's restructuring programme
following a series of acquisitions. Among general retailers, we benefited from
a strong contribution from our stake in education services firm Nord Anglia
Education. Having rejected a preliminary takeover approach from an investment
group early in the review period, shares in the `Leapfrog' Day Nurseries and
international school operator subsequently surged to a five-year high as the
company predicted that it is on track to meet full-year forecasts. Much of the
growth has been driven by expansion in its international schools division, with
increases in pupil registrations in line with the company's forecast.
Unfortunately, our investment in camera retailer Jessops offset some of the
gains as supply problems around the key Christmas season saw the company fail
to capitalise on its excellent High Street & internet presence and its strong
knowledge based franchise in higher-margin digital SLR cameras.
Performance benefited from our bias towards the basic materials sector, while
stock selection in the sector was also positive. Our large holding in chromites
mining & processing firm International Ferro Metals was one of the main
drivers, as the company revealed that the earlier-than-expected completion of
its second ferrochrome furnace would help the company bring extra capacity
on-stream earlier than forecast, thus bringing in unexpected revenues.
Meanwhile, our favouring of chemicals group Plant Health Care added
considerable value. The shares climbed after the fertiliser maker won its
largest-ever order for its eco-friendly Organic Plant Food, and subsequently
climbed further in January on news that the company had reached a licensing
agreement with Bayer to help develop its seed treatment Myconate. However, our
stake in bio-diesel producer D1 Oils worked against us as the stock struggled
following concerns over the rising price of vegetable oil.
Our holdings in the oil & gas sector had an adverse effect on performance, with
the price of Brent crude oil falling from US$70 to around US$60 per barrel over
the review period. Stock selection in the sector was also disappointing as our
investment in Plectrum Petroleum detracted from performance after the
exploration firm sounded a note of caution over the prospects of finding oil or
gas off the south coast of Western Australia. In the industrials sector,
returns were boosted by our large holding in support services group Carter &
Carter as the car mechanic training specialist delivered a sparkling trading
update highlighting the success of its Government-backed vocational learning
programmes. Our large overweight position in diverse fireproofing, insulation
and scaffolding services provider Cape also added considerable value, amid
strong demand from its energy-focused client base,.
Gartmore Investment Limited
Manager
Income Statement(Unaudited) Six months to 28 February 2007
Revenue Capital Total
�'000 �'000 �'000
Income and Capital Profits
Dividends and other income 254 - 254
Net profit on investments - 12,411 12,411
______ _______ _______
Return before Expenses, Finance Costs and 254 12,411 12,665
Taxation
Expenses
Management fee (67) (378) (445)
Other fees and expenses (140) (233) (373)
______ _______ _______
Return before Finance Costs and Taxation 47 11,800 11,847
Finance costs
Interest payable (8) (43) (51)
______ _______ _______
Return on Ordinary Activities before Taxation 39 11,757 11,796
Taxation - - -
______ _______ _______
Return to Equity Shareholders after Taxation 39 11,757 11,796
===== ====== ======
Total Return per Ordinary share 0.28p 84.74p 85.02p
===== ====== ======
The Total column above represents the Profit and Loss Account of the Company.
The revenue and capital items derive from continuing activities.
A Statement of Total Recognised Gains and Losses has not been presented as all
gains and losses are recognised in the Income Statement.
No operations were acquired or discontinued during the period.
Income Statement (Unaudited) (Comparative)
Six months to 28 February 2006
Revenue Capital Total
�'000 �'000 �'000
Income and Capital Profits
Dividends and other income 390 36 426
Net profit on investments - 7,764 7,764
______ _______ _______
Return before Expenses, Finance Costs and 390 7,800 8,190
Taxation
Expenses
Management fee (119) (278) (397)
Other fees and expenses (142) (295) (437)
______ _______ _______
Return before Finance Costs and Taxation 129 7,227 7,356
Finance costs
Interest payable (19) (39) (58)
______ _______ _______
Return on Ordinary Activities before Taxation 110 7,188 7,298
Taxation (2) - (2)
______ _______ _______
Return to Equity Shareholders after Taxation 108 7,188 7,296
===== ====== ======
Total Return per Ordinary share 0.78p 51.80p 52.58p
===== ====== ======
The Total column above represents the Profit and Loss Account of the Company.
The revenue and capital items derive from continuing activities.
A Statement of Total Recognised Gains and Losses has not been presented as all
gains and losses are recognised in the Income Statement.
No operations were acquired or discontinued during the period.
Reconciliation of
Movements
in Shareholders' Funds
(Unaudited)
For the six months to 28
February 2007
Capital Capital Capital
Share redemption reserve reserve Revenue
capital reserve realised unrealised Reserve Total
*
�'000 �'000 �'000 �'000 �'000 �'000
At 31 August 2006 3,469 506 79,733 723 1,265 85,696
Net capital return from
ordinary activities - - 4,732 7,025 - 11,757
Net revenue return from
ordinary activities - - - - 39 39
Equity dividend paid - - - - (589) (589)
______ _______ ______ ______ ______ ______
At 28 February 2007 3,469 506 84,465 7,748 715 96,903
===== ====== ===== ===== ===== =====
Comparative:
At 31 August 2005 3,469 506 65,488 10,563 1,673 81,699
Net capital return from
ordinary activities - - 4,771 2,417 - 7,188
Net revenue return from
ordinary activities - - - - 108 108
Equity dividend paid - - - - (589) (589)
______ ______ ______ ______ ______ _____
At 28 February 2006 3,469 506 70,259 12,980 1,192 88,406
===== ===== ===== ===== ===== ====
* The revenue reserve represents the amount of the Company's reserves
distributable by way of dividend.
Balance Sheet(Unaudited) At At
28 February 31 August
2007 2006
�'000 �'000
Non-current Assets
Listed investments held at fair value through profit 101,742 89,195
or loss
_______ _______
Current Assets
Debtors - amounts receivable within one year 58 499
Cash at bank 674 126
_______ _______
732 625
Current Liabilities
Creditors - amounts payable within one year (1,071) (824)
Bank loan (4,500) (3,300)
_______ _______
Net Current Liabilities (4,839) (3,499)
_______ _______
Net Assets 96,903 85,696
====== ======
Capital and Reserves
Called-up share capital 3,469 3,469
Capital redemption reserve 506 506
Capital reserve: realised 84,465 79,733
Capital reserve: unrealised 7,748 723
Revenue reserve 715 1,265
_______ _______
Equity Shareholders' Funds 96,903 85,696
====== ======
Net asset value per Ordinary share (incl. revenue 698.4p 617.6p
reserve)
===== =====
Net asset value per Ordinary share (excl. revenue 693.2p 608.5p
reserve)
===== =====
Cash Flow Statement(Unaudited) Six months to Six months to
28 February 28 February
2007 2006
�'000 �'000
Revenue Activities
Dividends and interest received from 337 387
investments
Interest received on deposits 5 57
Underwriting commission received 5 14
Expenses paid, allocated to revenue (237) (269)
_______ _______
Net cash inflow from revenue activities 110 189
_______ _______
Servicing of Finance
Interest paid, allocated to revenue (8) (18)
_______ _______
Investment Activities
Acquisitions of investments (36,807) (50,757)
Disposals of investments 37,011 36,040
Special dividends received, allocated to - 260
capital
Expenses and interest paid, allocated to (369) (306)
capital
_______ _______
(165) (14,763)
_______ _______
Equity Dividend Paid
Ordinary shares (589) (589)
_______ _______
Finance
Loan drawdown 1,200 9,250
_______ _______
Net Cash Inflow/(Outflow) 548 (5,931)
====== ======
Reconciliation of Net Cash Flow to
movement in Net Cash/(Debt)
Net cash inflow/(outflow) 548 (5,931)
Increase in borrowings (1,200) (9,250)
_______ _______
Change in net cash balances resulting from (652) (15,181)
cash flows
Net (debt)/cash brought forward (3,174) 6,710
_______ _______
Net debt balance at 28 February (3,826) (8,471)
====== ======
Comprising:
Cash at bank 674 779
Bank loan (4,500) (9,250)
_______ _______
(3,826) (8,471)
====== ======
Analysisof Net Assets and Shareholders' Funds
At 28 February 2007 At 31 August 2006
�'000 % �'000 %
UK Equities
Oil & Gas 6,958 7.2 7,332 8.6
Basic Materials 10,159 10.5 6,159 7.2
Industrials 25,337 26.1 25,477 29.7
Consumer Goods 5,514 5.7 2,921 3.4
Health Care 7,154 7.4 6,280 7.3
Consumer Services 9,915 10.2 9,294 10.8
Telecommunications - - 293 0.3
Utilities 555 0.6 405 0.5
Financials 13,258 13.7 9,868 11.5
Technology 22,892 23.6 20,793 24.3
_______ _____ _______ _____
101,742 105.0 88,822 103.6
UK Convertibles
Financials - - 373 0.4
_______ _____ _______ _____
Total Investments 101,742 105.0 89,195 104.0
Net Current Liabilities (4,839) (5.0) (3,499) (4.0)
_______ _____ _______ _____
Net Assets 96,903 100.0 85,696 100.0
====== ==== ====== ====
Attributable to:
Equity Shareholders
Ordinary shares 96,903 100.0 85,696 100.0
====== ==== ====== ====
Note
Analysis of investments by place of listing:
London Stock Exchange 47,866 47.0 49,090 55.0
Alternative Investment Market 53,876 53.0 40,105 45.0
______ _____ _______ _____
Valuation of Investments 101,742 100.0 89,195 100.0
====== ===== ====== =====
Accounting Policies
The unaudited accounts have been prepared on a going concern basis in
accordance with UK Generally Accepted Accounting Practice and the Statement of
Recommended Practice for "Financial Statements of Investment Trust Companies"
issued in December 2005.
The Company's accounting policies have not varied from those described in the
Report and Accounts for the year ended 31 August 2006.
Dividends and Other Income Six months to Six months to
28 February 28 February
2007 2006
�'000 �'000
Income from UK listed investments:
Franked dividends 242 279
Unfranked dividends 2 40
______ ______
244 319
Interest on deposits 5 57
Underwriting commission 5 14
______ ______
254 390
===== =====
Management Fees and Interest Payable
Management fees and finance costs are allocated 85% to Capital reserve:
realised and 15% to Revenue account. For the six months to 28 February 2006,
these costs were allocated 70% to Capital reserve: realised and 30% to Revenue
account.
Total Return per Ordinary Share
Total return per Ordinary share is calculated on the return to equity
shareholders of �11,796,000 (28 February 2006: �7,296,000) and 13,875,000 (28
February 2006: 13,875,000) being the weighted average number of Ordinary shares
in issue throughout the period.
Interim Dividend
The Directors have declared an interim dividend of 1.00p per share on
13,875,000 Ordinary shares in respect of the year ending 31 August 2007. The
Ordinary shares will be quoted ex-dividend on 18 April 2007 and the dividend
will be paid on 8 May 2007 to shareholders on the register on 20 April 2007.
The cost of the interim dividend is �139,000.
Net Asset Value
The Net Asset Value per Ordinary share (incl. revenue reserve) is calculated on
equity shareholders' funds of �96,903,000 (31 August 2006: �85,696,000) and
13,875,000 (31 August 2006: 13,875,000) Ordinary shares in issue at the
period-end.
InterimReport and Accounts
The financial information contained in this preliminary announcement of interim
results is unaudited and does not constitute statutory accounts as defined in
Section 240 of the Companies Act 1985. Full statutory accounts for the year
ended 31 August 2006 included a report from the Company's auditors, in
accordance with Section 235 of the Companies Act 1985, which was unqualified
and did not contain statements under Section 237 (2) and (3) of the Companies
Act 1985, were filed with the Registrar of Companies on 29 November 2006. No
statutory accounts in respect of any period after 31 August 2006 have been
reported on by the Company's auditors or delivered to the Registrar of
Companies.
The interim report and accounts for the six months to 28 February 2007 will be
posted to shareholders shortly. Copies will also be available from the
Company's registered office at Gartmore House, 8 Fenchurch Place, London EC3M
4PB and for download from www.gartmore.com.
Gartmore Investment Limited
Company Secretary
4 April 2007
END
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