TIDMHRI
RNS Number : 4161L
Herald Investment Trust PLC
18 July 2017
HERALD INVESTMENT TRUST plc
HALF-YEARLY FINANCIAL REPORT
For the six months ended 30 June 2017
SUMMARY OF PERFORMANCE
Performance
At inception At At since Performance
16 February 30 June 31 December 31 December since
1994 2017 2016 2016 inception
====================== ------------ -------- ------------ ------------ -----------
NAV per share
(including current
year income) 98.7p 1230.5p 1083.2p 13.6% 1,146.7%
====================== ------------ -------- ------------ ------------ -----------
NAV per share
(excluding current
year income) 98.7p 1229.5p 1082.6p 13.6% 1,145.7%
====================== ------------ -------- ------------ ------------ -----------
Share price 90.9p 996.0p 882.5p 12.9% 995.7%
---------------------- ------------ -------- ------------ ------------ -----------
Numis Smaller
Companies
plus AIM
(ex.investment
companies) Capital
Only 1,750.0 5,555.8 5,049.8 10.0% 217.5%
---------------------- ------------ -------- ------------ ------------ -----------
Russell 2000 (small
cap)
Technology Index
Capital Only
(in sterling terms) 688.7* 2,429.9 2,307.0 5.3% 252.8%
---------------------- ------------ -------- ------------ ------------ -----------
* At 9 April 1996 being the date funds were first available for international investment.
The Russell 2000 (small cap) Technology Index was rebased during
2009 following some minor adjustments to its constituents. The
rebased index has been used from 31 December 2008 onwards.
CHAIRMAN'S REVIEW
The Trust's NAV per share has appreciated during the first half
by 13.6% to 1230.5p. I am delighted to report that this reflected
solid progress in all regions. The UK portfolio returned 15.6%
versus the total return of the Numis Index (Inc AIM) of 11.6%. It
is particularly pleasing to have achieved an internal rate of
return (IRR) of 19.2% on the AIM portfolio, which now accounts for
GBP354m of the GBP517m in the UK market. A number of investments
held for many years have borne fruit, growing to become worthwhile
holdings from small beginnings. The North American portfolio's
total return was 13.9% versus the sterling total return on the
Russell 2000 Technology Index of 5.4%. The smaller Asian portfolio
appreciated 13.4%, and the European portfolio returned 27.7%.
In the first half of last year the UK market was moribund and
desperately illiquid. It is reassuring that having sprung back to
life in the second half of last year this healthier state has
continued thus far in 2017. The dramatic change in 2017 has been
the steady stream of follow-on fund raisings in the UK, of which we
have participated in 21 (and a further 9 in North America and 1 in
Australia) with an aggregate investment of GBP23m. Looking forward,
the pace of follow-on fund raisings is expected to slow down.
The stock market has its own cycle, but so does the technology
sector, and opportunities abound. The background for technology
companies seems more favourable than at any previous period this
century. After all, the TMT bubble burst in 2000 leaving a
hang-over of overcapacity, and before this had worked through the
financial crisis hit demand. The smartphone was the bright spot of
the first decade of the century, but there is now much more breadth
to the vibrancy in technology and new media. Discussions about
component shortages and capacity constraint are reminiscent of
periods in the 1980s and 1990s. Arguably the biggest driver is the
reversion to centralised computing with hosted applications in both
the private and public clouds. The PC/client server drove demand
and disruption in the 1980s and 1990s, which followed mainframes.
The big three infrastructure suppliers - Amazon Web Services,
Microsoft and Google - are accelerating technological change and
disrupting the market. Other important markets include the use of
electronics in cars, and the trend towards driverless cars, the
internet of things, robotics, artificial intelligence and the
cheapness of alternative energy through wind and solar. The race is
now on to store energy in scale, cost effectively.
In the UK portfolio 29 holdings returned more than GBP1m, but
IQE, Bango, GB Group and Next Fifteen Communications contributed
the most by value. Wandisco, Spectra Systems and Taptica more than
doubled as well as Bango and IQE. IQE was first acquired in 1999
and has delivered cumulative profits of GBP21.5m to the end of
June. However, GBP13.9m of that return has been achieved in 2017.
IQE manufactures compound semiconductor wafers which are being used
in optics as well as power amplifiers. Adesto, Everspin and
Hydrogenics have all appreciated from distressed levels by more
than 100% in the North American portfolio, but the star performer
by value has been Pegasystems, a Massachusetts based software
company for productivity in customer relationship management. This
holding was first acquired in 2003 at an average price of $3.95 per
share (split adjusted), and ended the period at $58. It is
impressive that the founder and CEO, Alan Trefler, still retains a
controlling 51% stake. His lack of inclination to issue paper has
meant the company has long been overlooked, with minimal research
coverage, but his success has at last been noticed. It is in stark
contrast to a number of US software and internet companies that
issue shares prolifically to directors and employees, and dilute
returns to outside shareholders. It seems to us that valuations
often do not sufficiently discount this cost to shareholders,
particularly when the focus is on adjusted earnings which exclude
the cost of share based payments.
In Europe, the star performers have been BE Semiconductor
Industries in the Netherlands, Isra Vision in Germany and Data
Respons in Norway. BE Semiconductor Industries was first acquired
in the portfolio in 2011 at an average price of EUR5.8 and stood at
EUR46.7 at the period end. Cumulatively the total return has been
GBP16.5m. Isra Vision was acquired in 2003 at a book cost of
GBP483k and the value at the period end was GBP7.1m, which is
nearly 15x the initial investment. Isra's exposure to robotics has
stimulated the rerating. In Asia, the South Korean portfolio had an
IRR of 24.2% and delivered over half the region's return with
useful contributions from PSK and Innox.
During the period, 1.495m shares were repurchased for GBP13.9m.
This represents 2% of the outstanding capital. Buybacks are made on
an opportunistic basis.
The period has had fewer takeovers than we have seen in previous
years. Netdimensions was the only significant one in the first
half. However in North America, Sandvine, Bankrate and MRV
Communications are all in play. In aggregate all the takeovers
announced this year will yield GBP15.6m if completed, and GBP37.7m
cash has been received during the period from takeovers announced
last year.
The IPO market in the US was particularly poor in 2016. There
has been a marginal improvement this year, but pricing is generally
unappealingly high. Companies are being held for longer in private
hands, but will presumably need an exit at some stage. Not all
exits will be trade takeovers.
The background for the sector is positive, but valuations are
higher than they have been. Equities seem likely to experience the
headwind from central banks' tightening and raising interest rates.
Against this background companies with genuine growth may become
more expensive. On this basis the sector still has attractions.
Julian Cazalet
Chairman
18 July 2017
TOP TWENTY EQUITY HOLDINGS AT 30 JUNE 2017
Company Business Value % of
GBP'000 total
assets*
------------------------- -------------------------------------- --------- ---------
Distributor of components
Diploma and systems 24,753 2.7
------------------------- -------------------------------------- --------- ---------
Design and manufacture
of compound semiconductor
IQE wafers 23,191 2.6
------------------------- -------------------------------------- --------- ---------
Intelligent identity data,
GB Group software and services 21,160 2.3
------------------------- -------------------------------------- --------- ---------
Supplier of software solutions
primarily to the UK public
IDOX sector 18,980 2.1
------------------------- -------------------------------------- --------- ---------
Next Fifteen Supplier of marketing communications
Communications services 17,361 1.9
------------------------- -------------------------------------- --------- ---------
Develops applications for
Pegasystems sales, marketing and operations 14,651 1.6
------------------------- -------------------------------------- --------- ---------
Silicon Motion
Technology ADR Develops controllers used
** in flash memory 14,183 1.6
------------------------- -------------------------------------- --------- ---------
Provider of carrier billing
and other alternative payment
Bango methods 13,516 1.5
------------------------- -------------------------------------- --------- ---------
Developer of semiconductor
BE Semiconductor packaging and assembly
Industries equipment 13,115 1.4
------------------------- -------------------------------------- --------- ---------
Global marketing services
M&C Saatchi business 12,718 1.4
------------------------- -------------------------------------- --------- ---------
Supplier of wireless machine
Telit Communications to machine modems and services 11,528 1.3
------------------------- -------------------------------------- --------- ---------
Licensor of semiconductor
signal processing intellectual
Ceva property 11,086 1.2
------------------------- -------------------------------------- --------- ---------
Developer of application
delivery and cyber security
Radware solutions 9,685 1.1
------------------------- -------------------------------------- --------- ---------
SQS Software Specialist in software
Quality Systems quality and software testing 9,524 1.0
------------------------- -------------------------------------- --------- ---------
Supplier of telecommunications
Telecom Plus services and other utilities 9,403 1.0
------------------------- -------------------------------------- --------- ---------
Euromoney Institutional Business to business media
Investor group 9,058 1.0
------------------------- -------------------------------------- --------- ---------
Supplier of logistics management
Descartes Systems software 8,918 1.0
------------------------- -------------------------------------- --------- ---------
Provider of portfolio analytics
Statpro and risk management software 8,843 1.0
------------------------- -------------------------------------- --------- ---------
International opinion data
YouGov and analytics 8,408 0.9
------------------------- -------------------------------------- --------- ---------
Digital content management
and language translation
SDL tools and services 8,364 0.9
------------------------- -------------------------------------- --------- ---------
268,445 29.5
---------------------------------------------------------------- --------- ---------
* Total assets before deduction of bank loans
** American Depositary Receipt
INCOME STATEMENT
(UNAUDITED)
For the six months ended For the six months ended
30 June 2017 30 June 2016
------------------------------------------ ------------------------------------- -----------------------------------
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------------------ ------------- ---------- ---------- ------------- --------- ---------
Gains on investments - 22,830 22,830 - 6,183 6,183
------------------------------------------ ------------- ---------- ---------- ------------- --------- ---------
Movements in unrealised gains on
investments - 81,809 81,809 - (1,989) (1,989)
------------------------------------------ ------------- ---------- ---------- ------------- --------- ---------
Currency losses - (2,255) (2,255) - (5,230) (5,230)
------------------------------------------ ------------- ---------- ---------- ------------- --------- ---------
Gains on derivative instruments - - - - 3,844 3,844
------------------------------------------ ------------- ---------- ---------- ------------- --------- ---------
Income 5,649 - 5,649 4,945 - 4,945
------------------------------------------ ------------- ---------- ---------- ------------- --------- ---------
Investment management fee (4,242) - (4,242) (3,294) - (3,294)
------------------------------------------ ------------- ---------- ---------- ------------- --------- ---------
Other administrative expenses (240) (1) (241) (273) (1) (274)
------------------------------------------ ------------- ---------- ---------- ------------- --------- ---------
Profit before finance costs and
taxation 1,167 102,383 103,550 1,378 2,807 4,185
------------------------------------------ ------------- ---------- ---------- ------------- --------- ---------
Finance costs of borrowings (259) - (259) (822) - (822)
------------------------------------------ ------------- ---------- ---------- ------------- --------- ---------
Profit before taxation 908 102,383 103,291 556 2,807 3,363
------------------------------------------ ------------- ---------- ---------- ------------- --------- ---------
Taxation (193) - (193) (159) - (159)
------------------------------------------ ------------- ---------- ---------- ------------- --------- ---------
Profit after taxation 715 102,383 103,098 397 2,807 3,204
------------------------------------------ ------------- ---------- ---------- ------------- --------- ---------
Profit/(loss) per ordinary share (note
4) 0.99p 142.14p 143.13p 0.53p 3.72p 4.25p
------------------------------------------ ------------- ---------- ---------- ------------- --------- ---------
Weighted average number of ordinary
shares in issue during each period 72,031,127 75,456,694
------------------------------------------ ------------- ---------- ---------- ------------- --------- ---------
The total column of this statement is the profit and loss
account of the Company, prepared in accordance with UK Accounting
Standards.
The profit after taxation is the total comprehensive income and
therefore no additional statement of comprehensive income is
presented. The supplementary revenue and capital columns are
presented for information purposes in accordance with the Statement
of Recommended Practice issued by the Association of Investment
Companies. All items in the above statement derive from continuing
operations and the Company. No operations were acquired or
discontinued in the year.
BALANCE SHEET
(UNAUDITED)
As at As at
30 June 31 December
2017 2016
GBP'000 GBP'000
-------------------------------------------------------------------- ----------- -------------
Fixed assets
-------------------------------------------------------------------- ----------- -------------
Investments held at fair value through profit or loss 818,522 712,969
-------------------------------------------------------------------- ----------- -------------
Current assets
-------------------------------------------------------------------- ----------- -------------
Cash and cash equivalents 88,262 82,448
-------------------------------------------------------------------- ----------- -------------
Other receivables 2,021 23,529
-------------------------------------------------------------------- ----------- -------------
90,283 105,977
-------------------------------------------------------------------- ----------- -------------
Current liabilities
-------------------------------------------------------------------- ----------- -------------
Other payables (28,175) (27,532)
-------------------------------------------------------------------- ----------- -------------
Net current assets 62,108 78,445
-------------------------------------------------------------------- ----------- -------------
Total net assets 880,630 791,414
-------------------------------------------------------------------- ----------- -------------
Capital and reserves
-------------------------------------------------------------------- ----------- -------------
Called up share capital 17,892 18,266
-------------------------------------------------------------------- ----------- -------------
Share premium 73,738 73,738
-------------------------------------------------------------------- ----------- -------------
Capital redemption reserve 4,060 3,686
-------------------------------------------------------------------- ----------- -------------
Capital reserve 783,550 695,049
-------------------------------------------------------------------- ----------- -------------
Revenue reserve 1,390 675
-------------------------------------------------------------------- ----------- -------------
Shareholders' funds 880,630 791,414
-------------------------------------------------------------------- ----------- -------------
Net asset value per ordinary share (including current year income) 1230.50p 1083.21p
-------------------------------------------------------------------- ----------- -------------
Net asset value per ordinary share (excluding current year income) 1229.51p 1082.63p
-------------------------------------------------------------------- ----------- -------------
Ordinary shares in issue 71,566,882 73,061,801
-------------------------------------------------------------------- ----------- -------------
STATEMENT OF CHANGES IN EQUITY
(UNAUDITED)
For the six months ended 30 June 2017
Called Capital Share-
up share Share redemption Capital Revenue holders'
capital premium reserve reserve reserve funds
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------------------- --------- -------- ----------- -------- -------- ---------
Shareholders'
funds at 1 January
2017 18,266 73,738 3,686 695,049 675 791,414
-------------------- --------- -------- ----------- -------- -------- ---------
Profit after
taxation - - - 102,383 715 103,098
-------------------- --------- -------- ----------- -------- -------- ---------
Shares bought
back (note 8) (374) - 374 (13,882) - (13,882)
-------------------- --------- -------- ----------- -------- -------- ---------
Shareholders'
funds at
30 June 2017 17,892 73,738 4,060 783,550 1,390 880,630
-------------------- --------- -------- ----------- -------- -------- ---------
For the six months ended 30 June 2016
Called Capital Share-
up share Share redemption Capital Revenue holders'
capital premium reserve reserve reserve funds
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------------------- --------- -------- ----------- -------- -------- ---------
Shareholders'
funds at 1 January
2016 19,028 73,738 2,924 575,202 245 671,137
-------------------- --------- -------- ----------- -------- -------- ---------
Profit after
taxation - - - 2,807 397 3,204
-------------------- --------- -------- ----------- -------- -------- ---------
Shares bought
back (note 8) (340) - 340 (9,345) - (9,345)
-------------------- --------- -------- ----------- -------- -------- ---------
Shareholders'
funds at
30 June 2016 18,688 73,738 3,264 568,664 642 664,996
-------------------- --------- -------- ----------- -------- -------- ---------
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1 Financial Statements
The condensed financial statements for the six months to 30 June
2017 within the Half Yearly Report comprise the statements set out
above together with the related notes that follow below. The
condensed financial statements do not constitute statutory accounts
as defined in sections 434 to 436 of the Companies Act 2006 and
have been neither audited or reviewed by the Company's auditors.
Financial information in relation to the year ended 31 December
2016 has been extracted from the statutory accounts which have been
filed with the Registrar of Companies. The Auditors' report on
those accounts was unqualified and did not contain a statement
under Section 498 (2) or (3) of the Companies Act 2006.
The Company's assets, the majority of which are investments in
quoted securities, exceed its liabilities significantly. All
borrowings require the prior approval of the Board. Gearing levels
and compliance with loan covenants are reviewed by the Board on a
regular basis. In accordance with the Company's Articles of
Association, shareholders have the right to vote on the
continuation of the Company every three years with the next vote
being in April 2019. Accordingly, the financial statements have
been prepared on the going concern basis as it is the Directors'
opinion that the Company will continue in operational existence for
the foreseeable future.
2 Accounting policies
The condensed financial statements have been prepared in
accordance with applicable United Kingdom Accounting Standards and
applicable law (UK Generally Accepted Accounting Practice),
including FRS 102 The Financial Reporting Standard applicable in
the UK and Republic of Ireland, FRS 104 Interim Financial Reporting
and the Statement of Recommended Practice Financial Statements of
Investment Trust Companies and Venture Capital Trusts, issued by
the Association of Investment Companies in November 2014, as
amended in January 2017.
The accounting policies applied for the condensed financial
statements are as set out in the Company's annual report for the
year ended 31 December 2016.
3 Investment management fee
Herald Investment Management Limited is appointed investment
manager under a management agreement which is terminable on twelve
months' notice. Its annual remuneration is 1.0% of the Company's
net asset value based on middle market prices, calculated on a
monthly basis payable in arrears. The management fee is levied on
all assets except the holding in Herald Ventures II Limited
Partnership managed by Herald Investment Management Limited.
4 Net return per ordinary share
Six months Six months
ended ended
30 June 2017 30 June 2016
GBP'000 GBP'000
---------------------------------------------- -------------- --------------
Revenue profit after taxation 715 397
---------------------------------------------- -------------- --------------
Capital profit after taxation 102,383 2,807
---------------------------------------------- -------------- --------------
Total net return 103,098 3,204
---------------------------------------------- -------------- --------------
Weighted average number of ordinary shares 72,031,127 75,456,694
---------------------------------------------- -------------- --------------
Net return per ordinary share is based on the above totals of
revenue and capital and the weighted average number of ordinary
shares in issue during each period.
There are no dilutive or potentially dilutive shares in
issue.
5 Dividends
In accordance with FRS 102 Section 32 'Events After the End of
the Reporting Period', the final dividend payable on ordinary
shares is recognised as a liability when approved by shareholders.
Interim dividends are recognised only when paid.
Dividends paid on ordinary shares in respect of earnings for
each period are as follows:
Six months Six months
ended ended
30 June 2017 30 June 2016
GBP'000 GBP'000
---------------------------------------------------------------------- -------------- --------------
Amounts recognised as distributions in the period:
---------------------------------------------------------------------- -------------- --------------
Final dividend for the year ended 31 December 2016 - nil (2015 - nil) - -
---------------------------------------------------------------------- -------------- --------------
No interim dividend will be declared.
6 The Company has a sterling loan facility of GBP25 million and
a GBP25 million multi-currency revolving advance loan maturing 31
December 2017.
At 30 June 2017, the sterling loan facility was fully drawndown.
Interest on the loan is payable in quarterly instalments in
January, April, July and October. The estimated repayment value of
the loan at 30 June 2017 was GBP25 million. The indicative costs of
repaying the loan as at 30 June 2017 were not materially different
in the context of the above figures.
7 Financial Instruments
The Company's investments as disclosed in the Company's balance
sheet are valued at fair value.
Nearly all of the Company's portfolio of investments are in the
Level 1 category as defined in FRS 102 as amended for fair value
hierarchy disclosures (March 16).
The three levels set out in FRS 102 are as follows:
Level 1: The unadjusted quoted price in an active market for
identical assets or liabilities that the entity can access at the
measurement date.
Level 2: Inputs other than quoted prices included within Level 1
that are observable (ie developed using market data) for the asset
or liability, either directly or indirectly.
Level 3: Inputs are unobservable (ie for which market data is
unavailable) for the asset or liability.
The analysis of the valuation basis for the financial
instruments based on the hierarchy is as follows:
30 June 2017 31 December 2016
-------------------- ------------------------ ------------------------
Assets Liabilities Assets Liabilities
GBP'000 GBP'000 GBP'000 GBP'000
-------------------- ---------- ------------ ---------- ------------
Level 1 895,330 (28,175) 807,216 (27,532)
-------------------- ---------- ------------ ---------- ------------
Level 3 13,475 - 11,730 -
-------------------- ---------- ------------ ---------- ------------
Total net assets 908,805 (28,175) 818,946 (27,532)
-------------------- ---------- ------------ ---------- ------------
The fair value of listed security investments is bid value.
Investments on the Alternative Investment Market are included at
their bid value. The fair value of unlisted investments uses
valuation techniques determined by the directors on the basis of
latest information in line with the relevant principles of the
International Private Equity and Venture Capital Valuation
Guidelines.
8 At the Annual General Meeting held on 18 April 2017 the
Company's authority to buy back up to 14.99% of its issued share
capital at that date was renewed. In the six months to 30 June 2017
a total of 1,494,919 (30 June 2016 - 1,358,941) ordinary shares of
25p each were bought back at a total cost of GBP13,881,514 (30 June
2016 - GBP9,344,635). At 30 June, the Company had authority to buy
back a further 9,275,678 ordinary shares. .
9 During the period, cost of purchases amounted to GBP61,924,000
(30 June 2016 - GBP33,258,000) and proceeds of sales amounted to
GBP60,752,000 (30 June 2016 - GBP43,247,000). Transaction costs of
GBP229,000 (30 June 2016 - GBP100,000) were incurred on the
purchase of investments and GBP204,000 (30 June 2016 - GBP168,000)
on sales of investments.
INVESTMENT POLICY
Herald's objective is to achieve capital appreciation through
investments in smaller quoted companies, in the areas of
telecommunications, multimedia and technology (TMT). Investments
may be made across the world. The business activities of investee
companies will include information technology, broadcasting,
printing and publishing and the supply of equipment and services to
these companies.
PRINCIPAL RISKS AND UNCERTAINTIES
The principal risks facing the Company relate to the Company's
investment activities. These risks are market risk (comprising
other price risk, interest rate risk and foreign currency risk),
credit risk and liquidity risk. An explanation of these risks and
how they are managed is contained in note 18 of the Company's
Annual Report and Financial Statements for the year to 31 December
2016. The principal risks and uncertainties have not changed since
the publication of the Annual Report which can be obtained free of
charge from Herald Investment Management Limited and is available
on the Manager's website: www.heralduk.com. Other risks facing the
Company include the following: regulatory risk (that the loss of
investment trust status or a breach of applicable legal and
regulatory requirements could have adverse financial consequences
and cause reputational damage), operational/financial/custody risk
(failure of service providers' accounting and/or settlements
systems could lead to inaccurate reporting or financial loss), the
risk that the discount can widen and gearing risk (the use of
borrowings can magnify the impact of falling markets). Further
information can be found on page 23 of the latest Annual Report and
Financial Statements.
RESPONSIBILITY STATEMENT
We confirm that to the best of our knowledge:
a) the condensed set of financial statements has been prepared
in accordance with FRS104 "Interim Financial Reporting" published
by the FRC and gives a true and fair view of the assets,
liabilities, financial position and profit of the Company;
b) the Half Yearly Report and interim management report
(Chairman's Review) includes a fair review of the information
required by Disclosure and Transparency Rules 4.2.7R (indication of
important events during the first six months, and their impact on
the financial statements and a description of principal risks and
uncertainties for the remaining six months of the year); and
c) the Half-Yearly Financial Report includes a fair review of
the information required by Disclosure and Transparency Rules
4.2.8R (disclosure of related party transactions and changes
therein - see note 3 above).
By order of the Board
Julian Cazalet
Chairman
18 July 2017
The Half Yearly Financial report will be posted to shareholders
on or around 3 August 2017 and published on the Manager's website:
www.heralduk.com
Contacts:
Katie Potts, Manager 020 7553 6300
Law Debenture Corporate Services Limited 020 7696 5285
Company Secretary
This information is provided by RNS
The company news service from the London Stock Exchange
END
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