TIDMNTN
1 DECEMBER 2020
NORTHERN 3 VCT PLC
UNAUDITED HALF-YEARLY FINANCIAL REPORT
FOR THE SIX MONTHSED 30 SEPTEMBER 2020
Northern 3 VCT PLC is a Venture Capital Trust (VCT) managed by Mercia
Fund Management. 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 2019 and 31
March 2020)
Six months ended Six months ended Year ended
30 September 30 September 31 March
2020 2019 2020
---------------- ---------------- ------------
Net assets GBP103.3m GBP86.6m GBP72.5m
Net asset value per share 93.6p 92.1p 78.1p
Return per share:
Revenue 0.6p 0.3p 0.3p
Capital 17.9p (0.1)p (12.1)p
Total 18.5p 0.2p (11.8)p
Dividend declared
in respect of the period 2.0p 2.0p 4.0p
Cumulative return to shareholders
since launch:
Net asset value per share 93.6p 92.1p 78.1p
Dividends paid per share* 97.4p 93.4p 95.4p
Net asset value plus dividends paid per share 191.0p 185.5p 173.5p
Mid-market share price at end of period 75.5p 86.5p 70.0p
Share price discount to net asset value 19.3% 6.1% 10.4%
Tax-free dividend yield (based on the net asset value
per share) 4.3% 4.2% 4.2%
*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:
Enquiries:
Simon John/James Bryce, NVM Private Equity -- 0191 244 6000
Website: www.nvm.co.uk
Martin Glanfield, Chief Financial Officer, Mercia Asset Management PLC
-- 0330 223 1430
HALF-YEARLY MANAGEMENT REPORT TO SHAREHOLDERS
The period under review has been dominated by the coronavirus (COVID-19)
pandemic. The management teams of the companies in our portfolio have
demonstrated resilience in their response to the evolving situation and
our investment manager continues to work closely with them to provide
support. A successful public share offer raising gross proceeds of GBP13
million was allotted during the period and means that we are well placed
to continue to provide additional financing if we consider that it is
sensible.
Results and dividend
The unaudited net asset value (NAV) per share at 30 September 2020 was
93.6 pence (31 March 2020 (audited) 78.1 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 2020, which was paid on 4
September 2020 and therefore recognised in the current half-yearly
accounts.
The return per share for the half year as shown in the income statement,
before deducting the dividend, was 18.5 pence, compared with a return of
0.2 pence in the six month period ended 30 September 2019. The total
return for the period was primarily caused by an increase in the
directors' valuations of unquoted investments, reflecting significant
progress in the performance of some portfolio companies.
The directors have declared an unchanged interim dividend of 2.0 pence
per share for the year ending 31 March 2021, which will be paid on 29
January 2021 to shareholders on the register at the close of business on
8 January 2021.
Venture capital investment activity
The primary focus over the last six months has been to support existing
investments and preserve value for shareholders, however, further
progress was made on the development of the portfolio with one new
investment completed: GBP0.7m was invested in Enate, a human and digital
workforce management software solution. Following a significant volume
of fund-raising activity across the sector in recent years, there is
currently a significant level of funding available for venture capital
and private equity investing. This inevitably increases competition for
attractive investment opportunities; however, our manager continues to
apply high standards in its appraisal of potential investment
opportunities.
We continue to allocate a significant proportion of our investment
activity to providing additional growth capital to our existing
portfolio companies. A total of GBP1.8 million was invested in six
existing portfolio businesses during the period to support their
continued development.
It was a relatively quiet period for investment realisations, however
the investment in AIM listed Cello Health plc was sold in full following
an agreed takeover bid. The proceeds generated for the company of
GBP0.9m represent a multiple of over 2.5x the original cost of the
investment. Positive underlying trading trends were observed in a
number of portfolio companies including Agilitas IT Holdings which was
sold subsequent to the balance sheet date generating a return of eight
times the original cost of the investment over its lifetime. The
valuation as at 30 September 2020 reflects the sale proceeds received.
Venture capital portfolio update
Following the first reports of COVID-19 in the prior financial year, the
initial effects in the UK principally impacted businesses with complex
supply chains or overseas customers in certain territories. As the
spread of the virus led to a global pandemic, the effect on the economy
has become much more pronounced and measures taken to tackle COVID-19
have had a material impact on almost every business in the UK.
The short-term impact on individual portfolio companies varies
significantly depending on the sector in which they operate and the
ability of their employees to work effectively from home. Your company
benefits from holding a diversified portfolio of investments and the
areas of the economy which continue to be the most affected, namely
travel, leisure and hospitality, represent less than 10% by cost of the
venture capital portfolio. Technology and software sub-sectors have
been more resilient during 2020 and investments in these areas represent
around 40% by cost of the venture capital portfolio. We are also
invested in a number of businesses which employ a purely e-commerce
business model. Trading in several of these holdings has been extremely
strong both during the initial lockdown and subsequently, leading to the
relevant valuations being marked up accordingly as at 30 September 2020.
Share offers and liquidity
As a result of the share offer launched in January 2020, gross proceeds
of GBP13 million were received and new shares were allotted during the
period. Having considered the current level of liquid resources
available to the company, including those received after the period end
from the sale of Agilitas IT Holdings, the board does not intend to
raise further funds in the current tax year. The company's dividend
investment scheme remains open, enabling shareholders to invest some or
all of their dividends in new shares attracting income tax relief.
Share buy-backs
We 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 487,973 shares, were purchased for cancellation
at a total cost of GBP367,000.
VCT qualifying status and legislation
Amendments to the VCT scheme rules announced in 2017 are still being
implemented on a phased basis and as previously reported, from 1 April
2020 your company has been required to hold at least 80% of its relevant
investments in VCT qualifying assets (previously 70%). The 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.
Independent auditor
The audit committee regularly reviews the requirements and deadlines for
mandatory audit tendering and rotation; under current regulations the
last period for which KPMG LLP would be permitted to act as auditor of
the company would be the year ending 31 March 2023. In the interest of
good governance, the audit committee conducted a tender process in
November 2020. Having considered the results of the tender, the board
approved the audit committee's recommendation that Mazars LLP, an
international firm of chartered accountants, be appointed as independent
auditor of the company for the year ending 31 March 2021.
Prospects
COVID-19 has caused a great deal of volatility in financial markets and
whilst most quoted indices have staged a significant recovery since the
lows experienced in March 2020, it is difficult to predict the future
trajectory of the economic recovery. Many businesses are facing
significant challenges, but we remain generally optimistic about the
prospects for the companies in our portfolio.
On behalf of the Board
James Ferguson
Chairman
The unaudited half-yearly financial statements for the six months ended
30 September 2020 are set out below.
INCOME STATEMENT
(unaudited) for the six months ended 30 September 2020
Six months ended Six months ended
30 September 2020 30 September 2019
Revenue Capital Total Revenue Capital Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Gain on
disposal of
investments - 466 466 - 45 45
Movements in
fair value
of
investments - 19,903 19,903 - 448 448
---------- ---------- ---------- ---------- ---------- ----------
- 20,369 20,369 - 493 493
Income 1,014 - 1,014 680 - 680
Investment
management
fee (206) (617) (823) (208) (623) (831)
Other
expenses (168) - (168) (195) - (195)
---------- ---------- ---------- ---------- ---------- ----------
Return on
ordinary
activities
before tax 640 19,752 20,392 277 (130) 147
Tax on
return on
ordinary
activities - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
Return on
ordinary
activities
after tax 640 19,752 20,392 277 (130) 147
---------- ---------- ---------- ---------- ---------- ----------
Return per 0.6p 17.9p 18.5p 0.3p (0.1)p 0.2p
share
Year ended 31 March 2020
Revenue Capital Total
GBP000 GBP000 GBP000
Gain on disposal of investments - (168) (168)
Movements in fair value of investments - (9,943) (9,943)
---------- ---------- ----------
- (10,111) (10,111)
Income 1,126 - 1,126
Investment management fee (435) (1,304) (1,739)
Other expenses (363) - (363)
---------- ---------- ----------
Return on ordinary activities before
tax 328 (11,415) (11,087)
Tax on return on ordinary
activities - - -
---------- ---------- ----------
Return on ordinary activities after tax 328 (11,415) (11,087)
---------- ---------- ----------
Return per share 0.3p (12.1)p (11.8)p
BALANCE SHEET
(unaudited) as at 30 September 2020
30 September 2020 30 September 2019 31 March 2020
GBP000 GBP000 GBP000
Fixed asset investments 85,689 70,730 63,776
---------- ---------- ----------
Current assets:
Debtors 583 1,067 28
Cash and cash equivalents 17,158 15,177 8,876
---------- ---------- ----------
17,741 16,244 8,904
Creditors (amounts
falling due
within one year) (98) (330) (137)
---------- ---------- ----------
Net current assets 17,643 15,914 8,767
---------- ---------- ----------
Net assets 103,332 86,644 72,543
---------- ---------- ----------
Capital and reserves:
Called-up equity share
capital 5,522 4,705 4,647
Share premium 19,500 7,198 7,428
Capital redemption
reserve 457 360 432
Capital reserve 58,106 64,931 60,786
Revaluation reserve 18,204 8,224 (1,653)
Revenue reserve 1,543 1,226 903
---------- ---------- ----------
Total equity
shareholders' funds 103,332 86,644 72,543
---------- ---------- ----------
Net asset value per share 93.6p 92.1p 78.1p
STATEMENT OF CHANGES IN EQUITY
(unaudited) for the six months ended 30 September 2020
-----------------Non-distributable
reserves----------------- Distributable reserves Total
Capital
Called up share Share redemption Revaluation Capital Revenue
capital premium reserve reserve* reserve reserve
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
At 1 April
2020 4,647 7,428 432 (1,653) 60,786 903 72,543
Return on
ordinary
activities
after tax - - - 19,857 (105) 640 20,392
Dividends
paid - - - - (2,208) - (2,208)
Net proceeds
of share
issues 900 12,072 - - - - 12,972
Shares
purchased for
cancellation (25) - 25 - (367) - (367)
---------- ---------- ---------- ---------- ---------- ---------- ---------
At 30
September
2020 5,522 19,500 457 18,204 58,106 1,543 103,332
---------- ---------- ---------- ---------- ---------- ---------- ---------
STATEMENT OF CHANGES IN EQUITY
(unaudited) for the six months ended 30 September 2019
-----------------Non-distributable
reserves----------------- Distributable reserves Total
Capital
Called up share Share redemption Revaluation Capital Revenue
capital premium reserve reserve* reserve reserve
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
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
for the year ended 31 March 2020
-----------------Non-distributable
reserves----------------- Distributable reserves Total
Capital
Called up share Share redemption Revaluation Capital Revenue
capital premium reserve reserve* reserve reserve
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
At 1 April
2019 4,393 840 299 9,166 65,665 2,368 82,731
Return on
ordinary
activities
after tax - - - (10,819) (596) 328 (11,087)
Dividends
paid - - - - (1,967) (1,793) (3,760)
Net proceeds
of share
issues 387 6,588 - - - - 6,975
Shares
purchased
for
cancellation (133) - 133 - (2,316) - (2,316)
---------- ---------- ---------- ---------- ---------- ---------- ----------
At 31 March
2020 4,647 7,428 432 (1,653) 60,786 903 72,543
---------- ---------- ---------- ---------- ---------- ---------- ----------
*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 2020
Six months
ended Six months ended Year ended
30 September 30 September
2020 2019 31 March 2020
GBP000 GBP000 GBP000
Cash flows from
operating
activities:
Return on ordinary
activities before
tax 20,392 147 (11,087)
Adjustments for:
Gain on disposal of
investments (466) (45) 168
Movement in fair
value of
investments (19,903) (448) 9,943
(Increase)/decrease
in debtors (556) (856) 183
(Decrease)/increase
in creditors (38) 126 (65)
---------- ---------- ----------
Net cash outflow
from operating
activities (571) (1,076) (858)
---------- ---------- ----------
Cash flows from
investing
activities:
Purchase of
investments (3,431) (6,789) (12,772)
Sale/repayment of
investments 1,886 6,363 8,696
---------- ---------- ----------
Net cash outflow
from investing
activities (1,545) (426) (4,076)
---------- ---------- ----------
Cash flows from
financing
activities:
Issue of ordinary
shares 13,300 6,852 7,109
Share issue expenses (327) (120) (135)
Share subscriptions
held pending
allotment - (6,493) (6,493)
Purchase of ordinary
shares for
cancellation (367) (1,073) (2,316)
Equity dividends
paid (2,208) (1,892) (3,760)
---------- ---------- ----------
Net cash
inflow/(outflow)
from financing
activities 10,398 (2,726) (5,595)
---------- ---------- ----------
Net
increase/(decrease)
in cash and cash
equivalents 8,282 (4,228) (10,529)
Cash and cash
equivalents at
beginning of
period 8,876 19,405 19,405
---------- ---------- ----------
Cash and cash
equivalents at end
of period 17,158 15,177 8,876
---------- ---------- ----------
INVESTMENT PORTFOLIO SUMMARY
as at 30 September 2020
Cost Valuation % of net assets
GBP000 GBP000 by value
Agilitas IT Holdings 822 10,507 10.2
Entertainment Magpie Group 1,360 8,795 8.5
Lineup Systems 974 5,095 4.9
Currentbody.com 1,843 4,191 4.1
SHE Software Group 2,168 2,829 2.7
Sorted Holdings 2,542 2,757 2.7
It's All Good 1,131 2,366 2.3
Clarilis 1,772 2,305 2.2
Ideagen* 406 2,162 2.1
Intelling Group 1,118 2,020 2.0
Volumatic Holdings 733 2,005 1.9
Idox* 530 1,989 1.9
Biological Preparations Group 1,915 1,787 1.7
Knowledgemotion 1,740 1,515 1.5
GRIP-UK t.a. The Climbing Hangar 1,904 1,505 1.5
---------- ---------- -------
Fifteen largest venture capital
investments 20,958 51,828 50.2
Other venture capital investments 36,227 23,807 23.0
---------- ---------- -------
Total venture capital investments 57,185 75,635 73.2
Listed equity investments 10,301 10,054 9.7
---------- ---------- -------
Total fixed asset investments 67,486 85,689 82.9
----------
Net current assets 17,643 17.1
---------- -------
Net assets 103,332 100.0
---------- -------
*Quoted on AIM
BUSINESS RISKS
The board carries out a regular and robust assessment of the risk
environment in which the company operates and seeks to identify new
risks as they emerge. 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 rules of the VCT scheme. The board reviews the investment
portfolio with the investment 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. The level of economic risk has been
elevated by the COVID-19 pandemic which has caused a global recession
during 2020. 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 it is appropriate and in the interests of the
company to do so. The manager typically provides an investment
executive to actively support the board of each unquoted investee
company. At all times, and particularly during periods of heightened
economic uncertainty, the investment executives share best practice from
across the portfolio with investee management teams in order to mitigate
economic risk.
Brexit risk: the implementation of the decision for the UK to withdraw
from the European Union (EU) is a process which involves significant
uncertainty. The impact on the future business environment in the UK is
therefore difficult to predict. Mitigation: whilst we do not expect
that Brexit will have a significant impact on the operations of Northern
3 VCT itself, the board and the manager follow Brexit developments
closely with a view to identifying changes which might affect the
company's investment portfolio. The manager works closely with investee
companies in order to plan for a range of possible outcomes.
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 or
global health crises, such as the COVID-19 pandemic, 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 Mercia in the case of
the 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 investment 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 which is able to
operate effectively even during times of disruption, such as that caused
by COVID-19. Mitigation: the board regularly reviews the system of
internal controls, both financial and non-financial, operated by the
company and the investment 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 2020 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 2020 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 2020.
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), Mrs A B Brown, 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 2020 and on
110,279,045 (2019: 94,579,721) 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 2020 divided by the 110,445,090 (2019:
94,101,352) ordinary shares in issue at that date.
The interim dividend of 2.0 pence per share for the year ending 31 March
2021 will be paid on 29 January 2021 to shareholders on the register at
the close of business on 8 January 2021.
A copy of the half-yearly financial report for the six months ended 30
September 2020 is expected to be posted to shareholders by 22 December
2020 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 company's website.
Neither the contents of the NVM Private Equity LLP or the Mercia Asset
Management PLC website, nor the contents of any website accessible from
hyperlinks on the NVM Private Equity LLP or Mercia Asset Management PLC
website (or any other website) is incorporated into, or forms part of,
this announcement.
(END) Dow Jones Newswires
December 01, 2020 11:20 ET (16:20 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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