14 NOVEMBER 2017
NORTHERN 3 VCT PLC
UNAUDITED HALF-YEARLY FINANCIAL REPORT
FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2017
Northern 3 VCT PLC is a Venture Capital Trust (VCT) managed by NVM Private Equity LLP. It invests mainly in unquoted venture capital holdings and aims to provide high long-term tax-free returns to shareholders through a combination of dividend yield and capital growth.
Financial highlights (comparative figures as at 30 September 2016 and 31 March 2017)
| | Six months to 30 September 2017 | Six months to 30 September 2016 | Year to 31 March 2017 |
| Net assets | £68.7m | £70.6m | £69.9m |
| Net asset value per share | 98.0p | 107.1p | 106.2p |
| Return per share: Revenue Capital Total | 1.5p (1.2)p 0.3p | 1.2p 12.3p 13.5p | 2.6p 12.0p 14.6p |
| Dividend per share declared/paid in respect of the period (31 March 2017 includes 5.0p special dividend) | 2.0p | 2.0p | 10.5p |
| Cumulative returns to shareholders since launch: Net asset value per share Dividends paid per share* Net asset value plus dividends paid per share | 98.0p 83.9p 181.9p | 107.1p 73.4p 180.5p | 106.2p 75.4p 181.6p |
| Mid-market share price at end of period | 93.0p | 91.5p | 101.0p |
| Share price discount to net asset value | 5.1% | 14.6% | 4.9% |
| Tax-free dividend yield (based on mid-market share price at end of period): | |||
| Excluding special dividend Including special dividend | 5.9% N/A | 6.0% N/A | 5.4% 10.4% |
*Excluding interim dividend not yet paid
For further information, please contact:
NVM Private Equity LLP
Alastair Conn/Christopher Mellor 0191 244 6000
Website: www.nvm.co.uk
HALF-YEARLY MANAGEMENT REPORT TO SHAREHOLDERS
The unaudited net asset value (NAV) per share at 30 September 2017 was 98.0 pence (31 March 2017 (audited) 106.2 pence). The September figure is stated after deducting the second interim and final dividends totalling 8.5 pence per share in respect of the year ended 31 March 2017, which were paid in July 2017 and therefore recognised in the September 2017 half-yearly accounts. The second interim dividend of 5.0 pence was a special payment, following further successful sales of holdings from the venture capital portfolio.
Taking account of the reduction in NAV resulting from the dividend payments, the operating outcome for the six month period was marginally positive with the income statement showing a return per share of 0.3p after a very strong advance in the preceding 12 months.
The directors have declared an unchanged interim dividend of 2.0 pence per share for the year ending 31 March 2018, which will be paid on 26 January 2018 to shareholders on the register at the close of business on 5 January 2018.
Investment portfolio
Four new holdings in VCT-qualifying unquoted companies were acquired during the period at a cost of £2.6 million, as follows:
- Velocity Composites (£95,000) - AIM-quoted manufacturer of material kits for aircraft production, Burnley
- Knowledgemotion (£958,000) - educational video aggregator and distributor, London
- Contego Fraud Solutions (£481,000) - identity verification system provider, Oxford
- Volo Commerce (£1,088,000) - enterprise resource planning platform for online merchants, London
A second round of funding was provided for existing investee company Sorted Holdings (£760,000).
Subsequent to 30 September 2017 new investments have been completed in Angle (AIM-quoted, £131,000) and Soda Software Labs (£1,301,000).
Proceeds from investment sales and repayments amounted to £6.4 million, producing a gain of £0.6 million over 31 March 2017 carrying values. The investment in Optilan Group was sold in a secondary buy-out transaction to Blue Water Energy for £2.8 million, and a further £2.2 million was released on the liquidation of five companies which were originally set up in 2015 with a view to commencing VCT-qualifying activities but as it turned out were not able to do so. In the AIM-quoted portfolio the remaining investment in Gear4music (Holdings) was sold, as was the investment in Hayward Tyler prior to an agreed takeover by Avingtrans.
Our managers continue to monitor the venture capital portfolio closely. As expected, the composition of the portfolio is changing gradually, reflecting the earlier-stage nature of the new investments which are being completed under the revised VCT regulations. This is likely to give rise to greater fluctuations in valuations over time, and there have already been some instances of movements in both directions. Overall the condition of the portfolio remains satisfactory.
Share issues and buy-backs
In September 2017 we launched a public offer of new shares, our first significant offer for over four years, to raise up to £20 million for the next phase of the company's investment activities. Northern Venture Trust and Northern 2 VCT launched similar offers in conjunction with ours. The response from investors has been very good, despite a number of competing issues from other VCT houses during the same period, and the offer is already almost fully subscribed. Over 50% of the amount invested came from existing shareholders in Northern 3 VCT, who were given priority in the offer, and we would like to thank both them and our new shareholders for their support and confidence in the company. We now have a very strong store of liquidity for our future investment programme.
It remains our policy to buy back the company's shares in the market at a discount of 5% to NAV, and 569,000 shares were re-purchased for cancellation during the six months ended 30 September 2017 at a cost of £530,000.
VCT qualifying status
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 managers monitor the position closely and the board also receives regular reports from our taxation advisers at Philip Hare & Associates LLP.
VCT legislation
The Government has continued to consult on the subject of how best to provide long-term financial investment for smaller unquoted companies in the UK, and our managers and their colleagues in the VCT sector have played a full part in making representations to HM Treasury concerning the key role played by VCTs over the past 20 years. We wait to see whether the outcome of the consultation leads to any changes in the VCT legislation when the Chancellor makes his Budget announcement on 22 November 2017. In the meantime NVM has continued to develop its investment resources to address the need to focus activity on earlier-stage businesses. As previously indicated, the VCT-qualifying investments made in previous years in later-stage companies are not affected by the recent legislation, except that many of them are no longer eligible for "follow-on" funding rounds.
Prospects
The financial markets have been remarkably buoyant over the past year despite concerns about future prospects for the UK economy and the political situation in Europe and further afield. We do not expect the recent marginal increase in interest rates to have a significant impact on the companies we have invested in, and the flow of potential new investments currently appears healthy.
On behalf of the Board
James Ferguson
Chairman
The unaudited half-yearly financial statements for the six months ended 30 September 2017 are set out below.
INCOME STATEMENT
(unaudited) for the six months ended 30 September 2017
| Six months ended 30 September 2017 | Six months ended 30 September 2016 | |||||
| Revenue £000 | Capital £000 | Total £000 | Revenue £000 | Capital £000 | Total £000 | |
| Gain on disposal of investments | - | 580 | 580 | - | 492 | 492 |
| Movements in fair value of investments | - | (986) | (986) | - | 7,975 | 7,975 |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | |
| - | (406) | (406) | - | 8,467 | 8,467 | |
| Income | 1,525 | - | 1,525 | 1,201 | - | 1,201 |
| Investment management fee | (187) | (562) | (749) | (173) | (517) | (690) |
| Other expenses | (156) | - | (156) | (150) | - | (150) |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | |
| Return on ordinary activities before tax | 1,182 | (968) | 214 | 878 | 7,950 | 8,828 |
| Tax on return on ordinary activities | (152) | 152 | - | (105) | 105 | - |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | |
| Return on ordinary activities after tax | 1,030 | (816) | 214 | 773 | 8,055 | 8,828 |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | |
| Return per share | 1.5p | (1.2)p | 0.3p | 1.2p | 12.3p | 13.5p |
| Dividend per share for the period | 1.0p | 1.0p. | 2.0p | 1.0p | 1.0p | 2.0p |
| Year ended 31 March 2017 | ||||||
| Revenue £000 | Capital £000 | Total £000 | ||||
| Gain on disposal of investments | - | 1,775 | 1,775 | |||
| Movements in fair value of investments | - | 7,785 | 7,785 | |||
| ---------- | ---------- | ---------- | ||||
| - | 9,560 | 9,560 | ||||
| Income | 2,626 | - | 2,626 | |||
| Investment management fee | (354) | (1,951) | (2,305) | |||
| Other expenses | (306) | - | (306) | |||
| ---------- | ---------- | ---------- | ||||
| Return on ordinary activities before tax | 1,966 | 7,609 | 9,575 | |||
| Tax on return on ordinary activities | (274) | 274 | - | |||
| ---------- | ---------- | ---------- | ||||
| Return on ordinary activities after tax | 1,692 | 7,883 | 9,575 | |||
| ---------- | ---------- | ---------- | ||||
| Return per share | 2.6p | 12.0p | 14.6p | |||
| Dividend per share for the period | 2.0p | 8.5p | 10.5p | |||
BALANCE SHEET
(unaudited) as at 30 September 2017
| 30 September 2017 £000 | 30 September 2016 £000 | 31 March 2017 £000 | |
| Fixed assets: | |||
| Investments | 58,867 | 68,849 | 62,717 |
| ---------- | ---------- | ---------- | |
| Current assets: | |||
| Debtors | 560 | 251 | 652 |
| Cash and deposits | 9,324 | 1,542 | 11,811 |
| ---------- | ---------- | ---------- | |
| 9,884 | 1,793 | 12,463 | |
| Creditors (amounts falling due | |||
| within one year) | (76) | (85) | (5,288) |
| ---------- | ---------- | ---------- | |
| Net current assets | 9,808 | 1,708 | 7,175 |
| ---------- | ---------- | ---------- | |
| Net assets | 68,675 | 70,557 | 69,892 |
| ---------- | ---------- | ---------- | |
| Capital and reserves: | |||
| Called-up equity share capital | 3,502 | 3,294 | 3,290 |
| Share premium | 7,011 | 2,074 | 2,223 |
| Capital redemption reserve | 141 | 100 | 113 |
| Capital reserve | 46,051 | 50,756 | 50,850 |
| Revaluation reserve | 10,345 | 13,300 | 12,124 |
| Revenue reserve | 1,625 | 1,033 | 1,292 |
| ---------- | ---------- | ---------- | |
| Total equity shareholders' funds | 68,675 | 70,557 | 69,892 |
| ---------- | ---------- | ---------- | |
| Net asset value per share | 98.0p | 107.1p | 106.2p |
STATEMENT OF CHANGES IN EQUITY
(unaudited) for the six months ended 30 September 2017
| -----------------Non-distributable reserves----------------- | Distributable reserves | Total | ||||||
| Share capital | Share premium | Capital redemption reserve | Revaluation reserve | Capital reserve | Revenue reserve | |||
| £000 | £000 | £000 | £000 | £000 | £000 | £000 | ||
| At 1 April 2017 | 3,290 | 2,223 | 113 | 12,124 | 50,850 | 1,292 | 69,892 | |
| Return on ordinary activities | ||||||||
| after tax for the period | - | - | - | (1,779) | 963 | 1,030 | 214 | |
| Dividends paid | - | - | - | - | (5,232) | (697) | (5,929) | |
| Net proceeds of share issues | 240 | 4,788 | - | - | - | - | 5,028 | |
| Shares re-purchased | ||||||||
| for cancellation | (28) | - | 28 | - | (530) | - | (530) | |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ||
| At 30 September 2017 | 3,502 | 7,011 | 141 | 10,345 | 46,051 | 1,625 | 68,675 | |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ||
STATEMENT OF CHANGES IN EQUITY
(unaudited) for the six months ended 30 September 2016
| -----------------Non-distributable reserves----------------- | Distributable reserves | Total | ||||||
| Share capital | Share premium | Capital redemption reserve | Revaluation reserve | Capital reserve | Revenue reserve | |||
| £000 | £000 | £000 | £000 | £000 | £000 | £000 | ||
| At 1 April 2016 | 3,277 | 1,348 | 76 | 6,899 | 54,452 | 912 | 66,964 | |
| Return on ordinary activities | ||||||||
| after tax for the period | - | - | - | 6,401 | 1,654 | 773 | 8,828 | |
| Dividends paid | - | - | - | - | (4,900) | (652) | (5,552) | |
| Net proceeds of share issues | 41 | 726 | - | - | - | - | 767 | |
| Shares re-purchased | ||||||||
| for cancellation | (24) | - | 24 | - | (450) | - | (450) | |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ||
| At 30 September 2016 | 3,294 | 2,074 | 100 | 13,300 | 50,756 | 1,033 | 70,557 | |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ||
STATEMENT OF CHANGES IN EQUITY
(unaudited) for the year ended 31 March 2017
| -----------------Non-distributable reserves----------------- | Distributable reserves | Total | ||||||
| Share capital | Share premium | Capital redemption reserve | Revaluation reserve | Capital reserve | Revenue reserve | |||
| £000 | £000 | £000 | £000 | £000 | £000 | £000 | ||
| At 1 April 2016 | 3,277 | 1,348 | 76 | 6,899 | 54,452 | 912 | 66,964 | |
| Return on ordinary activities | ||||||||
| after tax for the period | - | - | - | 5,225 | 2,658 | 1,692 | 9,575 | |
| Dividends paid | - | - | - | - | (5,559) | (1,312) | (6,871) | |
| Net proceeds of share issues | 50 | 875 | - | - | - | - | 925 | |
| Shares re-purchased | ||||||||
| for cancellation | (37) | - | 37 | - | (701) | - | (701) | |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ||
| At 31 March 2017 | 3,290 | 2,223 | 113 | 12,124 | 50,850 | 1,292 | 69,892 | |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ||
STATEMENT OF CASH FLOWS
(unaudited) for the six months ended 30 September 2017
| Six months ended | Six months ended | Year ended | |
| 30 September 2017 | 30 September 2016 | 31 March 2017 | |
| £000 | £000 | £000 | |
| Cash flows from operating activities: | |||
| Return on ordinary activities before tax | 214 | 8,828 | 9,575 |
| Adjustments for: | |||
| Gain on disposal of investments | (580) | (492) | (1,775) |
| Movement in fair value of investments | 986 | (7,975) | (7,785) |
| Decrease/(increase) in debtors | 92 | 1 | (400) |
| (Decrease)/increase in creditors | (932) | (535) | 387 |
| ---------- | ---------- | ---------- | |
| Net cash inflow/(outflow) from operating activities | (220) | (173) | 2 |
| ---------- | ---------- | ---------- | |
| Cash flows from investing activities: | |||
| Purchase of investments | (3,703) | (5,547) | (6,856) |
| Sale/repayment of investments | 7,146 | 3,860 | 12,394 |
| ---------- | ---------- | ---------- | |
| Net cash inflow/(outflow) from investing activities | 3,443 | (1,687) | 5,538 |
| ---------- | ---------- | ---------- | |
| Cash flows from financing activities: | |||
| Issue of ordinary shares | 5,117 | 775 | 951 |
| Share issue expenses | (87) | (8) | (26) |
| Share subscriptions held pending allotment | (4,281) | - | 4,281 |
| Repurchase of ordinary shares for cancellation | (530) | (450) | (701) |
| Equity dividends paid | (5,929) | (5,552) | (6,871) |
| ---------- | ---------- | ---------- | |
| Net cash outflow from financing activities | (5,710) | (5,235) | (2,366) |
| ---------- | ---------- | ---------- | |
| Net increase/(decrease) in cash and cash equivalents | (2,487) | (7,095) | 3,174 |
| Cash and cash equivalents at beginning of period | 11,811 | 8,637 | 8,637 |
| ---------- | ---------- | ---------- | |
| Cash and cash equivalents at end of period | 9,324 | 1,542 | 11,811 |
| ---------- | ---------- | ---------- |
INVESTMENT PORTFOLIO SUMMARY
as at 30 September 2017
| Company | Cost £000 | Valuation £000 | % of net assets by valuation |
| Fifteen largest venture capital investments: | |||
| No 1 Lounges | 1,748 | 3,412 | 5.0 |
| Entertainment Magpie Group | 1,360 | 3,167 | 4.6 |
| IDOX* | 530 | 2,820 | 4.1 |
| Buoyant Upholstery | 1,294 | 2,518 | 3.7 |
| Lineup Systems | 974 | 2,468 | 3.6 |
| Sorted Holdings | 1,521 | 2,372 | 3.5 |
| MSQ Partners Group | 1,478 | 2,286 | 3.3 |
| Agilitas IT Holdings | 1,448 | 1,725 | 2.5 |
| Biological Preparations Group | 1,915 | 1,671 | 2.4 |
| Closerstill Group | 1,520 | 1,660 | 2.4 |
| It's All Good | 1,131 | 1,656 | 2.4 |
| Wear Inns | 1,406 | 1,589 | 2.3 |
| Volumatic Holdings | 1,423 | 1,555 | 2.3 |
| ECO Animal Health Group* | 497 | 1,426 | 2.1 |
| Love Saving Group | 1,017 | 1,399 | 2.0 |
| ---------- | ---------- | ------- | |
| 19,262 | 31,724 | 46.2 | |
| Other venture capital investments | 22,078 | 19,538 | 28.4 |
| ---------- | ---------- | ------- | |
| Total venture capital investments | 41,340 | 51,262 | 74.6 |
| Listed equity investments | 7,182 | 7,605 | 11.1 |
| ---------- | ---------- | ------- | |
| Total fixed asset investments | 48,522 | 58,867 | 85.7 |
| ---------- | |||
| Net current assets | 9,808 | 14.3 | |
| ---------- | ------- | ||
| Net assets | 68,675 | 100.0 | |
| ---------- | ------- | ||
| *Quoted on AIM |
BUSINESS RISKS
The board carries out a regular and robust review of the risk environment in which the company operates. The principal risks and uncertainties identified by the board which might affect the company's business model and future performance, and the steps taken with a view to their mitigation, are as follows:
Investment and liquidity risk: investment in smaller and unquoted companies, such as those in which the company invests, involves a higher degree of risk than investment in larger listed companies because they generally have limited product lines, markets and financial resources and may be more dependent on their management or 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. 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 take advantage of new unquoted investment opportunities. 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 and interest rates may affect the valuation of investee companies and their ability to access adequate financial resources, as well as affecting the company's own share price and discount to net asset value. Mitigation: the company invests in a diversified portfolio of investments spanning various industry sectors, and maintains sufficient cash reserves to be able to provide additional funding to investee companies where appropriate.
Stock market risk: some of the company's investments are quoted on the London Stock Exchange or AIM and will be subject to market fluctuations upwards and downwards. External factors such as terrorist activity can negatively impact stock markets worldwide. In times of adverse sentiment there may be very little, if any, market demand for shares in smaller companies quoted on AIM. Mitigation: the company's quoted investments are actively managed by specialist advisers and the board keeps the portfolio 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. 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 2017 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 2017 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 2017.
Each of the directors confirms that to the best of his knowledge the half-yearly financial statements have been prepared in accordance with the Statement "Half-yearly financial reports" issued by the UK Accounting Standards Board and the half-yearly financial report includes a fair review of the information required by (a) DTR 4.2.7R of the Disclosure Rules and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year, and (b) DTR 4.2.8R of the Disclosure Rules and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period, and any changes in the related party transactions described in the last annual report that could do so.
The directors of the company at the date of this statement were Mr J G D Ferguson (Chairman), Mr C J Fleetwood, Mr T R Levett and Mr J M O Waddell.
The calculation of the revenue and capital return per share is based on the return on ordinary activities after tax for the period and on 69,893,045 (2016 65,685,799) 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 2017 divided by the 70,043,146 (2016 65,880,055) ordinary shares in issue at that date.
The interim dividend of 2.0 pence per share for the year ending 31 March 2018 will be paid on 26 January 2018 to shareholders on the register at the close of business on 5 January 2018.
A copy of the half-yearly financial report for the six months ended 30 September 2017 is expected to be posted to shareholders by 1 December 2017 and will be available to the public at the registered office of the company at Time Central, 32 Gallowgate, Newcastle upon Tyne NE1 4SN and on the NVM Private Equity LLP website, www.nvm.co.uk.
Neither the contents of the NVM Private Equity LLP website nor the contents of any website accessible from hyperlinks on the NVM Private Equity LLP website (or any other website) is incorporated into, or forms part of, this announcement.