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Northern 3 VCT PLC   -  NTN   

Annual Financial Report

Released 08:30 17-May-2019

Annual Financial Report

16 MAY 2019

NORTHERN 3 VCT PLC

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 MARCH 2019

Northern 3 VCT PLC is a Venture Capital Trust (VCT) managed by NVM Private Equity.  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 31 March 2018):

 

 
 2019 2018
Net assets£82.7m£84.3m
Net asset value per share94.2p94.0p
Return per share:  
Revenue1.8p1.9p
Capital3.8p(4.0)p
Total5.6p(2.1)p
Dividend per share for the year:  
Interim dividend2.0p2.0p
Proposed final dividend2.0p3.5p
Total4.0p5.5p
Cumulative return to shareholders since launch:  
Net asset value per share94.2p94.0p
Dividends paid per share*91.4p85.9p
Net asset value plus dividends paid per share185.6p179.9p
Mid-market share price at end of year86.00p89.50p
Share price discount to net asset value8.7%4.8%
Tax-free dividend yield (based on net asset value per share at the start of the year)4.3%5.2%

*Excluding proposed final dividend payable on 19 July 2019

For further information, please contact:

NVM Private Equity LLP
Simon John/James Bryce                    0191 244 6000

Website:  www.nvm.co.uk

CHAIRMAN’S STATEMENT

Northern 3 VCT has had a productive year during which ten new VCT–qualifying investments were completed and a successful public share offer was launched and fully subscribed. Cashflow remained strong, supported by a number of notable investment sales and as a result, your company is well placed to support our evolving portfolio. 

Results and dividend
The net asset value (NAV) per share at 31 March 2019, after deducting dividends totalling 5.5p paid during the year, was 94.2p compared with 94.0p as at 31 March 2018. The total return per share for the year as shown in the income statement was 5.6p (last year minus 2.1p), equivalent to 6.0% of the opening NAV.  The company’s NAV total return over five years remains ahead of the UK equity market total return index which we use as a comparator.

We are continuing to build a portfolio of investments in innovative earlier stage UK companies with significant growth potential, with a view to achieving a capital return rather than income generation.  The potential returns are attractive, however the investment holding period required will typically be longer and there may be greater fluctuations in short term results.  Paying regular dividends whilst seeking to sustain the NAV per share is a priority for your board and future distributions will continue to have regard to the level of returns generated.  As stated in the latest half-yearly report, our medium term aim, subject to regular review, is to provide a dividend yield of 4% per annum.  After careful consideration, we have proposed a final dividend of 2.0p in respect of the year, which together with the interim dividend of 2.0p paid in January makes a total of 4.0p. The total dividend equates to a tax-free yield of 4.3% based on the opening NAV per share. The proposed final dividend will, subject to approval by shareholders at the annual general meeting, be paid on 19 July 2019 to shareholders on the register on 21 June 2019.

Investment portfolio
The rate of new investment has been encouraging over the past year with the ten new VCT-qualifying investments costing £6.3 million.  Taken with follow-on investments totalling £3.7 million, the overall venture capital investment rate was £10.0 million for the second successive year.  We expect to continue to allocate a significant proportion of our annual investment activity to providing additional growth capital to our existing portfolio companies.  Around 50% by value of the unquoted portfolio consists of investments in more mature businesses acquired under previous iterations of the VCT scheme rules.  Healthy gains were realised from the successful sales of several investments from the mature portfolio, a trend we hope will continue in the coming years as the earlier stage portfolio develops.

In the quoted venture capital portfolio, a number of investee companies made progress during the year, with valuations increasing overall accordingly.  Both Cityfibre Infrastructure Holdings and Sinclair Pharma were the subjects of agreed takeover bids during the year, supporting the overall positive return.

Shareholder issues
Having reviewed the likely cash requirements over the coming years, we launched a ‘top-up’ share issue in January 2019 in order to maintain a comfortable margin of liquidity for future investment activity.  We raised our full target of £6.6 million in 12 days and would like to thank all investors for the vote of confidence shown in Northern 3 VCT.

Our dividend investment scheme, under which dividends can be re-invested in new ordinary shares free of dealing costs and with the benefit of the tax reliefs available on new VCT share subscriptions, continues to operate.  Shareholders who wish to join the scheme or amend their current participation in the scheme may obtain an updated scheme mandate form from NVM’s website at www.nvm.co.uk

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 year 2,565,184 shares, equivalent to approximately 2.9% of the opening share capital, were re-purchased for cancellation at an average cost of 88.5p per share.

VCT qualifying status
The company has continued to meet the qualifying conditions laid down by HM Revenue & Customs for maintaining its approval as a VCT.  The board reviews the company’s compliance position on a regular basis with the manager.  A professional firm of accountants which specialises in VCT compliance continues to act as independent adviser to the company on VCT taxation matters.

VCT legislation and regulation
We have grown accustomed to frequent legislative change in recent years, however the past 12 months has provided a welcome period of stability with no further amendments to the VCT scheme rules proposed in the most recent Autumn Budget Statement.  Previously announced measures are still being implemented on a phased basis and as previously reported, from April 2020 your company will be required to hold at least 80% of its funds in VCT qualifying assets (previously 70%).  The board and our investment manager are monitoring progress towards this target very closely and are encouraged by the strong investment rate. 

Until recently, most VCTs have submitted their potential investment opportunities to HMRC via the advanced assurance service, whereby an indicative opinion as to the qualifying nature of a proposed investment may be sought.  HMRC has a long stated aim of limiting the focus of this non-statutory service to those cases which are deemed to be more subjective and to therefore encourage VCTs to self-assure their more straight-forward cases.  Your board is encouraged that efforts to clarify how self-assurance should work in practice have recently resulted in HMRC issuing updates to their VCT guidance notes.  In future, our intention is to self-assure cases which satisfy certain criteria and on which an opinion has been issued by a professional adviser.  

Outlook
We have been operating for some time against a backdrop of political and economic uncertainty and these conditions look set to continue for some time as the deadline for the UK to leave the European Union has been extended.  The uncertainty created by this delay in conjunction with other macro-economic factors is causing a certain degree of volatility in financial markets.  Whilst limited clarity has yet emerged as to the future trading relationship between the UK and the EU, our manager’s approach has been to work with individual portfolio companies to assess specific risks and plan for a variety of potential outcomes.  Our manager has a good record of dealing with periods of change and we remain confident in their ability to deliver good results for shareholders in the medium to long term.

James Ferguson
Chairman      

Extracts from the audited financial statements for the year ended 31 March 2019 are set out below.                                                                                                                                         

INCOME STATEMENT
for the year ended 31 March 2019

 Year ended 31 March 2019Year ended 31 March 2018
 Revenue 
£000 
Capital 
£000 
Total 
£000 
Revenue 
£000 
Capital 
£000 
Total 
£000 
Gain on disposal of investments3,204 3,204 698 698 
Movements in fair value of investments1,195 1,195 (2,892) (2,892) 
 ---------- ---------- ---------- ---------- ---------- ---------- 
 4,399 4,399 (2,194) (2,194) 
Income2,541 2,541 2,436 2,436 
Investment management fee(397)(1,190)(1,587)(384)(1,150)(1,534)
Other expenses(373)(373)(335)(11) (346)
 ---------- ---------- ---------- ---------- ---------- ---------- 
Return on ordinary activities before tax1,771 3,209 4,980 1,717 (3,355) (1,638) 
Tax on return on ordinary activities(219)219 (209)209 
 ---------- ---------- ---------- ---------- ---------- ---------- 
Return on ordinary activities after tax1,552 3,428 4,980 1,508 (3,146) (1,638) 
 ---------- ---------- ---------- ---------- ---------- ---------- 
Return per share1.8p3.8p5.6p1.9p(4.0)p(2.1)p
Dividends paid/proposed in respect of the year1.5p2.5p4.0p1.5p4.0p5.5p

BALANCE SHEET
as at 31 March 2019

 31 March 2019 
£000 
31 March 2018 
£000 
Fixed assets:  
 Investments69,811 62,770 
 ---------- ---------- 
Current assets:  
 Debtors211 167 
 Cash and cash equivalents19,405 21,458 
 ---------- ---------- 
 19,616 21,625 
Creditors (amounts falling due within one year)(6,696)(135)
 ---------- ---------- 
Net current assets12,920 21,490 
 ---------- ---------- 
   
Net assets82,731 84,260 
 ---------- ---------- 
   
Capital and reserves:  
Called-up equity share capital4,393 4,483 
Share premium840 214 
Capital redemption reserve299 171 
Capital reserve65,665 69,721 
Revaluation reserve9,166 8,463 
Revenue reserve2,368 1,208 
 ---------- ---------- 
Total equity shareholders’ funds82,731 84,260 
 ---------- ---------- 
Net asset value per share94.2p94.0p

STATEMENT OF CHANGES IN EQUITY
for the year ended 31 March 2019

 ---------------Non-distributable reserves---------------Distributable reservesTotal  
 Called up share 
capital 
 

Share 
premium
Capital 
redemption 
reserve 
 

Revaluation 
reserve* 
 

Capital 
reserve 
 

Revenue 
reserve 
  
 £000 £000 £000 £000 £000 £000 £000  
At 1 April 20184,483 214 171 8,463 69,721 1,208 84,260  
Return on ordinary activities        
after tax703 2,725 1,552 4,980 
Dividends paid(4,512)(392)(4,904) 
Net proceeds of share issues38 626 664  
Shares purchased for cancellation 

(128)
 

 

128 
 

 

(2,269)
 

 

(2,269)
 
 ---------- ---------- ---------- ---------- ---------- ---------- ----------  
At 31 March 20194,393 840 299 9,166 65,665 2,368 82,731  
 ---------- ---------- ---------- ---------- ---------- ---------- ----------  

STATEMENT OF CHANGES IN EQUITY
for the year ended 31 March 2018

 ---------------Non-distributable reserves---------------Distributable reservesTotal 
 Called up share 
capital 
 

Share 
premium 
Capital 
redemption 
reserve 
 

Revaluation 
reserve* 
 

Capital 
reserve 
 

Revenue 
reserve 
 
 £000 £000 £000 £000 £000 £000 £000 
At 1 April 20173,290 2,223 113 12,124 50,850 1,292 69,892 
Return on ordinary activities       
after tax(3,661) 515 1,508 (1,638) 
Dividends paid(6,127)(1,592)(7,719)
Net proceeds of share issues1,251 23,560 24,811 
Shares purchased for cancellation 

(58)
 

 

58 
 

 

(1,086)
 

 

(1,086)
Cancellation of share premium reserve 

-
 

(25,569)
 

-
 

-
 

25,569
 

-
 

-
 ---------- ---------- ---------- ---------- ---------- ---------- ---------- 
At 31 March 20184,483 214 171 8,463 69,721 1,208 84,260 
 ---------- ---------- ---------- ---------- ---------- ---------- ---------- 

*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
for the year ended 31 March 2019

 Year ended Year ended 
 31 March 2019 31 March 2018 
 £000 £000 
Cash flows from operating activities:  
Return on ordinary activities before tax4,980 (1,638)  
Adjustments for:  
Gain on disposal of investments(3,204)(698)
Movement in fair value of investments(1,195)2,892
(Increase)/decrease in debtors(44)485
 Increase/(decrease) in creditors68 (872) 
 ---------- ---------- 
Net cash inflow from operating activities605 169  
 ---------- ---------- 
Cash flows from investing activities:  
Purchase of investments(18,342)(10,117)
Sale/repayment of investments15,700 7,870 
 ---------- ---------- 
Net cash outflow from investing activities(2,642)(2,247)
 ---------- ---------- 
Cash flows from financing activities:  
Issue of ordinary shares702 25,357 
Share issue expenses(38)(546)
Share subscriptions held pending allotment  6,493(4,281)
Purchase of ordinary shares for cancellation(2,269)(1,086)
Equity dividends paid(4,904)(7,719)
 ---------- ---------- 
Net cash (outflow)/inflow from financing activities(16)11,725 
 ---------- ---------- 
(Decrease)/increase in cash and cash equivalents(2,053)9,647 
Cash and cash equivalents at beginning of year21,458 11,811 
 ---------- ---------- 
Cash and cash equivalents at end of year19,405 21,458 
 ---------- ---------- 

INVESTMENT PORTFOLIO SUMMARY
as at 31 March 2019

  

Cost
£000
 

Valuation
£000
% of
net assets
by value
Venture capital investments:   
Sorted Holdings2,5423,3934.1
MSQ Partners Group1,4783,0823.7
Lineup Systems9742,9103.5
Agilitas IT Holdings1,4482,8883.5
No 1 Lounges1,7482,6143.2
Ideagen*5412,1902.6
Volumatic Holdings1,0782,1102.6
SHE Software Group1,8502,0832.5
Entertainment Magpie Group1,3601,7332.1
Currentbody.com1,2701,6342.0
It’s All Good1,1311,6061.9
Idox*5301,5871.9
Knowledgemotion1,4371,5611.9
Biological Preparations Group1,9151,5531.9
AVID Technology Group1,2101,5371.9
 ----------------------------
Fifteen largest venture capital investments20,512 32,48139.3
Other venture capital investments29,66626,75532.3
 ----------------------------
Total venture capital investments50,178 59,23671.6
Listed equity investments10,46710,57512.8
 ----------------------------
Total fixed asset investments60,64569,81184.4
 ----------  
Net current assets 12,92015.6
  ------------------
Net assets 82,731100.0
  ------------------

*Quoted on AIM

RISK MANAGEMENT

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 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 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. 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 managers, including NVM 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 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 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.

DIRECTORS’ RESPONSIBILITIES STATEMENT

The directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations.

Company law requires the directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with UK Accounting Standards, including FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland”.

Under company law the directors must not approve the financial statements unless they
are satisfied that they give a true and fair view of the state of affairs of the company and of
its profit or loss for the year.

In preparing the financial statements, the directors are required to (i) select suitable accounting policies and then apply them consistently;  (ii) make judgements and estimates that are reasonable and prudent;  (iii) state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements;  (iv) assess the company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and (v) prepare the financial statements on the going concern basis unless they either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company’s transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the company and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the directors are also responsible for preparing a strategic report, directors’ report, directors’ remuneration report and corporate governance statement that comply with that law and those regulations.

The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

The directors have confirmed that to the best of their knowledge (i) the financial statements, prepared in accordance with the applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company;  and (ii) the directors’ report and strategic report include a fair review of the development and performance of the business and the position of the company, together with a description of the principal risks and uncertainties that they face. 

The directors consider that the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the company’s position and performance, business model and strategy.

The directors of the company at the date of this announcement were Mr J G D Ferguson (Chairman), Mr C J Fleetwood, Mr T R Levett and Mr J M O Waddell.

OTHER MATTERS

The above summary of results for the year ended 31 March 2019 does not constitute statutory financial statements within the meaning of Section 435 of the Companies Act 2006 and has not been delivered to the Registrar of Companies.  Statutory financial statements will be filed with the Registrar of Companies in due course; the independent auditor’s report on those financial statements under Section 495 of the Companies Act 2006 is unqualified, does not include any reference to matters to which the auditor drew attention by way of emphasis without qualifying the report and does not contain a statement under Section 498 (2) or (3) of the Companies Act 2006.

The calculation of the return per share is based on the profit on ordinary activities after tax for the year of £4,980,000 (2018: minus £1,638,000) and on 89,416,452 (2018: 77,868,025) shares, being the weighted average number of shares in issue during the year.

The calculation of the net asset value per share as at 31 March 2019 is based on net assets of £82,731,000 (2018: £84,260,000) divided by the 87,866,505 (2018: 89,662,373) ordinary shares in issue at that date.

If approved by shareholders, the proposed final dividend of 2.0p per share for the year ended 31 March 2019 will be paid on 19 July 2019 to shareholders on the register at the close of business on 21 June 2019.

The full annual report including financial statements for the year ended 31 March 2019 is expected to be posted to shareholders on 21 June 2019 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.


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