19 MAY 2017
NORTHERN INVESTORS COMPANY PLC
RESULTS FOR THE YEAR ENDED 31 MARCH 2017
Northern Investors Company PLC is a private equity investment trust managed by NVM Private Equity LLP. The trust was launched in 1984 and has been listed on the London Stock Exchange since 1990.
In July 2011 shareholders approved a change in investment strategy whereby the trust ceased making new investments and began an orderly realisation of its portfolio with a view to returning capital to shareholders. The company has subsequently returned a total of £83.5 million to shareholders by way of tender offers and dividend distributions.
Financial highlights (comparative figures as at 31 March 2016):
| | 2017 | 2016 |
| Net assets | £12.7m | £17.1m |
| Number of shares in issue at end of year | 2,496,767 | 2,496,767 |
| Net asset value per share (2017 stated after 250p per share distribution in January 2017) | 508.4p | 685.4p |
| Cash distributions to shareholders: | ||
| During year | £6.8m | £16.1m |
| Since change in investment policy in July 2011 | £83.5m | £76.7m |
| Total return for the year: | ||
| Pence per share | 99.6p | 159.5p |
| As % of opening net asset value | 14.5% | 30.5% |
| Proposed dividend per share for the year | 30.0p | 24.0p |
| Mid-market share price at end of year | 525p | 635p |
| Share price (premium)/discount to net asset value | (3.3)% | 7.4% |
For further information, please contact:
Northern Investors Company PLC
Nigel Guy/Christopher Mellor 0191 244 6000
Stifel Nicolaus Europe Limited
Neil Winward/Mark Bloomfield/Gaudi Le Roux 020 7710 7600
Website: www.nvm.co.uk
NORTHERN INVESTORS COMPANY PLC
CHAIRMAN'S STATEMENT
Overview
Over the past year your board and manager have continued to progress the orderly realisation strategy adopted by shareholders in 2011. There has been a further reduction in the number of holdings remaining in the portfolio, and cash totalling £6.8 million was returned to shareholders during the year, taking the cumulative total to £83.5 million. A further £7.1 million will be distributed in June and July 2017 through a £0.7 million final dividend (30.0 pence per ordinary share) and a £6.4 million B share redemption (257.5 pence per ordinary share), bringing the total of cash distributions to over £90 million from a starting point of £59 million of net assets in 2011.
The residual net assets at 31 March 2017, before deducting the impending distributions, totalled £12.7 million and our efforts are now focused on exiting from the small number of remaining investments. As ever we will be seeking to strike the right balance between speed of exit and realisation of fair value. In order to achieve this without compromising our negotiating position in relation to our remaining holdings, we intend to extend our original target of completing the process by December 2017 by up to a further 12 months. I believe that both the board and our manager, NVM, have demonstrated a strong track record of realising the assets for best value at the appropriate time, and the extension should be seen in that context.
Financial results
The net asset value (NAV) per share at 31 March 2017 was 508.4 pence which, when adding back the 250 pence per share returned to shareholders through a B share redemption in January 2017, represents an increase of 10.7% from the corresponding figure of 685.4 pence at 31 March 2016.
The total return per share for the year as shown in the income statement was 99.6 pence, equivalent to 14.5% of the opening NAV. Investment income generally continues to reduce as investments are sold, but the total for the year was boosted by a one-off credit of £0.7 million in respect of accrued loan interest paid by Optilan Group. As a result the revenue return per share, calculated on the weighted average number of shares in issue during the year, rose from 12.3 pence to 22.9 pence.
Dividend
Since 2013 the annual dividend has been paid in the form of a single final dividend, with no interim dividend being declared. The directors propose a dividend for the year ended 31 March 2017 of 30.0 pence per share (last year 24.0 pence), equivalent to a total of £749,000 based on the 2,496,767 shares remaining in issue. This is the 21st successive year in which the dividend per share has been increased; Northern Investors now appears on the Association of Investment Companies' select "Dividend Heroes" list, comprising the 20 UK investment trusts which have achieved an increase in their dividend for at least 20 consecutive years. Subject to approval by shareholders at the annual general meeting on 11 July 2017, the final dividend will be paid on 21 July 2017 to shareholders on the register on 30 June 2017.
The directors will continue to recommend a dividend each year which takes account of the level of investment income and expenses, subject to observing the minimum amount necessary to maintain the company's authorised investment trust status.
Investment portfolio
During the year exits were achieved from Crantock Bakery and Cawood Scientific, and in total the proceeds from investment sales amounted to £4.1 million. Shortly after the year end we sold our investment in Optilan Group, for proceeds of £4.2 million. Since the adoption of the portfolio run-off strategy in July 2011, 25 investments have been realised for a total of over £81 million.
Following the sale of Optilan Group the number of holdings in the portfolio has reduced to five, with an aggregate carrying value at 31 March 2017 of £5.8 million. At this stage in the realisation process the remaining holdings are, by definition, those which are the most difficult to sell - whether through under-performance, through being at a low point in a cyclical industry sector or perhaps simply due to being too small to be of serious interest to potential acquirers. In two cases we are syndicate partners in investments led by another private equity house and whilst our interests are currently aligned, our ability to influence or control matters is inevitably much reduced.
We have previously indicated that it may be necessary to take a pragmatic approach to the realisable value of these unquoted minority holdings, in the interests of maintaining the overall momentum of the run-off project. The board has reviewed the remaining investments in detail with the manager and it is clear that in some cases a realistic exit opportunity is unlikely to occur within the next 12 months. Given the size of the portfolio we began with, comprising some 30 holdings, this is not a surprising situation; we will continue to work towards identifying the best possible outcome for each investment, and as previously mentioned we have extended our realisation time horizon in order to avoid finding our negotiating position compromised.
Corporate strategy
In January 2017 shareholders gave their approval to the establishment of a mechanism for returning funds to them by means of the allotment by bonus issue, and subsequent redemption for cash, of new B shares, following which an initial distribution of £6.2 million was made. We have announced today that we intend to return a further £6.4 million, equivalent to 257.5 pence per ordinary share, through a B share redemption in June 2017, as well as paying in July the proposed final dividend for the year ended 31 March 2017 totalling £0.7 million. At this point the cumulative distributions to shareholders will reach £90.7 million, equivalent to 154% of the July 2011 net assets of £59 million. As a reference point, we estimated in 2011 that the ultimate cash return to shareholders by 2017 from the realisation process would be in the range from 120% to 160%, so it is pleasing to have achieved the upper end of the range within that timescale whilst still having some further residual value to secure.
Our original objective was that the return of funds to shareholders would be completed in 2017. As explained above, we now expect the task of realising the portfolio to continue into 2018, and your board believes that this will be best progressed under the existing management arrangements with NVM. However we recognise that at some point in the future a line must be drawn. It is likely that the final stage of the phased wind-down will involve the company being placed in members' voluntary liquidation, with the liquidators completing the formalities of dissolving the company and distributing residual funds to shareholders. Our present expectation is that liquidators will be appointed during 2018. We have been advised that subsequent cash distributions by the liquidator should be treated as capital rather than income receipts in the hands of shareholders.
We have updated our projection of the final outcome of the realisation process and this indicates that the total eventually returned to shareholders is likely to be in the range from £96 million to £100 million - ie a further £6 million to £10 million over and above the £90 million which will have been returned by the end of July 2017. The indicated range is equivalent to between 162% and 170% of the net assets at the start of the process in 2011. Assuming no further change in the issued share capital, these further payments would be equivalent to between approximately 240 pence and 400 pence per share, in addition to the impending final dividend and B share redemption. As usual, we emphasise that such estimates of future cash flows are subject to various uncertainties and are for illustration only.
Contingent assets
As noted in the financial statements, at 31 March 2017 the company was entitled to receive up to £0.6 million of deferred proceeds from past investment sales over the period to December 2017. A further £0.6 million may be receivable in the future as a result of the sale of Optilan Group in April 2017. None of these proceeds has been recognised in the financial statements at this stage as their eventual receipt cannot be regarded as reasonably certain. However they have been taken into account in arriving at the range of possible realisation outcomes referred to above.
The claims brought by our company and a number of other investment companies against HM Revenue & Customs, to recover VAT paid on investment management fees in the period from 1990 to 2009, were rejected by the Supreme Court in April 2017. No credit had been taken in the company's financial statements for any possible recovery under the claim.
Prospects
The realisation process is now in its final stages and progress to date has been good, but the exit from each of the remaining investments will present its own challenge. Your directors will continue to work closely with the manager to bring about a conclusion and we believe there is still some potential value to be unlocked given a favourable combination of circumstances. The prevailing air of political and economic uncertainty is not an ideal backdrop, but the end is almost in sight and we look forward to delivering a highly satisfactory overall outcome to shareholders.
Nigel Guy
Chairman
The audited financial statements for the year ended 31 March 2017 are set out below.
INCOME STATEMENT
for the year ended 31 March 2017
| Year ended 31 March 2017 | Year ended 31 March 2016 | |||||
| Revenue £000 | Capital £000 | Total £000 | Revenue £000 | Capital £000 | Total £000 | |
| Gain on disposal of investments | - | 2,056 | 2,056 | - | 5,067 | 5,067 |
| Movements in fair value of investments | - | 305 | 305 | - | 3,413 | 3,413 |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | |
| - | 2,361 | 2,361 | - | 8,480 | 8,480 | |
| Income | 1,093 | - | 1,093 | 1,025 | - | 1,025 |
| Investment management fee | (55) | (568) | (623) | (60) | (1,324) | (1,384) |
| Other expenses | (322) | (22) | (344) | (316) | - | (316) |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | |
| Return on ordinary activities before tax, | ||||||
| being total comprehensive income | 716 | 1,771 | 2,487 | 649 | 7,156 | 7,805 |
| Tax on return on ordinary activities | (143) | 143 | - | (45) | 45 | - |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | |
| Return on ordinary activities after tax | 573 | 1,914 | 2,487 | 604 | 7,201 | 7,805 |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | |
| Return per share | 22.9p | 76.7p | 99.6p | 12.3p | 147.2p | 159.5p |
BALANCE SHEET
as at 31 March 2017
| 31 March 2017 £000 | 31 March 2016 £000 | |
| Fixed assets: | ||
| Investments | 9,981 | 11,720 |
| ---------- | ---------- | |
| Current assets: | ||
| Investments | - | 56 |
| Debtors | 791 | 25 |
| Cash and cash equivalents | 4,570 | 10,408 |
| ---------- | ---------- | |
| 5,361 | 10,489 | |
| Creditors (amounts falling due within one year) | (2,649) | (5,097) |
| ---------- | ---------- | |
| Net current assets | 2,712 | 5,392 |
| ---------- | ---------- | |
| Net assets | 12,693 | 17,112 |
| ---------- | ---------- | |
| Capital and reserves: | ||
| Called-up equity share capital | 624 | 624 |
| Capital redemption reserve | 6,242 | 4,531 |
| Capital reserve | (7,018) | (2,918) |
| Special reserve | 10,941 | 12,674 |
| Revaluation reserve | (17) | 251 |
| Revenue reserve | 1,921 | 1,950 |
| ---------- | ---------- | |
| Total equity shareholders' funds | 12,693 | 17,112 |
| ---------- | ---------- | |
| Net asset value per share | 508.4p | 685.4p |
STATEMENT OF CHANGES IN EQUITY
for the year ended 31 March 2017
| ------ Non-distributable reserves ------ | ------ Distributable reserves ------ | Total | ||||||
| Share capital | Capital redemption reserve | Revaluation reserve | Capital reserve | Special reserve | Revenue reserve | |||
| £000 | £000 | £000 | £000 | £000 | £000 | £000 | ||
| At 1 April 2016 | 624 | 4,531 | 251 | (2,918) | 12,674 | 1,950 | 17,112 | |
| Return on ordinary activities | ||||||||
| after tax for the year | - | - | (268) | 2,204 | (22) | 573 | 2,487 | |
| Cancellation of capital | ||||||||
| redemption reserve | - | (4,531) | - | - | 4,531 | - | - | |
| Bonus issue of B shares | - | - | - | - | (6,242) | - | (6,242) | |
| Redemption of B shares | - | 6,242 | - | (6,242) | - | - | - | |
| B share redemption expenses | - | - | (62) | - | - | (62) | ||
| Dividends paid | - | - | - | - | - | (602) | (602) | |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ||
| At 31 March 2017 | 624 | 6,242 | (17) | (7,018) | 10,941 | 1,921 | 12,693 | |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ||
STATEMENT OF CHANGES IN EQUITY
for the year ended 31 March 2016
| ------ Non-distributable reserves ------ | ------ Distributable reserves ------ | Total | ||||||
| Share capital | Capital redemption reserve | Revaluation reserve | Capital reserve | Special reserve | Revenue reserve | |||
| £000 | £000 | £000 | £000 | £000 | £000 | £000 | ||
| At 1 April 2015 | 1,225 | 3,930 | 1,346 | 4,257 | 12,674 | 2,179 | 25,611 | |
| Return on ordinary activities | ||||||||
| after tax for the year | - | - | (1,095) | 8,296 | - | 604 | 7,805 | |
| Re-purchase of shares | (601) | 601 | - | (15,260) | - | - | (15,260) | |
| Share re-purchase expenses | - | - | - | (211) | - | - | (211) | |
| Dividends paid | - | - | - | - | - | (833) | (833) | |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ||
| At 31 March 2016 | 624 | 4,531 | 251 | (2,918) | 12,674 | 1,950 | 17,112 | |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ||
STATEMENT OF CASH FLOWS
for the year ended 31 March 2017
| Year ended 31 March 2017 £000 | Year ended 31 March 2016 £000 | |
| Cash flows from operating activities: | ||
| Return on ordinary activities before tax | 2,487 | 7,805 |
| Adjustments for: | ||
| Gain on disposal of investments | (2,056) | (5,067) |
| Movement in fair value of investments | (305) | (3,413) |
| (Increase)/decrease in debtors | (766) | 31 |
| Increase/(decrease) in creditors | (2,448) | 1,051 |
| ---------- | ---------- | |
| Net cash inflow/(outflow) from operating activities | (3,088) | 407 |
| ---------- | ---------- | |
| Cash flows from investing activities: | ||
| Purchase of investments | - | - |
| Sale/repayment of investments | 4,100 | 20,828 |
| ---------- | ---------- | |
| Net cash inflow from investing activities | 4,100 | 20,828 |
| ---------- | ---------- | |
| Cash flows from financing activities: | ||
| Repurchase of ordinary shares for cancellation | - | (15,260) |
| Redemption of B shares | (6,242) | - |
| Expenses associated with redemption/repurchase of shares | (62) | (211) |
| Dividends paid on ordinary shares and B shares | (602) | (833) |
| ---------- | ---------- | |
| Net cash outflow from financing activities | (6,906) | (16,304) |
| ---------- | ---------- | |
| Net increase/(decrease) in cash and cash equivalents | (5,894) | 4,931 |
| Cash and cash equivalents at beginning of year | 10,464 | 5,533 |
| ---------- | ---------- | |
| Cash and cash equivalents at end of year | 4,570 | 10,464 |
| ---------- | ---------- |
INVESTMENT PORTFOLIO SUMMARY
as at 31 March 2017
| Cost £000 | Valuation £000 | % of net assets by value | |
| Optilan Group | 1,900 | 4,180 | 32.9 |
| Axial Systems Holdings | 2,311 | 2,668 | 21.0 |
| Weldex (International) Offshore Holdings | 3,252 | 1,921 | 15.1 |
| Lanner Group | 561 | 630 | 5.0 |
| CGI Group Holdings | 1,908 | 582 | 4.6 |
| S&P Coil Products | 66 | - | - |
| ---------- | ---------- | -------- | |
| Total fixed asset investments | 9,998 | 9,981 | 78.6 |
| ---------- | |||
| Net current assets | 2,712 | 21.4 | |
| ---------- | -------- | ||
| Net assets | 12,693 | 100.0 | |
| ---------- | -------- |
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: the majority of the company's investments comprise minority holdings in small and medium-sized unquoted companies, which by their nature entail a higher level of risk and lower liquidity than investments in large quoted companies. Mitigation: the investment manager aims to limit the risk attaching to the portfolio as a whole by close monitoring of individual holdings, including the appointment of investor directors where appropriate. The board reviews the portfolio, including the schedule of projected exits, with the investment manager on a regular basis with a view to ensuring that the orderly realisation process remains on track.
Portfolio concentration risk: following the adoption of the company's revised investment policy in July 2011, the portfolio has and will continue to become more concentrated as investments are realised and cash is returned to shareholders. This will increase the proportionate impact of changes in the value of individual investments on the value of the company as a whole. The directors' valuation of the company's investments represents their best assessment of the fair value of the investments as at the valuation date and the amounts eventually realised from such investments may be more or less than the directors' valuation. Mitigation: the directors and manager keep the changing composition of the portfolio under review and focus closely on those holdings which represent the largest proportions of total value.
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 meet expenditure commitments including any investments which may be made under the company's revised investment policy. The company has very little exposure to foreign currency risk and does not enter into derivative transactions.
Economic risk: events such as economic recession or general fluctuations 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 should this be necessary.
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.
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.
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 the profit or loss of the company 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; and (iv) prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. As explained below, the directors do not believe it is appropriate to prepare the financial statements for the year ended 31 March 2017 on a going concern basis.
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 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 directors' report, strategic 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 United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
DIRECTORS' RESPONSIBILITY STATEMENT IN RELATION TO THE ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2017
The directors have confirmed that to the best of their knowledge (i) taken as a whole 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 strategic report and directors' 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 financial statements, taken as a whole, are fair, balanced and understandable and provide 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 N R A Guy (Chairman), Mr J C Barnsley, Mr P W F Marsden and Mr M P Nicholls.
OTHER MATTERS
The above summary of results for the year ended 31 March 2017 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, draws attention to the non-going concern basis of preparing the accounts 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.
In July 2011 shareholders approved a change in the investment policy of the company, with the objective of conducting an orderly realisation of the assets of the company in a manner that seeks to achieve a balance between an efficient return of cash to shareholders and maximising the value of the company's investments. As it is likely that this process will ultimately lead to the liquidation of the company, the financial statements have not been prepared on a going concern basis. No adjustments were necessary to the investment valuations or other assets and liabilities included in the financial statements as a consequence of the change in the basis of preparation.
The calculation of the revenue and capital return per share is based on the return on ordinary activities after tax for the year and on 2,496,767 (2016 4,893,434) ordinary shares, being the weighted average number of shares in issue during the year.
The calculation of the net asset value per share is based on the net assets at 31 March 2017 divided by the 2,496,767 (2016 2,496,767) ordinary shares in issue at that date.
The proposed final dividend of 30.0 pence per share for the year ended 31 March 2017 will, if approved by shareholders, be paid on 21 July 2017 to shareholders on the register at the close of business on 30 June 2017.
The full annual report including financial statements for the year ended 31 March 2017 is expected to be posted to shareholders by 9 June 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.