15 NOVEMBER 2016
NORTHERN INVESTORS COMPANY PLC
UNAUDITED HALF-YEARLY FINANCIAL REPORT
FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2016
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.
Financial highlights (comparative figures as at 30 September 2015 and 31 March 2016):
| | Six months to 30 September 2016 | Six months to 30 September 2015 | Year to 31 March 2016 |
| Net assets | £18.2m | £27.1m | £17.1m |
| No of shares in issue at end of period | 2,496,767 | 4,900,000 | 2,496,767 |
| Net asset value per share | 728.6p | 553.6p | 685.4p |
| Cash distributions to shareholders | |||
| (dividends paid plus share buy-backs) | |||
| During period | £0.6m | £0.8m | £16.1m |
| Since change in investment policy (July 2011) | £77.3m | £61.4m | £76.7m |
| Return for the period | |||
| Pence per share | 67.2p | 47.9p | 159.5p |
| As % of opening net asset value | 9.8% | 9.2% | 30.5% |
| Dividend per share declared | |||
| in respect of the period | - | - | 24.0p |
| Mid-market share price at end of period | 845.0p | 590.0p | 635.0p |
| Share price (premium)/discount | |||
| to net asset value | (16.0)% | (6.6)% | 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
HALF-YEARLY MANAGEMENT REPORT TO SHAREHOLDERS
Overview
The half year to 30 September 2016 has been a period of considerable economic and political uncertainty in the UK, not least as a result of the EU membership referendum and its aftermath. This has inevitably led to the financial markets taking a more cautious approach to corporate mergers and acquisitions activity, and no further investment exits were completed during the period. Nevertheless good progress has been made with positioning our companies for eventual sale and we expect to see some transactions come to fruition in the second half of our financial year.
Despite the uncertain background, the overall progress of our investee companies during the period has been good, and this has resulted in a further increase in net asset value (NAV) to 728.6 pence as at 30 September 2016 - a 6.3% increase over the half year.
Including funds distributed through the March 2016 tender offer (£15.3 million) and the July 2016 dividend (£0.6 million), the total cash returned to shareholders since the change in investment policy in July 2011 has reached £77.3 million, with a further £18.2 million of assets still held on the company's balance sheet. It remains our aim that the run-off process should be largely completed by December 2017.
Investment portfolio
There were no investment additions or disposals during the period under review. Your directors have continued to review the portfolio with the manager on a regular basis, placing a strong emphasis on the exit plan for each investment. The three largest holdings, Optilan Group, Axial Systems Holdings and Cawood Scientific, now represent almost 80% of the total portfolio valuation and in the short term the manager's efforts will be focussed on realising value from these investments in an orderly manner. Some of the remaining holdings may prove more difficult to exit from, particularly in two cases where the funds managed by NVM Private Equity are not the lead investors and we are to a greater extent dependent on the co-operation of other shareholders.
The directors' valuation of the portfolio increased by £1.8 million over the half year. The return for the period was augmented by the receipt of a £0.3 million deferred consideration payment from the sale of Kitwave One in February 2016. A further £1.1 million of deferred payments from previous sales will fall due over the next 15 months, though subject to some uncertainty which means that they have not yet been recognised in our financial statements.
Financial performance
Over the six month period to 30 September 2016 the company's NAV, after deducting the 2015/16 final dividend of 24.0 pence per share paid in July, rose from 685.4 pence to 728.6 pence. The return per share for the half year was 67.2 pence, compared with 47.9 pence (on a larger number of shares in issue) in the corresponding period last year. Investment income from the portfolio has continued to reduce following the sale of some of our higher-yielding investments last year.
An initial performance fee instalment of £2.8 million was paid to NVM in May 2016, the underlying cash distributions hurdle having been achieved during the year ended 31 March 2016. The remaining performance fee provision at 30 September 2016 was £2.4 million, although this will only become payable to the extent that the company's present asset value is converted into cash distributions to shareholders. Your directors consider that the incentive scheme continues to achieve an effective alignment of NVM's interests with those of shareholders, as demonstrated by the success of the portfolio run-off process to date.
Share price
The mid-market share price increased from 635 pence to 845 pence during the half year, with the shares trading at a premium to NAV for most of the period. With only 2.5 million shares remaining in issue, a relatively low level of trading in the shares can lead to disproportionate movements in the share price.
Dividend
As in the last four financial years, no interim dividend has been declared. Given the company's reducing size and unpredictable investment income, it is not possible at this stage to say whether a final dividend will be proposed in respect of the current financial year. However the company will in any case pay a dividend in respect of each year to the extent, if any, which may be necessary to maintain the company's authorised investment trust status.
VAT claim against HM Revenue & Customs
We reported previously that the company had brought a claim against HM Revenue & Customs to recover VAT paid on management fees in the period from 1990 to 2009, to the extent not already recovered by the company. The claim has been stayed whilst we await the outcome of the lead litigation which was heard in the Supreme Court in May 2016. At this stage it remains impracticable to estimate the possible recovery, if any.
Corporate strategy
Since July 2011 a total of £77.3 million has been returned to shareholders through five tender offers, priced at net asset value, and a series of dividends. This is equivalent to 131% of the company's net assets at the start of the process.
The most recent tender offer in March 2016 was only 75% taken up by shareholders, with the result that the company is currently holding more cash than the directors had envisaged. After consulting our legal and financial advisers, we have decided that the next distribution to shareholders will be made by means of a bonus issue to all ordinary shareholders of new B preference shares, which will then be redeemed for cash. We have been advised that for tax purposes this should be treated as a capital, rather than an income, receipt in the hands of the recipients. Further details will be given in a circular to shareholders which is expected to be published in December 2016. Subject to shareholder approval of the necessary resolutions, it is envisaged that a distribution of not less than £6 million will take place before the end of January 2017.
In September 2016 Court consent was given to the cancellation of the company's £4.5 million capital redemption reserve, resulting in the creation of a new distributable reserve which will give us additional flexibility in the future distribution of funds to shareholders.
It is still our objective that the realisation of the portfolio should be substantially completed by the end of 2017, although it is possible that a small number of assets will remain to be dealt with after that date. There has been no significant change to the range of possible outcomes previously announced, ie that the further amount to be returned, including the proposed January 2017 distribution, could be in the range from £18 million to £23 million, making a cumulative total of between £95 million and £100 million (equivalent to between 160% and 170% of the net assets at the start of the realisation process). We currently project future cash distributions of between 720 pence and 920 pence for each of the 2,496,767 shares remaining in issue. It must be emphasised that the board's estimates are subject to various uncertainties including timing, market conditions, individual company performance and the behaviour of other shareholders in investee companies.
Outlook
We are now in the later stages of the run-off process which began in 2011. The results to date have been good, and your board and manager are focussed on achieving a timely completion of the exercise so as to deliver a satisfactory overall outcome for shareholders.
On behalf of the Board
Nigel Guy
Chairman
The unaudited half-yearly financial statements for the six months ended 30 September 2016 are set out below.
INCOME STATEMENT
(unaudited) for the six months ended 30 September 2016
| Six months ended 30 September 2016 | Six months ended 30 September 2015 | |||||
| Revenue £000 | Capital £000 | Total £000 | Revenue £000 | Capital £000 | Total £000 | |
| Gain on disposal of investments | - | 277 | 277 | - | 240 | 240 |
| Movements in fair value of investments | - | 1,758 | 1,758 | - | 2,185 | 2,185 |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | |
| - | 2,035 | 2,035 | - | 2,425 | 2,425 | |
| Income | 227 | - | 227 | 590 | - | 590 |
| Investment management fee | (27) | (349) | (376) | (30) | (455) | (485) |
| Other expenses | (185) | (22) | (207) | (194) | - | (194) |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | |
| Return on ordinary activities before tax | 15 | 1,664 | 1,679 | 366 | 1,970 | 2,336 |
| Tax on return on ordinary activities | (3) | 3 | - | (11) | 24 | 13 |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | |
| Return on ordinary activities after tax | 12 | 1,667 | 1,679 | 355 | 1,994 | 2,349 |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | |
| Return per share | 0.5p | 66.7p | 67.2p | 7.2p | 40.7p | 47.9p |
| Year ended 31 March 2016 | ||||||
| Revenue £000 | Capital £000 | Total £000 | ||||
| Gain on disposal of investments | - | 5,067 | 5,067 | |||
| Movements in fair value of investments | - | 3,413 | 3,413 | |||
| ---------- | ---------- | ---------- | ||||
| - | 8,480 | 8,480 | ||||
| Income | 1,025 | - | 1,025 | |||
| Investment management fee | (60) | (1,324) | (1,384) | |||
| Other expenses | (316) | - | (316) | |||
| ---------- | ---------- | ---------- | ||||
| Return on ordinary activities before tax | 649 | 7,156 | 7,805 | |||
| Tax on return on ordinary activities | (45) | 45 | - | |||
| ---------- | ---------- | ---------- | ||||
| Return on ordinary activities after tax | 604 | 7,201 | 7,805 | |||
| ---------- | ---------- | ---------- | ||||
| Return per share | 12.3p | 147.2p | 159.5p | |||
BALANCE SHEET
(unaudited) as at 30 September 2016
| 30 September 2016 £000 | 30 September 2015 £000 | 31 March 2016 £000 | |
| Fixed assets: | |||
| Investments | 13,478 | 23,979 | 11,720 |
| ---------- | ---------- | ---------- | |
| Current assets: | |||
| Investments | 56 | 56 | 56 |
| Debtors | 32 | 14 | 25 |
| Cash and deposits | 7,126 | 7,453 | 10,408 |
| ---------- | ---------- | ---------- | |
| 7,214 | 7,523 | 10,489 | |
| Creditors (amounts falling due | |||
| within one year) | (2,500) | (4,375) | (5,097) |
| ---------- | ---------- | ---------- | |
| Net current assets | 4,714 | 3,148 | 5,392 |
| ---------- | ---------- | ---------- | |
| Net assets | 18,192 | 27,127 | 17,112 |
| ---------- | ---------- | ---------- | |
| Capital and reserves: | |||
| Called-up equity share capital | 624 | 1,225 | 624 |
| Capital redemption reserve | - | 3,930 | 4,531 |
| Capital reserve | (2,987) | 3,890 | (2,918) |
| Special reserve | 17,183 | 12,674 | 12,674 |
| Revaluation reserve | 2,009 | 3,707 | 251 |
| Revenue reserve | 1,363 | 1,701 | 1,950 |
| ---------- | ---------- | ---------- | |
| Total equity shareholders' funds | 18,192 | 27,127 | 17,112 |
| ---------- | ---------- | ---------- | |
| Net asset value per share | 728.6p | 553.6p | 685.4p |
STATEMENT OF CHANGES IN EQUITY
(unaudited) for the six months ended 30 September 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 2016 | 624 | 4,531 | 251 | (2,918) | 12,674 | 1,950 | 17,112 |
| Return on ordinary activities | |||||||
| after tax for the period | - | - | 1,758 | (69) | (22) | 12 | 1,679 |
| Cancellation of capital | |||||||
| redemption reserve | - | (4,531) | - | - | 4,531 | - | - |
| Dividends paid | - | - | - | - | - | (599) | (599) |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | |
| At 30 September 2016 | 624 | - | 2,009 | (2,987) | 17,183 | 1,363 | 18,192 |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | |
STATEMENT OF CHANGES IN EQUITY
(unaudited) for the six months ended 30 September 2015
| --------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 period | - | - | 2,361 | (367) | - | 355 | 2,349 |
| Dividends paid | - | - | - | - | - | (833) | (833) |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | |
| At 30 September 2015 | 1,225 | 3,930 | 3,707 | 3,890 | 12,674 | 1,701 | 27,127 |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | |
STATEMENT OF CHANGES IN EQUITY
(unaudited) 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 period | - | - | (1,095) | 8,296 | - | 604 | 7,805 |
| Re-purchase of shares | |||||||
| for cancellation | (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
(unaudited) for the six months ended 30 September 2016
| Six months ended | Six months ended | Year ended | |
| 30 September 2016 | 30 September 2015 | 31 March 2016 | |
| £000 | £000 | £000 | |
| Cash flows from operating activities: | |||
| Return on ordinary activities before tax | 1,679 | 2,336 | 7,805 |
| Adjustments for: | |||
| Gain on disposal of investments | (277) | (240) | (5,067) |
| Movement in fair value of investments | (1,758) | (2,185) | (3,413) |
| (Increase)/decrease in debtors | (7) | 55 | 31 |
| Increase/(decrease) in creditors | (2,597) | 329 | 1,051 |
| ---------- | ---------- | ---------- | |
| Net cash inflow/(outflow) from operating activities | (2,960) | 295 | 407 |
| ---------- | ---------- | ---------- | |
| Cash flows from investing activities: | |||
| Purchase of investments | - | - | - |
| Sale/repayment of investments | 277 | 2,514 | 20,828 |
| ---------- | ---------- | ---------- | |
| Net cash inflow from investing activities | 277 | 2,514 | 20,828 |
| ---------- | ---------- | ---------- | |
| Cash flows from financing activities: | |||
| Repurchase of ordinary shares for cancellation | - | - | (15,260) |
| Share re-purchase expenses | - | - | (211) |
| Dividends paid on ordinary shares | (599) | (833) | (833) |
| ---------- | ---------- | ---------- | |
| Net cash outflow from financing activities | (599) | (833) | (16,304) |
| ---------- | ---------- | ---------- | |
| Net increase/(decrease) in cash/cash equivalents | (3,282) | 1,976 | 4,931 |
| Cash and cash equivalents at beginning of period | 10,464 | 5,533 | 5,533 |
| ---------- | ---------- | ---------- | |
| Cash and cash equivalents at end of period | 7,182 | 7,509 | 10,464 |
| ---------- | ---------- | ---------- |
INVESTMENT PORTFOLIO SUMMARY
as at 30 September 2016
| Company | Cost £000 | Valuation £000 | % of net assets by valuation |
| Optilan Group | 1,900 | 4,105 | 22.6 |
| Axial Systems Holdings | 2,311 | 3,520 | 19.4 |
| Cawood Scientific | 1,196 | 2,951 | 16.2 |
| Weldex (International) Offshore Holdings | 3,252 | 1,664 | 9.1 |
| Lanner Group | 621 | 710 | 3.9 |
| CGI Group Holdings | 1,908 | 528 | 2.9 |
| Crantock Bakery | 215 | - | - |
| S&P Coil Products | 66 | - | - |
| ---------- | ---------- | ------- | |
| Total fixed asset investments | 11,469 | 13,478 | 74.1 |
| ---------- | |||
| Net current assets | 4,714 | 25.9 | |
| ---------- | ------- | ||
| Net assets | 18,192 | 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 is becoming 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. 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 fluctuations in interest rates, stock markets and the level of demand for corporate acquisitions in individual industry sectors 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 board and manager monitor the investment portfolio closely and aim to position each holding for realisation at the optimum time. The company 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.
OTHER MATTERS
The unaudited half-yearly financial statements for the six months ended 30 September 2016 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 2016 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) drew attention by way of emphasis of matter to the fact that the financial statements had not been prepared on the going concern basis 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 2016. The financial statements have not been prepared on the going concern basis, since the company's current objective is to conduct an orderly realisation of the investment portfolio and return cash to shareholders. 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 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.
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 calculation of the revenue and capital return per share is based on the return on ordinary activities after tax for the six months ended 30 September 2016 and on 2,496,767 (2015 4,900,000) 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 2016 divided by the 2,496,767 (2015 4,900,000) ordinary shares in issue at that date.
A copy of the half-yearly financial report for the six months ended 30 September 2016 is expected to be posted to shareholders by 25 November 2016 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.