Osprey Smaller Companies Announcements

RNS Number : 5300H Osprey Smaller Cos Income Fund Ltd 06 November 2008  
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OSPREY SMALLER COMPANIES INCOME FUND LIMITED
RESULTS FOR THE YEAR ENDED 31 AUGUST 2008

HIGHLIGHTS
Net assets at 31 August 2008 of £19.2million (2007: £26.3 million), down 27.18% in the year;
Net assets equal to 141.57pence (2007: 194.42 pence) per share, up 46.16% since launch (Capital Return) and 85.6% since launch (Total Return);
Outperformance of the FTSE Small Cap Index, the Company's closest benchmark index;
Profits of £7.3 million realised in the year from the sale of investments;
Dividends paid in line with Prospectus expectations and previous years;
Appointment of Rhys Davies as non-executive Director of the Company  following the retirement of Roger Alcock;  and
Appointment of Midas Investment Management Limited as Investment Adviser;

Post year-end
Board exercise control over the discount of the share price to NAV by purchasing 2,707,388 Ordinary Shares for cancellation;  and
Voluntary partial repayment of £3.0 million of the Bank of Scotland plc Loan Facility.

For further information please contact:

Elysium Fund Management Limited
PO Box 650
No. 1 Le Truchot
St Peter Port
Guernsey
GY1 3JX

elysium@elysiumfundman.com
Tel: 01481 810 100
Fax: 01481 810 120
Midas Investment Management Limited
2nd Floor, Arthur House
Chorlton Street
Manchester
M1 3FH
info@midasim.co.uk
Tel:  0161 228 1709
Fax: 0161 228 2510
 
CHAIRMAN'S STATEMENT

I am pleased to present the results of the Company for the year ended 31 August 2008.

Change of Investment Adviser and Tender Offer 
Following the acquisition of a 29.9% shareholding in the Company by Manchester & Metropolitan Investment Management Limited ("M&M"), the Board was approached by Midas Investment Management Limited ("Midas"), a company related to M&M, with a proposal for them to be appointed as Investment Adviser to the Company. The Board considered Midas' proposal, together with one submitted by Unicorn Asset Management Limited ("Unicorn") and then through its advisers consulted widely with the Company's shareholders. On 19 June 2008 Midas was appointed as Investment Adviser in replacement to Unicorn.

Elysium Fund Management Limited ("Elysium") agreed to the termination of its management agreement with the Company and on 19 June 2008 entered into an administration agreement under which it will continue to provide administration and secretarial services to the Company.

The Board recognised that some shareholders wanted to realise their investment in the Company. Accordingly, the Company announced a tender offer for up to 20% of its Ordinary Shares.  At an Extraordinary General Meeting of the Company held on 16 October 2008, a resolution authorising the Company to repurchase 20% of the Ordinary Shares for cancellation was approved.  On 21 October 2008 the Company announced that it would buy back 2,707,388 Ordinary Shares for £2,563,960. Following the purchase, the Company cancelled these shares together with the 500,000 Ordinary Shares already held as Treasury Shares. Following the share cancellation, the issued share capital of the Company comprised 10,829,612 Ordinary Shares.

Results
This year has been very difficult for global equity markets as a whole, and this is reflected in the performance of the Company. Although the net asset value per Ordinary Share of the Company fell by 27.18%[1] during the year ended 31 August 2008 to 141.57p, it outperformed the FTSE Small Cap Index (excluding investment trusts) Index ("FTSE Small Cap Index"), which fell by 32.47%.  The Company had a negative total return for the year of 23.84%, compared to a 32.39% fall in the FTSE Small Cap Total Return Index.

Investments
Since the change of Investment Adviser on 19 June 2008, Midas has concentrated on repositioning the portfolio into more liquid stock to ensure that the Company is better equipped to deal with and react effectively to the uncertain market in the times ahead. A number of investments have also been sold in order to be able to satisfy the cash requirements of the tender offer.

Dividends
The Company continued to pay dividends in line with the original estimates, as contained in the Prospectus. Two interim dividends were paid in respect of the year ended 31 August 2008, the first interim dividend of 2.50p (2007: 2.50p) was declared on 19 March 2008 and paid on 9 April 2008 and the second interim dividend of 4.00p (2007: 4.00p) was declared on 7 August 2008 and paid on 29 August 2008. At 31 August 2008, the distributable reserves of the Company stood at £3,489,559 (2007: £3,270,030).

Share Price
Due to continuing uncertain and volatile market conditions and the suspension of buy back operations during the second half of the year, as a result of the close period arising from discussions with M&M, the discount of the share price to the net asset value increased from 14.58% at 31 August 2007 to 31.23% at 31 August 2008. The Company attempted to reduce the discount by putting out a tender to repurchase 20% of the issued share capital of the Company.  Despite the Tender Offer, as a result of the turbulent market conditions and the expectation of a global economic recession, which affected both the value of the Company's investments and its share price, the share price continued to fall and at 31 October 2008 the share price stood at 81.5p.  However, the Tender Offer does seem to have exerted a positive influence on the discount of the share price to net asset value, which fell from 31.23% at 31 August 2008 to 23.12% at 31 October 2008.

Bank Loan
During October 2008, the Company voluntarily repaid a total of £3,000,000 of the loan facility with Bank of Scotland. Following this partial repayment, £7,500,000 of the bank loan remains outstanding.

September and October Performance
September and October proved challenging for all investment related companies as world equity markets plummeted. This was reflected in the fall in both the net asset value and the share price of the Company.  The net asset value of the Ordinary Shares fell to 105.79p[1] at 31 October 2008, and the share price fell to 81.5p per share on 31 October 2008.

Change of Directors
I would like to take this opportunity to thank the former Chairman, Roger Alcock, for his contribution to the success of the Company. Mr Alcock was Chairman at the time of the float of the Company and resigned on 31 May 2008. I am pleased to welcome Rhys Davies to the Board, as an independent non-executive Director. He is a chartered financial analyst and has extensive experience of investment management and I am confident that we have a good team of non-executive Directors and advisers to take your Company forward.

 Outlook
As predicted, the difficult market conditions experienced in the first half of the financial year continued into the second, and are predicted to continue for some time in the future. Although the Company suffered a negative return over the year, it outperformed its benchmark indices. The Board believes that the portfolio is well-positioned to weather the challenging times ahead and, as global equity markets recover, to meet its investment objective of delivering an attractive level of income and capital growth for investors.

I look forward to welcoming shareholders to our sixth Annual General Meeting to be held at 10.30am on 10 December 2008 at the Company's registered office at 2nd Floor, No. 1 Le Truchot, St Peter Port, Guernsey, GY1 3JX.

R Prosser
5 November 2008

[1] Investments valued at bid prices.

   
INVESTMENT ADVISER'S REPORT

Our objectives upon our appointment as Investment Adviser on 19 June 2008 were to reposition the portfolio as follows:
Reduce the gearing in the portfolio during the current market environment of uncertainty.   The gearing has now been reduced from a position of net gearing as a percentage of the portfolio of 32.7%, as at 19 June 2008, to a net cash position at 31 August 2008 of 33.8%.
Spread the sector weightings in the portfolio so that the Company is not so overweight in its three largest sectors.  Upon appointment our three largest sectors (excluding cash), being industrial engineering, electronic and electrical equipment, and construction & materials, had an aggregate overweighting against the FTSE All Share weightings of 60.9%.  Currently, our three largest overweight sectors (excluding cash) are electronic and electrical equipment, industrial engineering, and support services with an aggregate overweighting of 21.5%.
Increase the liquidity of the underlying holdings within the portfolio.  The weighted average market capitalisation of stocks in the portfolio has increased from our appointment from £546 million to £1,180 million.  Please note that this has occurred whilst the FTSE Small Cap Index has fallen by 4.3%.
Market conditions remain extremely testing.  Every glimmer of hope leads to market rallies amid press proclamations of a market turn but all are soon extinguished by a raft of further worrying news.  In this environment, we have sought to reduce the Company's exposure to holdings that have a high level of gearing and/or are cyclically sensitive.  This has led to the sale of a number of stocks such as Pendragon Plc and RPC Group Plc.  
We estimate that approximately 20% by value of the portfolio was, and remains, extremely illiquid.  As it was our primary intention upon appointment to reduce the gearing of the portfolio in a falling market and we required further cash resources for the recently announced tender offer, we have had to sell some of the more liquid stocks. We have also sold a number of stocks which are considered by the market to be financially sound companies with good long term prospects.  However these stocks were in sectors that were overweight in the portfolio and/or were trading at valuation multiples above the market average, examples being Spirax Sarco Engineering Plc, Rotork Plc and Renishaw Plc.
We have reinvested a proportion of the proceeds in stocks which have the following characteristics:
 They have a market capitalisation greater than £250 million which should provide some liquidity;
 In aggregate, they provide a reasonable dividend yield which should allow the Company to continue to pay a
 reasonable dividend yield;  and
 Valuations multiples which are equal to or at discounts to the market.
The key acquisitions we have made which the Company currently holds have been WSP Group Plc (acquired post year end), iShares Plc - iShares FTSE 100, Aberdeen Asset Management Plc and BT Group Plc. 
BT Group Plc and iShares Plc - iShares FTSE 100 are not typical companies that we would (under normal circumstances) look to buy but they have the characteristics of market average to high yields and high liquidity which are attractive in the current market environment.  
Over the next six month period, our intention is to continue to sell the illiquid holdings and reinvest in stocks with market capitalisations which offer some liquidity, offer good long term growth prospects, trade on attractive valuation multiples and have some predictability or sustainability of earnings.

M Sheppard
Midas Investment Management Limited
5 November 2008

The financial information set out in this announcement does not constitute the Company's statutory financial statements for the year ended 31 August 2008

  
INCOME STATEMENT
for the year ended  31 August 2008

Year ended 31 August 2008
Year ended 31 August 2007

  £'000
  £'000
Investment gains and losses
Realised gain from sale of investments at fair value through profit or loss
7,305
3,481
Movement in unrealised gain on revaluation of investments at fair value through profit or loss

(13,562)

1,167

---------
---------
Total investment gains and losses
(6,257)
4,648

Income
Dividends
1,115
1,628
Bank interest
261
77

---------
---------
Total income
1,376
1,705

Expenses
Management fee
(308)
(383)
Administration fee
(95)
(84)
Performance fee
-
(726)
Custodian fee
(29)
(21)
Audit fee
(13)
(13)
Directors' fees
(49)
(50)
Interest payable and similar charges
(749)
(684)
Other expenses
(150)
(131)

---------
---------
Total expenses
(1,393)
(2,092)
---------
---------
Net (loss)/profit for the year
(6,274)
4,261

---------
---------

(Loss)/earnings per Ordinary Share - basic and diluted
(46.34)p
30.89p

All items in the above statement are derived from continuing operations.

  
STATEMENT OF CHANGES IN EQUITY

For the year ended 31 August 2008
Share capital

Share premium

Distributable reserves
Other non-distributable reserves
Total

£'000
£'000
£'000
£'000
£'000
Balance at 1 September 2007
1,404
8,995
3,270
12,649
26,318
Net profit/(loss) for the year
-
-
1,099
(7,373)
(6,274)
Dividends
-
-
(879)
-
(879)

---------
---------
---------
---------
---------
Balance at 31 August 2008
1,404
8,995
3,490
5,276
19,165

---------
---------
---------
---------
---------

For the year ended  31 August 2007
Share capital

Share premium

Distributable reserves
Other non-distributable reserves
Total

£'000
£'000
£'000
£'000
£'000
Balance at 1 September 2006
1,404
8,995
4,483
9,832
24,714
Net profit for the year
-
-
1,444
2,817
4,261
Dividends 
-
-
(1,750)
-
(1,750)
Purchase of own shares
-
-
(907)
-
(907)

---------
---------
---------
---------
---------
Balance at 31 August 2007
1,404
8,995
3,270
12,649
26,318

---------
---------
---------
---------
---------

  
BALANCE SHEET
as at 31 August 2008
31 August 2008
31 August 2007
  £'000
  £'000
Non-current assets

Investments at fair value through profit or loss

12,959
36,890
Current assets

Receivables and prepayments

151
99
Cash and cash equivalents 

16,969
783
---------
---------
17,120
882
---------
---------
Total assets

30,079
37,772
---------
---------
Current liabilities

Payables and accruals

(428)
(966)
Non-current liabilities

Bank loan

(10,486)
(10,488)
---------
---------
Total liabilities

(10,914)
(11,454)
---------
---------
Net assets

19,165
26,318
---------
---------
Capital and reserves

Called-up share capital

1,404
1,404
Share premium

8,995
8,995
Distributable reserves

3,490
3,270
Other non-distributable reserves

5,276
12,649
---------
---------
Total equity shareholders' funds

19,165
26,318
---------
---------

Net asset value per Ordinary Share
141.57p

194.42p

  
STATEMENT OF CASH FLOW
for the year ended 31 August 2008

Year ended 31 August 2008
Year ended 31 August 2007

£'000
£'000
Operating activities
Dividends received
1,190
1,624
Bank interest received
246
77
Management fee paid
(474)
(374)
Administration fee paid
(84)
(84)
Performance fee paid
(726)
(713)
Loan interest paid
(740)
(660)
Other expenses paid
(218)
(226)

---------
---------
Net cash outflow from operating activities
(806)
(356)

Investing activities
Purchase of investments at fair value through profit or loss
(3,413)
(3,821)
Sale of investments at fair value through profit or loss
21,294
5,197

---------
---------
Net cash inflow from investing activities
17,881
1,376

Financing activities
Dividends paid on Ordinary Shares
(879)
(1,224)
Bank loan arrangement fee
(10)
-
Purchase of own shares for Treasury
-
(907)

---------
---------
Net cash outflow from financing activities
(889)
(2,131)
---------
---------
Increase/(decrease) in cash and cash equivalents
16,186
(1,111)

---------
---------

Cash and cash equivalents at beginning of year
783
1,894
Increase/(decrease) in cash and cash equivalents
16,186
(1,111)

---------
---------
Cash and cash equivalents at year end
16,969
783

---------
---------
This information is provided by RNSThe company news service from the London Stock Exchange  END  FR FSAFIISASESF