Unaudited Half-Yearly Financial Report for the Six Months Ended 30 September 2023
23/11/2023 14:00
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23 NOVEMBER 2023
NORTHERN 2 VCT PLC
UNAUDITED HALF-YEARLY FINANCIAL REPORT
FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2023
Northern 2 VCT PLC is a Venture Capital Trust (VCT) managed by Mercia Fund
Management Limited. It invests mainly in unquoted venture capital holdings and
aims to provide long-term tax-free returns to shareholders through a
combination of dividend yield and capital growth.
Financial highlights (comparative figures as at 30 September 2022 and 31 March
2023)
Six months ended 30 September 2023 Six months ended 30 September 2022 Year ended 31 March 2023
Net assets £113.9m £113.1m £109.6m
Net asset value per share 58.6p 60.2p 59.0p
Return per share
Revenue 0.3p (0.2)p (0.2)p
Capital 0.6p (2.4)p (1.7)p
Total 0.9p (2.6)p (1.9)p
Dividend per share declared in respect of the period 1.8p 2.0p 3.3p
Cumulative return to shareholders since launch
Net asset value per share 58.6p 60.2p 59.0p
Dividends paid per share* 137.3p 134.0p 136.0p
Net asset value plus dividends paid per share 195.9p 194.2p 195.0p
Mid-market share price at end of period 55.0p 58.0p 54.5p
Share price discount to net asset value 6.1% 3.7% 7.6%
Tax-free dividend yield (based on net asset value per share)** 5.5% 5.2% 5.1%
*Excluding interim dividend not yet paid
**The annualised dividend yield is calculated by dividing the dividends paid
in respect of the 12 month period ended on each reference date by the net
asset value per share at the start of the 12 month period.
Enquiries:
James Sly, Mercia Asset Management PLC – 0330 223 1430
Website: www.mercia.co.uk/vcts
HALF-YEARLY MANAGEMENT REPORT TO SHAREHOLDERS
FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2023
Despite the subdued nature of the investment markets over the past six months,
your Company has continued to achieve successful exits of its investments and
has deployed its liquidity to continue to support innovation and growth in the
portfolio.
The UK economy, in common with many developed markets, continues to face
challenging macroeconomic conditions with continued inflationary pressures,
high interest rates, and low rates of economic growth in addition to the
uncertainties posed by geopolitical events. The impact of these challenges
varies across the portfolio, from trading fundamentals to valuations and
capital availability.
Results and dividend
The Company achieved a positive return of 0.9 pence per share in the period
(2022: loss of 2.6p per share), equivalent to 1.5% of the unaudited net asset
value (NAV) per share on 31 March 2023. After deducting the final dividend for
the year to March 2023 of 1.3p, paid in August 2023, the NAV at 30 September
2023 was 58.6 pence.
It remains our objective to pay a dividend at least equivalent to 5% of the
opening NAV in each year. The Board has declared an interim dividend for the
year ending 31 March 2024 of 1.8 pence per share, which will be paid on 17
January 2024 to shareholders who are on the register on 15 December 2023.
Venture capital investment activity and portfolio update
During the period proceeds from portfolio sales totalled £12.3 million,
compared with a cost of £2.8 million. These proceeds predominantly arose from
the sale of Evotix for initial proceeds of £11.5 million compared with a cost
of £2.5 million, a realised multiple of 4.6 times and an excellent result,
especially given the market backdrop. Evotix had been valued at its exit price
in the 31 March 2023 NAV and therefore the substantial gain on sale had
already been recognised in prior accounting periods. In addition, there were a
number of previously exited investments where deferred proceeds were paid and
therefore recognised in the period.
The unaudited total (realised and unrealised) gain on investments for the six
month period to 30 September 2023 was £2.1 million (six months ended 30
September 2022: loss of £3.8 million) of which £1.5 million related to net
unrealised gains in the portfolio driven by commercial traction in several
portfolio companies. As is to be expected in a portfolio of more than 50
companies, these increases have been partially offset by some value reductions
where particular portfolio companies have struggled or are at risk of failure.
Investment activity continued in the period, with £5.0 million invested
across five existing and two new portfolio companies. The new portfolio
companies are Camena Bioscience (£1.7 million investment), a Cambridge-based
bio-science company advancing innovative DNA synthesis, and Risk Ledger (£1.5
million investment), a cyber-security business focussed on vendor risk
management.
The listed AIM portfolio substantially comprises our holding in musicMagpie
plc, a previously partially exited investment, where the share price has
stabilised following a decline in the previous financial year.
In the period, the decision was made to liquidate the £8.9 million portfolio
of listed securities managed by RBC Brewin Dolphin. The portfolio was used to
generate a yield on cash given the low interest rate environment which
persisted until recently. Over the period of investment this portfolio
generated returns of more than 3% per annum, but recent interest rate rises
has meant that alternative investments are now available which can generate
similar returns with less market risk. As a result, the funds were moved into
a money market fund with a large, reputable counterparty.
Dividend and investment income for the six month period to 30 September 2023
was £1.1 million (unaudited) (six months ended 30 September 2022: £0.1
million) reflecting increased yields on cash balances held in interest bearing
accounts and the money market fund.
The cash generated from investment disposals, in combination with the proceeds
from the 2022/23 fully subscribed £6.0 million public share offer and the
2023/24 offer that is currently open, enables your Company to be well
positioned to pursue new opportunities. It is particularly important in the
current environment that the Company has ample cash reserves to "follow its
money" in existing investments and can continue to invest in new opportunities
which may now exhibit more favourable investment terms.
Shareholder issues
As a result of the fully subscribed public share offer launched in January
2023, 10,290,184 new ordinary shares were issued in April 2023 for gross
proceeds of £6.0 million.
Our dividend investment scheme, which enables shareholders to invest their
dividends 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, with around 15% of total dividends reinvested by shareholders during
the year.
We continue to experience a sustained demand for long-term growth capital for
smaller companies in the UK. In order to continue to support our existing
portfolio and invest in new early stage opportunities, we are currently
fundraising in conjunction with the other Northern VCTs. Full details of how
to participate in the fund raise is available on the Company’s website at
http://www.mercia.co.uk/vcts/.
We have maintained our policy of being willing to buy back the Company’s
shares in the market when necessary in order to maintain liquidity, at a 5%
discount to NAV. During the period, a total of 2,161,856 shares were
repurchased for cancellation, equivalent to approximately 1.2% of the opening
share capital.
Change of registrar
We are pleased to report that from close of business on 10 November 2023 the
Company changed its registrar to The City Partnership (UK) Limited
(“City”). You will receive a letter confirming this change, and should you
need to contact City, contact details may be found on the Company’s website.
Board of directors
In accordance with the details outlined in our Annual Report, Frank Neale
retired from the Board following the Company’s Annual General Meeting in
August 2023. Following Frank’s retirement, Cecilia McAnulty has been
appointed as Senior Independent Director and Ranjan Ramparia has been
appointed as Chair of the Audit Committee.
VCT qualifying status and legislation
The Company has continued to meet the stringent qualifying conditions laid
down by HM Revenue & Customs for maintaining its approval as a VCT. Our
investment manager monitors the position closely and reports regularly to the
Board. Philip Hare & Associates LLP has continued to act as independent
adviser to the Company on VCT taxation matters.
The 2025 "Sunset Clause" was legislation which the EU required the UK to enact
some years ago to end shareholders' upfront tax relief on VCT investments from
2025 - this was intended to harmonise the treatment of subsidised capital
across the EU. After considerable lobbying from the VCT industry, we were
pleased to see in the Autumn Statement of 22 November 2023 the commitment to
introduce legislation to extend the date of the Sunset Clause to 2035.
Outlook
While macroeconomic conditions continue to cause considerable uncertainty and
challenges for early stage businesses, we continue to work with our investment
manager to support our existing portfolio, taking opportunities as they arise
to realise returns for shareholders. Your Company is invested in a diversified
portfolio of businesses with medium-term prospects in which we remain
confident.
The Board very much appreciates the continuing support of shareholders.
On behalf of the Board
David Gravells
Chair
INVESTMENT PORTFOLIO
(Unaudited) as at 30 September 2023
Cost £000 Valuation £000 % of net assets by value
Fifteen largest venture capital investments:
Gentronix 1,164 3,683 3.2%
Grip-UK (t/a Climbing Hangar) 3,536 3,536 3.1%
Volumatic Holdings 216 3,037 2.7%
Tutora (t/a Tutorful) 2,490 2,627 2.3%
Pure Pet Food 1,605 2,463 2.2%
Project Glow Topco (t/a Currentbody.com) 1,544 2,410 2.1%
Newcells Biotech 2,257 2,394 2.1%
Rockar 1,766 2,341 2.1%
Biological Preparations Group 2,166 2,206 1.9%
Netacea 2,165 2,181 1.9%
Buoyant Upholstery 1,057 1,982 1.7%
Adludio 1,916 1,916 1.7%
Forensic Analytics 1,836 1,836 1.6%
Clarilis 1,828 1,828 1.6%
Camena Bioscience 1,702 1,702 1.5%
Fifteen largest venture capital investments 27,248 36,142 31.7%
Other venture capital investments 45,213 30,123 26.5%
Total venture capital investments 72,461 66,265 58.2%
Net current assets 47,622 41.8%
Net assets 113,887 100.0%
Extracts from the unaudited half-yearly financial statements for the six
months ended 30 September 2023 are set out below.
INCOME STATEMENT
(Unaudited) for the six months ended 30 September 2023
Six months ended 30 September 2023 Six months ended 30 September 2022 Year ended 31 March 2023
Revenue £000 Capital £000 Total £000 Revenue £000 Capital £000 Total £000 Revenue £000 Capital £000 Total £000
Gain on disposal of investments - 518 518 – 126 126 – (219) (219)
Movements in fair value of investments - 1,533 1,533 – (3,887) (3,887) – (1,302) (1,302)
- 2,051 2,051 – (3,761) (3,761) – (1,521) (1,521)
Dividend and interest income 1,123 - 1,123 146 – 146 598 – 598
Investment management fee (258) (775) (1,033) (248) (745) (993) (505) (1,514) (2,019)
Other expenses (322) (322) (246) – (246) (522) – (522)
Return before tax 543 1,276 1,819 (348) (4,506) (4,854) (429) (3,035) (3,464)
Tax on return 81 (81) – – – 109 (109) –
Return after tax 624 1,195 1,819 (348) (4,506) (4,854) (320) (3,144) (3,464)
Return per share 0.3p 0.6p 0.9p (0.2)p (2.4)p (2.6)p (0.2)p (1.7)p (1.9)p
BALANCE SHEET
(Unaudited) as at 30 September 2023
30 September 2023 £000 30 September 2022 £000 31 March 2023 £000
Fixed assets
Investments 66,265 74,767 80,314
Current assets
Debtors 396 60 118
Cash and cash equivalents 47,367 38,371 29,318
47,763 38,431 29,436
Creditors (amounts falling due within one year) (141) (88) (174)
Net current assets 47,622 38,343 29,262
Net assets 113,887 113,110 109,576
Capital and reserves
Called-up equity share capital 9,722 9,388 9,282
Share premium 43,847 37,658 38,165
Capital redemption reserve 957 692 849
Capital reserve 64,843 61,151 59,176
Revaluation reserve (6,195) 4,160 2,015
Revenue reserve 713 61 89
Total equity shareholders’ funds 113,887 113,110 109,576
Net asset value per share 58.6p 60.2p 59.0p
STATEMENT OF CHANGES IN EQUITY
(Unaudited) for the six months ended 30 September 2023
Non-distributable reserves Distributable reserves Total £000
Called-up share capital £000 Share premium £000 Capital redemption reserve £000 Revaluation reserve* £000 Capital reserve £000 Revenue reserve £000
At 1 April 2023 9,282 38,165 849 2,015 59,176 89 109,576
Return after tax - - - (8,210) 9,405 624 1,819
Dividends paid - - - - (2,531) - (2,531)
Net proceeds of share issues 548 5,682 - - - - 6,230
Shares purchased for cancellation (108) - 108 - (1,207) - (1,207)
At 30 September 2023 9,722 43,847 957 (6,195) 64,843 713 113,887
STATEMENT OF CHANGES IN EQUITY
for the six months ended 30 September 2022
Non-distributable reserves Distributable reserves Total £000
Called-up share capital £000 Share premium £000 Capital redemption reserve £000 Revaluation reserve* £000 Capital reserve £000 Revenue reserve £000
At 1 April 2022 8,145 21,952 615 9,765 63,642 735 104,854
Return after tax – – – (5,605) 1,099 (348) (4,854)
Dividends paid – – – – (2,682) (326) (3,008)
Net proceeds of share issues 1,320 15,706 – – – – 17,026
Shares purchased for cancellation (77) – 77 – (908) – (908)
At 30 September 2022 9,388 37,658 692 4,160 61,151 61 113,110
STATEMENT OF CHANGES IN EQUITY
for the year ended 31 March 2023
Non-distributable reserves Distributable reserves Total £000
Called-up share capital £000 Share premium £000 Capital redemption reserve £000 Revaluation reserve* £000 Capital reserve £000 Revenue reserve £000
At 1 April 2022 8,145 21,952 615 9,765 63,642 735 104,854
Return after tax – – – (7,750) 4,606 (320) (3,464)
Dividends paid – – – – (6,408) (326) (6,734)
Net proceeds of share issues 1,371 16,213 – – – – 17,584
Shares purchased for cancellation (234) - 234 – (2,664) – (2,664)
At 31 March 2023 9,282 38,165 849 2,015 59,176 89 109,576
*The revaluation reserve is generally non-distributable other than that part
of the reserve relating to gains/losses on readily realisable quoted
investments, which are distributable.
STATEMENT OF CASH FLOWS
(Unaudited) for the six months ended 30 September 2023
Six months ended 30 September 2023 £000 Six months ended 30 September 2022 £000 Year ended 31 March 2023 £000
Cash flows from operating activities
Return before tax 1,819 (4,854) (3,464)
Adjustments for:
(Gain)/loss on disposal of investments (518) (126) 219
Movements in fair value of investments (1,533) 3,887 1,302
(Increase)/decrease in debtors (278) (17) (75)
(Decrease)/increase in creditors (33) (65) 21
Net cash outflow from operating activities (543) (1,175) (1,997)
Cash flows from investing activities
Purchase of investments (5,715) (5,503) (17,600)
Sale/repayment of investments 21,815 4,853 13,643
Net cash inflow/(outflow) from investing activities 16,100 (650) (3,957)
Cash flows from financing activities
Issue of ordinary shares 6,389 17,042 18,075
Share issue expenses (159) (16) (491)
Purchase of ordinary shares for cancellation (1,207) (908) (2,664)
Equity dividends paid (2,531) (3,008) (6,734)
Net cash (outflow)/inflow from financing activities 2,492 13,110 8,186
Net (decrease)/increase in cash and cash equivalents 18,049 11,285 2,232
Cash and cash equivalents at beginning of period 29,318 27,086 27,086
Cash and cash equivalents at end of period 47,367 38,371 29,318
RISK MANAGEMENT
The Board carries out a regular and robust assessment of the risk environment
in which the Company operates and seeks to identify new risks as they emerge.
The principal and emerging 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
within the rules of the VCT scheme. The Board reviews the investment portfolio
with the investment manager on a regular basis.
Financial risk: most of the Company’s investments involve a medium to
long-term commitment and many are 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. The level of economic risk has been elevated most recently by
inflationary pressures and interest rate increases.
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 it is
appropriate and in the interests of the Company to do so. The manager
typically provides an investment executive to actively support the board of
each unquoted investee company. At all times, and particularly during periods
of heightened economic uncertainty, the investment executives share best
practice from across the portfolio with investee management teams in order to
mitigate economic risk.
Stock market risk: some of the Company’s investments are quoted on AIM and
will be subject to market fluctuations upwards and downwards. External factors
such as terrorist activity, political activity or global health crises, 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 Mercia
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.
Changes to UK legislation in the future could have an adverse effect on the
Company’s ability to achieve satisfactory investment returns whilst
retaining its VCT approval.
Mitigation: the Board and the investment manager monitor political
developments and where appropriate seek to make representations either
directly or through relevant trade bodies.
Internal control risk: the Company’s assets could be at risk in the absence
of an appropriate internal control regime which is able to operate effectively
even during times of disruption.
Mitigation: the Board regularly reviews the system of internal controls, both
financial and non-financial, operated by the Company and the investment
manager. These include controls designed to ensure that the Company’s assets
are safeguarded and that proper accounting records are maintained.
VCT qualifying status risk: while it is the intention of the directors that
the Company will be managed so as to continue to qualify as a VCT, there can
be no guarantee that this status will be maintained. A failure to continue
meeting the qualifying requirements could result in the loss of VCT tax
relief, the Company losing its exemption from corporation tax on capital
gains, to shareholders being liable to pay income tax on dividends received
from the Company and, in certain circumstances, to shareholders being required
to repay the initial income tax relief on their investment.
Mitigation: the investment manager keeps the Company’s VCT qualifying status
under continual review and its reports are reviewed by the Board on a
quarterly basis. The Board has also retained Philip Hare & Associates LLP to
undertake an independent VCT status monitoring role.
OTHER MATTERS
The unaudited half-yearly financial statements for the six months ended 30
September 2023 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 2023 have been extracted from the audited financial statements for that
year, which have been delivered to the Registrar of Companies; the independent
auditor’s report on those financial statements (i) was unqualified, (ii) did
not include any reference to matters to which the auditor drew attention by
way of emphasis without qualifying the report and (iii) did not contain a
statement under Section 498 (2) or (3) of the Companies Act 2006. The
half-yearly financial statements have been prepared on the basis of the
accounting policies set out in the annual financial statements for the year
ended 31 March 2023.
Each of the directors confirms that to the best of their knowledge the
half-yearly financial statements have been prepared in accordance with the
Statement “Half-yearly financial reports” issued by the UK Accounting
Standards Board and the half-yearly financial report includes a fair review of
the information required by (a) DTR 4.2.7R of the Disclosure Rules and
Transparency Rules, being an indication of important events that have occurred
during the first six months of the financial year and their impact on the
condensed set of financial statements, and a description of the principal
risks and uncertainties for the remaining six months of the year, and (b) DTR
4.2.8R of the Disclosure Rules and Transparency Rules, being related party
transactions that have taken place in the first six months of the current
financial year and that have materially affected the financial position or
performance of the entity during that period, and any changes in the related
party transactions described in the last annual report that could do so.
The directors of the company at the date of this statement were Mr D P A
Gravells (Chair), Mr S P Devonshire, Miss C A McAnulty and Ms R K Ramparia.
The calculation of return per share is based on the return after tax for the
six months ended 30 September 2023 and on 195,318,553 (30 September 2022:
187,721,836) ordinary shares, being the weighted average number of shares in
issue during the period.
The calculation of net asset value per share is based on the net assets at 30
September 2023 divided by the 194,443,120 (30 September 2022: 187,760,850)
ordinary shares in issue at that date.
The interim dividend of 1.8 pence per share for the year ending 31 March 2024
will be paid on 17 January 2024 to shareholders on the register on 15 December
2023.
A copy of the half-yearly financial report for the six months ended 30
September 2023 will be available on the Mercia Asset Management PLC website.
The contents of the Mercia Asset Management PLC website and the contents of
any website accessible from hyperlinks on the Mercia Asset Management PLC
website (or any other website) are not incorporated into, nor form part of,
this announcement