Northern Investors Co PLC – Northern Investors Co PLC : Half-yearly report

Northern Investors Co PLC : Half-yearly report

7 NOVEMBER 2011

NORTHERN INVESTORS COMPANY PLC

UNAUDITED HALF-YEARLY FINANCIAL REPORT
FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2011

Northern Investors Company PLC is a private equity investment trust managed by NVM Private Equity Limited.  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 unquoted investments and began an orderly realisation of the portfolio with a view to returning funds to shareholders through a series of tender offers over a period of several years.

Financial highlights (comparative figures as at 30 September 2010):

	2011	2010
Net assets	£59.6m	£55.3m
Net asset value per share	307.4p	285.2p
Return per share after tax:   Revenue   Capital   Total	5.2p 3.9p 9.1p	2.7p 15.1p 17.8p
Interim dividend per share
declared in respect of the period	2.2p	2.2p
Mid-market share price	208.5p	178.5p
Share price discount to net asset value	32.2%	37.4%

For further information, please contact:

Northern Investors Company PLC
Nigel Guy/Christopher Mellor                   0191 244 6000

Oriel Securities
Joe Winkley/Emma Griffin                       020 7710 7600

Website:  www.nvm.co.uk

HALF-YEARLY MANAGEMENT REPORT TO SHAREHOLDERS

The past six months have been an eventful period for Northern Investors Company, and I am pleased to have this opportunity to update shareholders about recent developments, review the company’s investment performance and outline the board’s approach to the way forward.

Corporate strategy and investment policy
At the general meeting on 21 July 2011 shareholders approved proposals to modify the company’s objectives and investment policy, with the intention that no new investments would be made and that the portfolio would be managed with a view to progressively returning funds to shareholders over a period of time.  The company has subsequently announced proposals to return cash to shareholders through a series of tender offers over the portfolio realisation period, beginning with an initial tender offer in the fourth quarter of 2011 to return approximately £13 million to shareholders.  Today we have published a circular setting out further details of the tender offer, whereby the company is offering to re-purchase up to 4,267,000 ordinary shares, representing 22% of its issued share capital, at a price of 300p per share, which is equivalent to the unaudited net asset value per share (NAV) at 30 September 2011 less the interim dividend of 2.2p per share payable on 6 January 2012 and an allowance for the costs of the tender offer.

As stated in the tender offer circular, the directors have reviewed the portfolio with the manager and we estimate that an amount equivalent to between 60% and 80% of the present net assets of the company could be returned to shareholders in cash by March 2015.  It is further estimated that the realisation of the portfolio will be substantially completed in approximately five to six years, and that the ultimate cash return to shareholders (including the impending tender offer) could be in the range from 120% to 160% of the present net assets.  However it must be emphasised that such estimates are indicative only and are inevitably subject to a number of material uncertainties including general market conditions, the future performance of investee companies, the behaviour of other shareholders in investee companies and the level of activity in the mergers and acquisitions market.

Performance
Over the six month period to 30 September 2011 the company’s NAV, after deducting the 2010/11 final dividend of 5.8p per share paid in July, rose by 3.3p to 307.4p.  The mid-market share price fell marginally during the period to 208.5p at 30 September 2011.  The following table shows the movement in NAV and share price over the latest periods of six months, one year and three years compared with the movement in the FTSE All-Share index:

Periods to 30 September 2011:	NAV per share	Share price	FTSE All-Share
Six months	+1.1%	– 0.7%	-13.5%
One year	+7.8%	+16.8%	-7.4%
Three years	+20.1%	+33.7%	+6.9%

The share price discount to NAV has fluctuated in a range between 20% and 35% and ended the period at 32%.  Adjusting for cash balances, the implied discount to the directors’ valuation of the portfolio at 30 September 2011 was approximately 44%.

Investment income for the period benefitted from the one-off receipt of £1.0 million from Promanex Group Holdings referred to below, which more than compensated for the high level of legal and professional costs incurred in connection with the review of corporate strategy and associated shareholder meetings.  The revenue return per share was 5.2p compared with 2.7p in the corresponding period last year.

We were pleased to learn that Northern Investors’ long-term performance record was recognised by the company being named as Best Alternative Investment Trust in the What Investment Investment Trust Awards for 2011.

Dividends
The directors have considered future dividend policy in the light of the company’s changed objectives.

In the past your directors have taken a progressive approach to dividends, with the result that the annual dividend has been increased in each of the past 14 financial years, from 1.75p per share in the year ended 31 March 1997 to 8.0p in the year ended 31 March 2011.  An unchanged interim dividend of 2.2p per share has been declared for the year ending 31 March 2012, and we intend in due course, barring unforeseen circumstances, to propose a final dividend of not less than 5.8p, making a total for the year of not less than 8.0p.

It is the board’s present intention to continue distributing substantially all of the revenue surplus available in each financial year, but shareholders will appreciate that the level of investment income, and hence the annual dividend, is likely to reduce as income-producing investments are realised and cash is returned to shareholders through the proposed series of tender offers.  It is expected that for the year ending 31 March 2013 and subsequent years the annual dividend will be paid in the form of a single final dividend, with no interim dividend being paid.  The directors will in any case declare annual dividends sufficient to maintain the company’s authorised investment trust status.

Investment portfolio
No new investments were made during the period, in line with the revised investment policy adopted in July 2011.  Additional investments totalling £399,000 were made in two portfolio companies.

In August 2011 the company’s investment in Promanex Group Holdings, the support services and facilities management contractor, was sold to Costain Group PLC.  Cash totalling £5.2 million was received at completion, comprising £4.2 million for the sale of the investment and £1.0 million of accrued investment income not previously recognised in the financial statements.  The surplus realised by comparison with original cost was £0.8 million, a satisfactory outcome given the difficulties experienced by Promanex during our four year period of ownership.

Deferred proceeds arising from the sale of DxS in September 2009 amounted to a further £0.8 million, of which £0.5 million had already been recognised in the financial statements for the year ended 31 March 2011.

The investment portfolio at 30 September 2011 comprised one AIM-quoted and 27 unquoted holdings with an aggregate carrying value of £43.7 million.  The board continues to review the portfolio with the managers regularly, with a view to monitoring the performance of each holding and the strategy for its ultimate exit.  Our remit from shareholders is to realise the company’s assets in an orderly manner which achieves a balance between an efficient return of cash to shareholders and the maximisation of the value of each investment.  Whilst some holdings may be considered ready for sale at an early stage, the company has a number of investments, some of them relatively large, which are immature and will need to be retained for longer periods in order to enable their inherent value to be successfully realised.  This is a normal profile for a private equity portfolio, and it follows that the strategy for realising individual investments will be flexible and may need to be altered to reflect changes in the circumstances of an investment or in the prevailing market conditions.

The net cash flow generated from the portfolio in the six months to 30 September 2011 was £4.8 million, as a result of which total cash and deposits at the end of the period amounted to £16.1 million.

Board of directors
There have been several changes to the composition of the board.  Michael Denny and Sarah Stewart retired at the close of the annual general meeting on 21 July 2011;  Peter Haigh had intended to continue as a director and as chairman until the continuation vote scheduled to take place in 2012, but decided in view of the change in corporate strategy to bring his retirement forward to 15 September 2011.  On the same date Philip Marsden and I were appointed to the board as non-executive directors, and I accepted the board’s invitation to take up the position of chairman.  On behalf of shareholders I would like to thank all of the retiring directors for their contributions to the company’s success, and I look forward to working with the re-shaped board to implement the change in strategy approved by shareholders.

Risk management
The board carries out a regular review of the risk environment in which the company operates.  There has been no significant change to the key risks discussed on page 9 of the annual report for the year ended 31 March 2011, including those resulting from the size and relative illiquidity of the unquoted investments held by the company.

Prospects
These are early days in the execution of the company’s new strategy.  Your directors believe that the portfolio is in good shape and has the potential to release significant cash and satisfactory gains, as described in more detail in the tender offer circular.  The economic background remains very difficult, particularly for small private companies of the type which makes up the bulk of the portfolio, but your board and managers have extensive experience of managing and exiting private equity investments in unfavourable conditions, and will focus on optimising value and cash flow for the benefit of shareholders.

On behalf of the Board

Nigel Guy
Chairman

The unaudited half-yearly financial statements for the six months ended 30 September 2011 are set out below.

INCOME STATEMENT
(unaudited) for the six months ended 30 September 2011

	Six months ended 30 September 2011			Six months ended 30 September 2010
	Revenue  £000	Capital  £000	Total  £000	Revenue  £000	Capital  £000	Total  £000
Gain on disposal of investments	–	385	385	–	2,436	2,436
Movements in fair value of investments	–	663	663	–	725	725
	———-	———-	———-	———-	———-	———-
	–	1,048	1,048	–	3,161	3,161
Income	1,886	–	1,886	1,027	–	1,027
Investment management fee	(90)	(360)	(450)	(139)	(324)	(463)
Exceptional costs relating to
investment policy review	(308)	–	(308)	–	–	–
Other expenses	(206)	(20)	(226)	(184)	–	(184)
	———-	———-	———-	———-	———-	———-
Return on ordinary activities before tax	1,282	668	1,950	704	2,837	3,541
Tax on return on ordinary activities	(277)	94	(183)	(175)	91	(84)
	———-	———-	———-	———-	———-	———-
Return on ordinary activities after tax	1,005	762	1,767	529	2,928	3,457
	———-	———-	———-	———-	———-	———-
Return per share	5.2p	3.9p	9.1p	2.7p	15.1p	17.8p

				Year ended 31 March 2011
				Revenue  £000	Capital  £000	Total  £000
Gain on disposal of investments				–	3,834	3,834
Movements in fair value of investments				–	3,758	3,758
				———-	———-	———-
				–	7,592	7,592
Income				1,915	–	1,915
Investment management fee				(185)	(1,410)	(1,595)
Exceptional costs relating to
investment policy review				–	–	–
Other expenses				(357)	–	(357)
				———-	———-	———-
Return on ordinary activities before tax				1,373	6,182	7,555
Tax on return on ordinary activities				(330)	330	–
				———-	———-	———-
Return on ordinary activities after tax				1,043	6,512	7,555
				———-	———-	———-
Return per share				5.4p	33.5p	38.9p

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS’ FUNDS
(unaudited) for the six months ended 30 September 2011

	Six months ended  30 September 2011  £000	Six months ended  30 September 2010  £000	Year ended  31 March 2011  £000
Equity shareholders’ funds at 1 April 2011	58,988	52,927	52,927
Return on ordinary activities after tax	1,767	3,457	7,555
Dividends recognised in the period	(1,125)	(1,067)	(1,494)
	———-	———-	———-
Equity shareholders’ funds at 30 Sept 2011	59,630	55,317	58,988
	———-	———-	———-

BALANCE SHEET
(unaudited) as at 30 September 2011

	30 September 2011  £000	30 September 2010  £000	31 March 2011  £000
Fixed asset investments	43,689	34,794	47,736
	———-	———-	———-
Current assets:
Investments	43	1,040	42
Debtors	199	140	765
Cash and deposits	16,098	19,592	12,180
	———-	———-	———-
	16,340	20,772	12,987
Creditors (amounts falling due
within one year)	(399)	(249)	(1,735)
	———-	———-	———-
Net current assets	15,941	20,523	11,252
	———-	———-	———-
Net assets	59,630	55,317	58,988
	———-	———-	———-
Capital and reserves
Called-up equity share capital	4,849	4,849	4,849
Share premium	–	12,694	12,694
Capital redemption reserve	306	306	306
Capital reserve	37,420	38,620	38,986
Special reserve	12,674	–	–
Revaluation reserve	2,484	(3,082)	136
Revenue reserve	1,897	1,930	2,017
	———-	———-	———-
Total equity shareholders’ funds	59,630	55,317	58,988
	———-	———-	———-
Net asset value per share	307.4p	285.2p	304.1p

CASH FLOW STATEMENT
(unaudited) for the six months ended 30 September 2011

	Six months ended  30 September 2011			Six months ended  30 September 2010			Year ended  31 March 2011
	£000		£000	£000		£000	£000		£000
Cash flow statement
Net cash inflow from operating activities			247			900			511
Taxation:
Corporation tax paid			–			–			(1)
Financial investment:
Purchase of investments	(399)			(1,045)			(13,724)
Sale/repayment of investments	5,196			4,991			10,077
	———-			———-			———-
Net cash inflow/(outflow) from financial investment			4,797			3,946			(3,647)
Equity dividends paid			(1,125)			(1,067)			(1,494)
			———-			———-			———-
Net cash inflow/(outflow) before use
of liquid resources			3,919			3,779			(4,631)
Net cash inflow/(outflow) from
use of liquid resources			(1)			(3)			995
			———-			———-			———-
Increase/(decrease) in cash at bank			3,918			3,776			(3,636)
			———-			———-			———-
Reconciliation of revenue return before tax
to net cash flow from operating activities
Revenue return on ordinary activities before tax			1,282			704			1,373
(Increase)/decrease in debtors			66			423			(120)
Increase/(decrease) in creditors			(721)			97			668
Management expenses charged to capital			(380)			(324)			(1,410)
			———-			———-			———-
Net cash inflow from operating activities			247			900			511
			———-			———-			———-
Reconciliation of movement in net funds
	1 April 2011			Cash flows			30 September 2011
		£000			£000			£000
Cash at bank		12,180			3,918			16,098
Short-term investments		42			1			43
		———-			———-			———-
Net funds		12,222			3,919			16,141
		———-			———-			———-

INVESTMENT PORTFOLIO SUMMARY
as at 30 September 2011

Company	Cost £000	Valuation £000	% of net assets by valuation
Kerridge Commercial Systems	3,978	8,148	13.7
Control Risks Group Holdings	3,731	4,484	7.5
Kitwave One	3,633	3,633	6.1
Weldex (International) Offshore Holdings	3,253	3,253	5.4
Axial Systems Holdings	2,311	2,572	4.3
Closerstill Holdings	1,234	2,127	3.6
Alaric Systems	1,619	1,953	3.3
IG Doors	728	1,736	2.9
Envirotec	1,008	1,566	2.6
Paladin Group	1,407	1,552	2.6
	———-	———-	——-
Ten largest investments	22,902	31,024	52.0
Arleigh International	990	1,546	2.6
Wear Inns	1,304	1,304	2.2
Cawood Scientific	1,196	1,196	2.0
CGI Group Holdings	1,723	998	1.7
Optilan Group	1,900	950	1.6
Lanner Group	891	891	1.5
Closer2 Investments	866	866	1.4
S&P Coil Products	330	799	1.3
Promatic Group	1,195	755	1.3
Direct Valeting	578	750	1.3
	———-	———-	——-
Twenty largest investments	33,875	41,079	68.9
Other investments	7,127	2,610	4.4
	———-	———-	——-
Total fixed asset investments	41,002	43,689	73.3
	———-
Net current assets		15,941	26.7
		———-	——-
Net assets		59,630	100.0
		———-	——-

The above half-yearly financial statements for the six months ended 30 September 2011 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 auditors and have not been delivered to the Registrar of Companies.  The figures for the year ended 31 March 2011 have been extracted from the audited financial statements for that year, which have been delivered to the Registrar of Companies;  the independent auditors’ report on those financial statements was unqualified.  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 2011.

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 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, Mr F L G Neale and Mr M P Nicholls.

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 2011 and on 19,395,440 (2010 19,395,440) ordinary shares, being the weighted average number of shares in issue during the period.

The interim dividend of 2.2p per share for the year ending 31 March 2012 will be paid on 6 January 2012 to shareholders on the register at the close of business on 9 December 2011.

A copy of the half-yearly financial report for the six months ended 30 September 2011 is expected to be posted to shareholders by 18 November 2011 and will be available to the public at the registered office of the company at Northumberland House, Princess Square, Newcastle upon Tyne NE1 8ER and on the NVM Private Equity Limited website, www.nvm.co.uk.

Neither the contents of the NVM Private Equity Limited website nor the contents of any website accessible from hyperlinks on the NVM Private Equity Limited website (or any other website) is incorporated into, or forms part of, this announcement.

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