Octopus AIM VCT plc
Final Results
27 May 2021
Octopus AIM VCT plc, managed by Octopus Investments Limited, today announces the final results for the year ended 28 February 2021.
These results were approved by the Board of Directors on 27 May 2021.
You may view the Annual Report in full at www.octopusinvestments.com in due course. All other statutory information will also be found there.
Financial Summary
| 28 February 2021 | 29 February 2020 | |
| Net assets (£’000) | 182,156 | 115,110 |
| Profit after tax (£’000) | 50,850 | 992 |
| Net asset value (“NAV”) per share (p) | 124.7 | 93.3 |
| Dividends per share paid in year (p) | 5.5 | 9.0 |
| Total return (%) * | 39.5 | 1.3 |
| Final dividend proposed (p)** | 3.5 | 3.0 |
| Special dividend proposed (p)** | 2.5 | - |
| Total ongoing charges (%)*** | 1.7 | 1.9 |
* Total return is an alternative performance measure calculated as movement in NAV per share in the period plus dividends paid in the period, divided by the NAV per share at the beginning of the period.
**Subject to shareholder approval at the Annual General Meeting, the proposed final and special dividend will be paid on 13 August 2021 to shareholders on the register on 9 July 2021.
***Total ongoing charges is an alternative performance measure calculated using the AIC recommended methodology.
Chairman’s Statement
Introduction
I am pleased to present the Annual Report of the Octopus AIM VCT for the year ended 28th February 2021. I would like to welcome all new shareholders who have joined in the year.
It has been an extraordinary year, beginning just as serious concerns about a new strain of coronavirus, which had emerged from China and was spreading in Europe were gathering pace. Subsequent events have had an impact on peoples’ lives, jobs and the wider economy as well as on stock market sentiment both here and around the world.
A total lockdown of our economy in March to protect the National Health Service and to save lives was accompanied by a sharp fall in stockmarket indices which only started to stabilise once our government, in common with others around the world indicated that they were prepared to intervene in any way necessary to contain the financial impact of the pandemic. This was a signal for share prices to start to recover and although there remained volatile months, indices continued to rise despite the Government being forced to lock down again when further waves of the disease hit in November and January.
In the year under review AIM has raised £6.2 billion of further and new capital for companies, a sharp increase on the £3.7 billion raised in the previous year. It was really encouraging to see existing AIM companies successfully raising funds to see them through the crisis, emphasising the advantages of a public market listing. Unsurprisingly the number of new issues remained below average although our investment manager has reported a significant uptick since the start of 2021 with more new companies looking to come to public markets in the next six months. Against this background Octopus AIM VCT made £9.6 million of VCT qualifying investments in the period.
In the year under review, the Company raised £27.8 million net of costs through the issue of new shares and continued to buy back shares from shareholders wishing to sell.
Performance
Adding back the 5.5p of dividends paid out in the year, the NAV per share total return was a pleasing +39.5%. To provide context in the same twelve months the FTSE AIM All-Share Index rose by 39.3%, the FTSE SmallCap (excluding investment companies) Index rose by 21.5% and the FTSE All-Share Index rose by 3.5%, all on a total return basis.
Once again stock specific factors had a significant impact on performance, both positive and negative, and these are covered in more detail in the Manager’s review. The need for businesses to adhere to lockdown rules has meant that individual company performances have been even more polarised than usual, although the portfolio’s relatively high exposure to the software, environmental and healthcare sectors has provided a significant boost to returns. The purpose of a VCT is to provide capital for small growth companies and 2020 has seen strong performance from those exposed to the new economy which make up a significant proportion of our investment portfolio.
Further details of performance are contained in the Investment Manager’s Review.
Dividends
In January 2021 an interim dividend of 2.5p was paid to all shareholders in addition to the 3.0p final dividend for the prior year that had been paid in August 2020. The Board has considered the level of dividend in the context of recent share price movements and on this occasion has chosen to raise the final dividend to 3.5p. In addition, as a result of a number of partial and full disposals of holdings at a profit during the year the board is proposing a special dividend of 2.5p which will be paid at the same time as the final dividend, giving a total payment for the year of 8.5p. This represents a 7.1% yield based on the share price of 119.5p on 28 February 2021. The Board hopes to be able to continue to pay a minimum of 2.5p each half year and to adjust the final dividend annually, based on the year end share price, so that shareholders receive either 5p per annum or a 5% yield, whichever is the greater at the time.
Cancellation of Share Premium Account
At the last General Meeting, shareholders voted to cancel share premium to create a pool of distributable reserves to the amount of £35.4 million. This is a regular occurrence to enable the continued payment of dividends and buyback of shares. A further resolution to cancel share premium is being proposed at this year’s Annual General Meeting.
Dividend Reinvestment Scheme
In common with many other VCTs in the industry, the Company has established a Dividend Reinvestment Scheme (“DRIS”). Some shareholders have already taken advantage of this opportunity. For investors who do not require income, but value the additional tax relief on their reinvested dividends, this is an attractive scheme and I hope more shareholders will find it useful. In the course of the year 1,328,650 new shares have been issued under this scheme, returning £1.4 million to the Company. The final dividend referred to above will be eligible for the DRIS.
Share Buybacks
During the year to 28 February 2021 the Company continued to buy back and cancel shares in the market from selling shareholders and purchased 3,867,733 Ordinary shares for a total consideration of £3.9 million. We have maintained a discount of approximately 4.5% to NAV (equating to a 5.0% discount to the selling shareholder after costs), which the Board monitors and intends to retain as a policy which fairly balances the interests of both remaining and selling shareholders. Buybacks remain an essential practice for VCTs, as providing a means of selling is an important part of the initial investment decision and has enabled the Company to grow. As such I hope you will all support the appropriate resolution at the AGM.
Board Changes
At the time of the interim results I welcomed Andrew Boteler who joined the board in March 2020 and whose election was ratified by shareholders at the Annual General Meeting in July. I should now like to announce that after serving on this board since the company was launched in 1998 and as Chairman since 2016 it is now time for me to retire, and I shall not be offering myself for reelection at the forthcoming AGM. I am very pleased to announce that Neal Ransome, who has been a board member since 2016 is to take over as Chairman and Andrew Boteler will chair the audit committee.
Share Issues
During the year 9,686,020 shares were issued under the fundraise that launched on 29 November 2019 and closed on 27 February 2020 raising £9 million after costs.
On 20 August 2020, a prospectus offer was launched alongside Octopus AIM VCT 2 plc to raise a combined total of up to £20 million with a £10 million over allotment facility. This prospectus closed to further applications on 30 November 2020. 15,501,587 shares were issued in the current period, raising £17.2 million after costs.
VCT Status
PricewaterhouseCoopers LLP (“PwC”) provides the Board and Investment Manager with advice concerning continuing compliance with HMRC regulations for VCTs. The Board has been advised that Octopus AIM VCT remains in compliance with conditions laid down by HMRC for maintaining approval as a VCT. From 1 March 2020 a key requirement is to maintain at least an 80% qualifying investment level, up from the previous level of 70%. As at 28 February 2021 91.8% of the portfolio as measured by HMRC rules was invested in qualifying investments.
Annual General Meeting (“AGM”)
The AGM will take place on 22 July 2021 at 11:45am. In light of the UK government’s public health guidelines on the Coronavirus pandemic and the interests of the safety and wellbeing of our shareholders, this year’s AGM will be run as a closed meeting and shareholders will not be able to attend in person. However, we intend to host a virtual shareholder event on the same day as the AGM so that shareholders receive an update from the Investment Manager and can ask the Board and the Investment Manager questions. We would encourage all shareholders to submit their votes for the closed AGM via proxy as there will be no opportunity to vote in person. If you have a question you wish to submit to the virtual shareholder event then please send these via email to AimAGM@octopusinvestments.com by 5.00pm on 17 July 2021.
Further information can be found in the Directors’ Report and Notice of Annual General Meeting.
Formal notices will be sent to shareholders by their preferred method (e-mail or post).
At the AGM a resolution will be proposed to extend the life of the Company until 2027 in order to preserve its VCT status for the benefit of both existing shareholders and new investors who are participating in the latest offer.
Outlook
The recovery in share prices from their lows in March 2020 has continued with remarkably few setbacks given the seriousness of the pandemic and the need for further lockdowns. The conclusion of a Brexit deal removed some of the uncertainty which had overshadowed the UK market for some time and left shares looking relatively undervalued compared with their international competitors. A much quicker than anticipated roll out of vaccines in the UK has further buoyed share prices as investors are now looking through the pandemic as the economy starts to open up again, although there is a note of caution about whether this will lead to inflation.
The portfolio now contains 86 holdings across a range of sectors with exposure to some exciting new technologies in the software, environmental and healthcare sectors. Many of these have been able to raise funds for growth in the past year leaving them well positioned to achieve their ambitions. The balance of the portfolio towards profitable companies remains, and the investment Manager expects to continue to find good opportunities to invest the cash as a recovery in confidence sustains the current increased demand from companies for more growth capital.
Roger Smith
Chairman
27 May 2021
Investment Manager’s Review
Introduction
It feels extraordinary to be reporting such a very strong appreciation in the NAV total return in what was a very turbulent year to 28 February 2021. The year started with the stockmarket already in freefall as the severity of the coronavirus pandemic was becoming apparent. This forced our government in common with others around the world to shut down economic activity to protect healthcare systems and save lives. More encouragingly, policies were then put in place to alleviate the worst of the short term social and economic damage wreaked by the virus. Even though individual volatile months followed, the market steadily recovered from its March lows once the economy demonstrated its potential to bounce back as restrictions were eased over the summer. Although we were locked down again in November amid rising cases, the share prices had started to look through the disastrous economic performance in the second quarter of 2020 and hope for better conditions with fewer restrictions to follow. The approval of the first vaccines and a rapid start to rolling them out as well as a Brexit deal achieved at the final deadline all helped sentiment as investors focused on the relative under-valuation of UK assets rather than renewed lockdown measures introduced in January.
In the year to 28 February 2021 AIM excelled itself by successfully raising new capital for its constituents across the market capitalisation range. For portfolio companies this has left many well financed for future growth plans and has particularly helped many in the healthcare and technology sectors to raise money to develop new treatments and products. The Company has deployed existing cash throughout the year as well as raising £27.8 million net of costs for future investments.
Changes to the Board of Directors
You will see from the Chairman’s statement that Roger Smith, chairman since 2016 and audit chair before that is not seeking re-election at the AGM. Roger has been a member of the board of the VCT since its inception in 1998 and we as managers would like to extend our thanks to him on behalf of the board and shareholders for all his many years working on our behalf. We have particularly valued his experience and advice and welcomed his robust challenges over the years. We wish him well in his retirement.
The Alternative Investment Market
AIM was the best performing UK index in the period, reflecting a higher exposure to growth stocks in the software, technology and healthcare sectors than the wider market. In the twelve months to February 2021 the AIM Index returned 39.3%, well ahead of the Smaller Companies Index (ex-Investment Trusts) which returned a positive 21.5%. The FTSE All-Share Index only achieved a much more modest positive return of 3.5% over the same period, reflecting a much higher weighting in some of the more traditional sectors of the economy including banks, traditional retailers and manufacturing companies.
In the interim report we highlighted the success of AIM in raising new capital for its existing members. In the four months from April onwards we saw a steady procession of companies of all sizes successfully raising money to help with pandemic costs and for growth. You can see on the bar chart below that there was a brief lull in fundraisings in August and September and then a stronger finish to the year. In the twelve months to 28 February 2021 AIM raised a further £5.7 billion of new capital for existing companies which compares to a figure of £3.2 billion the previous year.
Given the background it was not really surprising that AIM raised only £0.5 billion for new companies floating on the market, the same as the previous year which had been overshadowed by Brexit uncertainty. More recent trends have been stronger and anecdotally we are hearing about a healthy pipeline of prospective new entrants from brokers which should be underpinned by a more buoyant market. VCTs play a significant part in the funding process and we identify below the companies we have invested in during the second half of the year.
Performance
Adding back the 5.5p of dividends paid during the year to show the total return, the NAV increased by 39.5% in the year (2020: 1.3% increase). This compares with a total return for the for the FTSE AIM All-Share Index of +39.3%, the FTSE SmallCap Index ex-Investment Trusts of +21.5%, both of which were well ahead of the FTSE All-Share Index which returned a more modest +3.5%. It was a year characterised by individual periods of significant market volatility as investors reacted to unfolding events. Initially share prices fell across the board as the seriousness of the pandemic became apparent and people and companies concentrated on the immediate priorities of keeping themselves and their employees safe. Once the dust had settled, investors quickly focused their attention on those companies showing resilience and balance sheet strength as well as those with an opportunity to capitalise on new opportunities thrown up by the pandemic. This meant that performance was more than ever dominated by stock specific factors.
Among the holdings in the pharmaceutical and healthcare sectors Ergomed had an outstanding year. Profit expectations were upgraded several times as it managed to replace some delayed cancer trials with some trials for Covid-19 drugs fairly early on in the pandemic. It has a range of services it can offer large pharmaceutical companies including the monitoring of drugs for adverse events and conducting drugs trials for very rare diseases. We expect the strong organic growth to continue in the current year.
Another healthcare stock, EKF Diagnostics also performed extremely well, achieving a series of upgrades to forecasts. Like Ergomed, some of its business was negatively impacted by Coronavirus related delays to orders as doctors saw fewer patients and conducted fewer point of care diagnostic tests. However, this was more than made up for orders for Primestore MTM, a Coronavirus sample collection device which has been in strong demand and has generated profits and cash for the Group. Maxcyte, which has developed an instrument which can produce cells safely in large volumes for cell therapy, again saw increased demand for its instruments which have now moved decisively out of the research lab and are being used to develop treatments in the clinic. Forecasts have been upgraded several times and the shares have performed exceptionally well for the VCT. It has announced an intention to seek a dual listing on Nasdaq.
Some of the smaller stocks in the healthcare sector also did very well, helped by much warmer investor attitude towards those needing funding. This has left many of them with cash on the balance sheet and therefore far better equipped for potential success than previous years. Intelligent Ultrasound successfully raised further funds and although its sales of training simulators dipped as a result of the pandemic its software has now been designed into a GE ultrasound machine. It also developed a lung module for use in the Coronavirus pandemic. Verici Dx followed Renalytix AI as a spin-out from EKF Diagnostics, raising finance on AIM. Both shares have done well in the year.
Other portfolio companies benefitted from their exposure to the new economy. The best performing of these was Trackwise Designs which signed a substantial contract with an electric vehicle manufacturer to use its improved harness technology which can also be designed into medical equipment and aircraft to save weight and space. Ilika, which is developing and starting to supply solid state batteries also performed well and both companies successfully raised funds in 2020.
Events forced many companies and individuals to change the way that they operate. In different ways Gear4Music whose high street competition was unable to open their shops in a year when demand for musical instruments was strong, Panoply Holdings which specialises in helping the public sector to embrace efficient ways of working in a digital world and Hasgrove which saw a strong demand for its intranet solution for internal communications were all beneficiaries. GB Group was another strong performer and remains one of the largest holdings in the portfolio even after taking significant profits in the year. Where a company is established and has grown in size we will continue to hold the shares if we still believe it has the capacity to grow further on a medium term time horizon. This helps to balance the portfolio as newly raised cash is invested in earlier stage companies which could take some time to achieve profitability.
A few portfolio companies suffered from pandemic related headwinds which resulted in poor share price performances. Quixant, held back in 2019 by the loss of market share of its largest customer was further impacted in 2020 by the closure of its customer base during lockdown. Sales in this division are now stable and it has some exciting new products for the broadcasting sector and a strong balance sheet. Equals Group suffered from a loss of currency trades from tourists using its platform to exchange money. We sold the shares at a loss. Velocity Composites and Mycelx have customers in sectors badly impacted by the pandemic and its economic consequences and so have faced a challenging year. Breedon Group had to cease trade completely in March 2020 although it was allowed to operate in the subsequent lockdowns and we expect demand to rebound strongly in 2021 as the government looks to increase capital spending on building projects. Its shares have therefore already recovered well.
Those consumer facing companies forced to shut faced significant challenges. Vertu Motors was able to adapt relatively swiftly to an on-line world and was helped by being able to keep its workshops open in recent lockdowns. This was not possible for Escape Hunt or Tasty which have only recently been able to start trading again. The VCT does not have a high exposure to consumer facing businesses.
Several portfolio companies found it harder to sell to customers during the pandemic. Adept Telecom’s share price suffered from lacklustre figures held back by a decline in demand for on premise telephony solutions adding to the longer term decline of its voice and lines business. However, other areas did well, particularly its connectivity services to London schools. We expect growth to accelerate now that this is no longer a significant part of the business. Restore was also impacted by lockdown which left offices empty and recycling services demand lower. Mattioli Woods and Brooks Macdonald had their revenues impacted by lower market valuations on which revenue is calculated and the difficulty of winning new clients while the country was in lockdown. Among the smaller software holdings Osirium, Falanx and DXS all reported similar problems accessing customers and closing deals.
Investing for a VCT involves backing companies when they are still at a very early stage of development and share price progress depends on them being noticed by a wider pool of investors as they grow over time. This quite often takes longer than first expected and they remain potentially vulnerable until they become profitable and self-financing. Our fear in April 2020 was that the pandemic would make raising enough finance to achieve this much harder. To the credit of AIM investors this has not turned out to be the case and even those companies which have faced more difficult trading conditions have in many cases emerged with stronger balance sheets in 2021.
Although the earlier stage companies in the portfolio represent a relatively small proportion by value we expect them to contribute to future performance as their businesses gather momentum. In the year under review there were some examples of companies that demonstrated that they had started to achieve that resulting in share price outperformance. Examples included Ixico, SDI Group, PCI Pal, Synairgen and Renalytix AI. The last of these was spun out of the holding in EKF Diagnostics since when it has made better than expected progress with its commercialisation strategy for its kidneyintelx test in the US as well as achieving a Nasdaq listing.
Portfolio Activity
Having made eleven qualifying investments at a total cost of £5.8 million in the first half of the year, we added seven further qualifying holdings at a cost of £3.8 million in the second half. A total of £9.6 million was well ahead of the £6.3 million invested in the previous year, and the momentum has continued since the year end with a further £5.7m of investments committed in a busy AIM market for fundraisings.
In the second half we invested £1.4 million in three new issues, two of which Verici Dx and Abingdon Health were on AIM and the third of which Oberon Investments was listed on the AQSE Growth market. Verici Dx was another spin out from EKF Diagnostics following the success of Renalytix AI. It has two tests for use on kidney transplant patients. The money has been raised to conduct clinical trials which are expected to show that these tests improve the outcome for patients as well as enabling a more precise prescription of anti-rejection drugs following each transplant. Abingdon Health has built the capability to produce lateral flow tests on a large scale, helped by an initial government order for Covid-19 antibody tests. It expects to be able to develop a domestic market for lateral flow test production as the pandemic exposed the weakness of relying solely on offshore suppliers. Oberon Investments is a small investment management company with ambitious growth plans. The money raised from VCTs is being used to develop a corporate advisory arm to the business.
We also made three follow-on investments in the second half with a total value of £2.1 million. The investment in Popsa was modest to fund the ongoing strong growth of its photo book business. Sales have exceeded forecasts and the valuation has been written up with this round although we still hold it at a 20% discount to the fundraise price to reflect the fact that it is a private company. The investment into Reneuron was more substantial. It has focused its resources on getting approval for its treatment for Retinisis Pigmentosa, for which most sufferers cannot be treated leaving them to eventually go blind. Some significant clinical trial results are expected over the next twelve months, and the company is now financed well into 2022. We also made a second investment into the British Honey Company. It has recently acquired another distillery with some established contracts and brands. Our investment is to increase its canning capacity and set the business up for further growth.
We made one further new investment of £0.3 million in a small private company called The Food Marketplace. It operates a platform on which specialist food vendors can market their products to customers. It has been growing very rapidly and we believe the management team has exciting plans to keep the momentum going as lockdown of the retail economy eases.
The non-qualifying element of the equity portfolio comprises the funds raised in share offers awaiting deployment into qualifying investments. Although we still hold some existing non-qualifying AIM holdings where we see the opportunity for further share price progress, we continued to reduce some of these holdings in the year under review. More recently we have reduced the size of our holdings in the Octopus Managed Portfolios (OPM) as we have made qualifying investments and increased our holdings in the FP Octopus Micro-Cap and the FP Octopus Multi-Cap Income Fund with the result that we now no longer have a position in the OPM funds. This strategy is designed to obtain a better return on funds awaiting investment than the very low rates available on cash and in the year we have seen this to be the driver of positive value growth. In the period under review £2.7 was invested in the FP Octopus Multi-Cap Income Fund and £2.3m into the FP Octopus Micro-Cap. A net divestment of £17.4m was made from the OPM funds.
During the year we took profits on rising share prices and sold part of the holdings in Ergomed, Gamma, GB Group, LoopUp, Access Intelligence, Ilika, Synairgen, Trackwise Designs and VR Education as well as disposing of the entire C4X Discovery and Omega Diagnostic holdings, all at a profit. Cello Health was sold as the result of a takeover bid and the entire holding in Equals Group was sold at a loss after a series of profit warnings. In all disposals raised £10.7 million in cash and made an aggregated profit on original cost of £4.8 million. We will continue to take profits in holdings when they become a large percentage of the portfolio with the proceeds financing dividends.
VCT Regulations
There have been no further changes to the VCT regulations since publication of the previous set of audited accounts. As a reminder, the current requirements are that any funds raised after 6 April 2019 should be 30% invested in qualifying holdings within 12 months of the end of the accounting period in which the shares were issued, and for financial years beginning after 6 April 2019 the portfolio will also have to maintain a minimum of 80% invested at cost in qualifying holdings. We are determined to maintain a threshold of quality and to invest where we see the potential for returns from growth. However, the emphasis of the new regulations is definitely to encourage investment into earlier stage companies and to that extent, it seems likely over a number of years, that the portfolio will see a rise in the number of smaller companies receiving our initial investment. We would expect to invest further in those companies as they demonstrate their ability to grow.
At present there has been little change to the profile of the portfolio, as we continue to hold the larger market capitalisation companies, in which we invested several years ago as qualifying companies, or which we bought in the market prior to the rule changes where we see the potential for them to continue to grow.
In order to qualify companies must:
• have fewer than 250 full time equivalent employees;
• have less than £15 million of gross assets at the time of investment and no more than £16 million immediately post investment;
• be less than seven years old from the date of their first commercial sale (or 10 years if a knowledge intensive company) if raising State Aided (ie VCT) funds for the first time;
• have raised no more than £5 million of State Aided funds in the previous 12 months and less than the lifetime limit of £12 million (or from 6 April 2018 £10 million in 12 months and a £20 million lifetime limit if a knowledge intensive company); and
• produce a business plan to show that the funds are being raised for growth and development.
Long-term responsible investing
The investment team has always invested as long-term responsible shareholders and supported businesses in the process of improving the corporate governance structure. As part of the investment process, the team is incorporating a material risk review depending on the exposure of the underlying business where appropriate. These risks span from environmental (emissions, energy management, waste, ecological impact), social (privacy, security, product quality, selling practices), human (labour, health and safety, diversity), business model (product design, supply chain, material sourcing) to leadership (ethics, competitive behaviour, regulatory, critical incidents, and risk management). The team assess the exposure and how well management is managing these material risks. The team believes that assessing these factors allows for informed investment analysis and it forms part of the investment strategy. The investment manager is taking its duty as a shareholder seriously and acting as a steward of capital. This includes regular engagement with the independent non-executive members of boards. The team’s stewardship and engagement policy can be found here (https://ift.tt/3wEzFew m/519bad6a06ce2d77/original/Octopus-Quoted-SmallerCompanies-Engagement-Policy.pdf)
Coronavirus
The team has continued to work from home for much of the year, operating business as usual, holding meetings with companies and reporting back to your Board on developments within the portfolio on a regular basis.
Reflecting on the underlying portfolio we have been struck by the resilience shown by the companies during what has been a particularly challenging year. The shock of the Coronavirus pandemic led many of them to concentrate on increasing the efficiency of their operations and to embrace new technology. Additionally the majority of our holdings are business rather than directly consumer facing, and many have recurring revenues and are exposed to sectors of the economy which are benefitting from change. When the pandemic struck, forecasts were withdrawn in many cases and then only cautiously reinstated. The result has been that expectations have been upgraded as visibility has improved, supporting rising share prices.
We wrote in last years accounts about our initial concerns about company balance sheets and funding for those companies yet to reach profitability. The willingness of investors to invest money during the pandemic has meant that many companies are now more strongly positioned than they were entering the pandemic and their longer term chances of succeeding in their growth plans have therefore improved despite having to endure difficult trading conditions in the short term.
Outlook and Future Prospects
A year ago we wrote that the uncertainty caused by the Coronavirus pandemic made predictions of any sort almost impossible. In addition, the US was in an election year and Brexit still needed to be settled. Today we have left the EU with a deal, the US has produced a result which ought to provide a more stable environment for global trade and an ongoing roll out of vaccines brings hope that the Coronavirus pandemic can be brought under control. The short term social and economic damage caused by the virus is obvious to all, however, economists have reasons to be more upbeat about the future. A combination of the policy support from governments around the world, the easing of global trade tensions, the growing strength of corporate balance sheets and the spike in the consumer savings ratio could all contribute to a significant pick up in spending and growth later in the year.
We believe that the recent market strength points to a return of investor confidence in UK assets now that Brexit talks are concluded which should be a trigger for the valuation discount to overseas markets to continue to close. Companies, which had been understandably cautious about the path out of lockdown have started to resume guidance on forecasts, many of which have already been raised in 2021 with the prospect of further upgrades to come as long as the recovery continues. This, together with the re-appearance of takeover bids for companies should provide support for share prices. This is despite the looming threat from inflation and its potential impact on equity valuations, the presence of which has started to be felt in particular by very highly rated US technology stocks. More positively, the new issues market has been stronger so far in 2021 supplementing the secondary fundraising market which remained healthy throughout the volatile months of 2020.
The portfolio’s strength is that it is well diversified both in terms of sector exposure and in terms of individual company concentration. It now contains 86 holdings with investments across a range of sectors including healthcare and technology and the balance of the portfolio towards profitable companies remains. Encouragingly, as a result of successful fundraises in 2020 a high proportion of the unprofitable companies in the portfolio are now well financed to execute on their growth ambitions. The VCT currently has funds available for the many new investment opportunities that are presenting themselves as well as enabling us to support existing portfolio companies where we can. We remain selective when viewing prospective new investments, and have so far made seven qualifying investments in the new financial year.
The AIM Team
Octopus Investments Limited
27 May 2021
Directors' Responsibility Statement
The Directors are responsible for preparing the Annual Report and Accounts in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors are required to prepare the financial statements and have elected to prepare the Company’s Financial Statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law) 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 for the Company for that period.
In preparing these Financial Statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and accounting estimates that are reasonable and prudent;
• state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the Financial Statements;
• prepare the Financial Statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business; and
• prepare a Strategic Report, a Director’s Report and Director’s Remuneration Report which comply with the requirements of the Companies Act 2006.
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 are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for ensuring that the annual report and accounts, taken as a whole, are fair, balanced, understandable and provide the information necessary for shareholders to assess the Company’s position and performance, business model and strategy.
Website Publication
The Directors are responsible for ensuring the Annual Report and the Accounts are made available on a website. Financial statements are published on the Company’s website in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the Company’s website is the responsibility of the Directors. The Directors’ responsibility also extends to the ongoing integrity of the Financial Statements contained therein.
Directors’ responsibilities pursuant to Disclosure Guidance and Transparency Rules 4 (DTR4)
Roger Smith (Chairman), Stephen Hazell-Smith, Joanne Parfrey Neal Ransome and Andrew Boteler, the Directors, confirm to the best of their knowledge that:
• the financial statements have been prepared in accordance with the Financial Reporting Standard applicable in the United Kingdom and Republic of Ireland (“FRS 102”) and give a true and fair view of the assets, liabilities, financial position and profit and loss of the Company; and
• the Annual Report includes a fair review of the development and performance of the business and the financial position of the Company, together with a description of the principal risks and uncertainties that it faces. For and on behalf of the Board
Roger Smith
Chairman
27 May 2021
NON-STATUTORY ACCOUNTS
The financial information set out below does not constitute the Company's statutory accounts for the years ended 28 February 2021 or 29 February 2020 but is derived from those accounts. Statutory accounts for the year ended 29 February 2020 have been delivered to the Registrar of Companies and statutory accounts for the year ended 28 February 2021 will be delivered to the Registrar of Companies in due course. The Auditor has reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the Auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The text of the Auditor's reports can be found in the Company's full Annual Report and Accounts at www.octopusinvestments.com
Income Statement
| Year to 28 February 2021 | Year to 29 February 2020 | |||||
| Revenue | Capital | Total | Revenue | Capital | Total | |
| £'000 | £’000 | £’000 | £'000 | £’000 | £’000 | |
| Gain on disposal of fixed asset investments | - | 4,361 | 4,361 | - | 349 | 349 |
| Gain on disposal of current asset investments | - | 58 | 58 | - | 382 | 382 |
| Gain on valuation of fixed asset investments | - | 44,908 | 44,908 | - | 505 | 505 |
| Gain on valuation of current asset investments | - | 3,655 | 3,655 | - | 1,507 | 1,507 |
| Investment Income | 472 | 51 | 523 | 776 | 36 | 812 |
| Investment management fees | (487) | (1,461) | (1,948) | (482) | (1,445) | (1,927) |
| Other expenses | (707) | - | (707) | (636) | - | (636) |
| Profit/(loss) before tax | (722) | 51,572 | 50,850 | (342) | 1,334 | 992 |
| Tax | - | - | - | - | - | - |
| Total comprehensive income/(loss) after tax | (722) | 51,572 | 50,850 | (342) | 1,334 | 992 |
| Earnings per share – basic and diluted | (0.5)p | 37.9p | 37.4p | (0.3)p | 1.1p | 0.8p |
• The ‘Total’ column of this statement represents the statutory Income Statement of the Company; the supplementary revenue return and capital return columns have been prepared in accordance with the AIC Statement of Recommended Practice.
• All revenue and capital items in the above statement derive from continuing operations.
• The Company has only one class of business and derives its income from investments made in shares and securities and from bank and money market funds, as well as OEIC funds.
The Company has no recognised gains or losses other than the results for the period as set out above. Accordingly a Statement of Comprehensive Income is not required.
Balance Sheet
| As at 28 February 2021 | As at 29 February 2020 | |||
| £’000 | £’000 | £’000 | £’000 | |
| Fixed asset investments | 129,915 | 81,699 | ||
| Current assets: | ||||
| Investments | 16,212 | 24,859 | ||
| Money market funds | 1,326 | 1,324 | ||
| Debtors | 1,864 | 78 | ||
| Applications cash* | 162 | 16,456 | ||
| Cash at bank | 33,724 | 7,911 | ||
| 53,288 | 50,628 | |||
| Creditors: amounts falling due within one year | (1,047) |
(17,217) |
||
| Net current assets | 52,241 | 33,411 | ||
| Total assets less current liabilities | 182,156 | 115,110 | ||
| Called up equity share capital |
1,461 |
1,234 | ||
| Share premium | 57,966 | 65,883 | ||
| Capital redemption reserve | 173 | 134 | ||
| Special distributable reserve | 67,477 | 43,630 | ||
| Capital reserve realised | (21,945) | (26,719) | ||
| Capital reserve unrealised | 78,169 | 31,371 | ||
| Revenue reserve | (1,145) | (423) | ||
| Total equity shareholders’ funds | 182,156 | 115,110 | ||
| NAV per share – basic and diluted | 124.7p | 93.3p | ||
*Cash held but not yet allotted
The statements were approved by the Directors and authorised for issue on 27 May 2021 and are signed on their behalf by:
Roger Smith
Chairman
Company number: 03477519
Statement of changes in Equity
| Share capital £’000 |
Share premium £’000 |
Capital redemption reserve £’000 |
Special distributable reserves* £’000 |
Capital reserve – realised* £’000 |
Capital reserve – unrealised £’000 |
Revenue reserve* £’000 |
Total £’000 |
||
| As at 1 March 2020 | 1,234 | 65,883 | 134 | 43,630 | (26,719) | 31,371 | (423) | 115,110 | |
| Comprehensive income for the year: | |||||||||
| Management fee allocated as capital expenditure | - | - | - | - | (1,461) | - | - | (1,461) | |
| Current year gains on disposal | - | - | - | - | 4,419 | - | - | 4,419 | |
| Current period gains on fair value of investments | - | - | - | - | - | 48,563 | - | 48,563 | |
| Capital investment income | - | - | - | - | 51 | - | - | 51 | |
| Loss after tax | - | - | - | - | - | - | (722) | (722) | |
| Total comprehensive income for the year | - | - | - | - | 3,009 | 48,563 | (722) | 50,850 | |
| Contributions by and distributions to owners: |
|||||||||
| Repurchase and cancellation of own shares | (39) | - | 39 | (3,940) | - | - | - | (3,940) | |
| Issue of shares | 266 | 29,347 | - | - | - | - | - | 29,613 | |
| Share issue costs | - | (1,842) | - | - | - | - | - | (1,842) | |
| Dividends paid | - | - | - | (7,635) | - | - | - | (7,635) | |
| Total contributions by and distributions to owners | 227 | 27,505 | 39 | (11,575) | - | - | - | 16,196 | |
| Other movements: | |||||||||
| Cancellation of share premium | - | (35,422) | - | 35,422 | - | - | - | - | |
| Prior years’ holding gains now realised | - | - | - | - | 1,765 | (1,765) | - | - | |
| Total other movements | - | (35,422) | - | 35,422 | 1,765 | (1,765) | - | - | |
| Balance as at 28 February 2021 | 1,461 | 57,966 | 173 | 67,477 | (21,945) | 78,169 | (1,145) | 182,156 | |
| Share capital £’000 |
Share premium £’000 |
Capital redemption reserve £’000 |
Special distributable reserves* £’000 |
Capital reserve – realised* £’000 |
Capital reserve – unrealised £’000 |
Revenue reserve* £’000 |
Total £’000 |
||
| As at 1 March 2019 | 1,213 | 81,368 | 94 | 36,592 | (28,999) | 32,317 | (81) | 122,504 | |
| Comprehensive income for the year: | |||||||||
| Management fee allocated as capital expenditure | - | - | - | - | (1,445) | - | - | (1,445) | |
| Current year gains on disposal | - | - | - | - | 731 | - | - | 731 | |
| Current period gains on fair value of investments | - | - | - | - | - | 2,012 | - | 2,012 | |
| Capital investment income | - | - | - | - | 36 | - | - | 36 | |
| Loss after tax | - | - | - | - | - | - | (342) | (342) | |
| Total comprehensive income for the year | - | - | - | - | (678) | 2,012 | (342) | 992 | |
| Contributions by and distributions to owners: | |||||||||
| Repurchase and cancellation of own shares | (40) | - | 40 | (3,829) | - | - | - | (3,829) | |
| Issue of shares | 61 | 6,454 | - | - | - | - | - | 6,515 | |
| Share issue costs | - | (295) | - | - | - | - | - | (295) | |
| Dividends paid | - | - | - | (10,777) | - | - | - | (10,777) | |
| Total contributions by and distributions to owners | 21 | 6,159 | 40 | (14,606) | - | - | - | (8,386) | |
| Other Movements: | |||||||||
| Cancellation of share premium | - | (21,644) | - | 21,644 | - | - | - | - | |
| Prior years’ holding gains now realised | - | - | - | - | 2,958 | (2,958) | - | - | |
| Total other movements | - | (21,644) | - | 21,644 | 2,958 | (2,958) | - | - | |
| Balance as at 29 February 2020 | 1,234 | 65,883 | 134 | 43,630 | (26,719) | 31,371 | (423) | 115,110 | |
*Included in these reserves is an amount of £44,387,000 (2020: £16,488,000) which is considered distributable to shareholders.
Cash Flow Statement
| Year to 28 February 2021 |
Year to 29 February 2020 |
|
| £'000 | £'000 | |
| Cash flows from operating activities | ||
| Profit before tax | 50,850 | 992 |
| Adjustments for: | ||
| Increase in debtors | (114) | (7) |
| Increase/(decrease) in creditors | 123 | (84) |
| Gain on disposal of fixed asset investments | (4,361) | (349) |
| Gain on disposal of current asset investments | (58) | (382) |
| Gain on valuation of fixed asset investments | (44,908) | (505) |
| Gain on valuation of current asset investments | (3,655) | (1,507) |
| Non-cash distributions | (51) | - |
| Cash from operations | (2,174) | (1,842) |
| Income taxes paid | - | - |
| Net cash generated from operating activities | (2,174) | (1,842) |
| Cash flows from investing activities | ||
| Purchase of fixed asset investments | (9,638) | (6,236) |
| Proceeds from sale of fixed asset investments | 9,070 | 7,062 |
| Purchase of current asset investments | (5,040) | (1,118) |
| Proceeds from sale of current asset investments | 17,400 | 7,000 |
| Net cash flows from investing activities | 11,792 | 6,708 |
| Cash flows from financing activities | ||
| Movement in applications account | (16,293) | 16,286 |
| Purchase of own shares | (3,940) | (3,829) |
| Share issues | 28,196 | 4,755 |
| Share issue costs | (1,842) | (295) |
| Dividends paid | (6,218) | (9,017) |
| Net cash flows from financing activities | (97) | 7,900 |
| Increase in cash and cash equivalents | 9,521 | 12,766 |
| Opening cash and cash equivalents | 25,691 | 12,925 |
| Closing cash and cash equivalents | 35,212 | 25,691 |
| Cash and cash equivalents comprise | ||
| Cash at bank | 33,724 | 7,911 |
| Applications cash | 162 | 16,456 |
| Money market funds | 1,326 | 1,324 |
| 35,212 | 25,691 |
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