Amati VCT plc

HALF-YEARLY REPORT

For the six months ended 31 August 2017

Amati VCT plc announces that its 2017 Half-Yearly Report has been published. The full report will be made available on the National Storage Mechanism website: http://www.morningstar.co.uk/uk/NSM and can be accessed via the Company's website at www.amatiglobal.com/avct_literature.php.  It will be circulated to shareholders shortly.

Page numbers and cross-references in this announcement below refer to page numbers and cross-references in the PDF of the Half-yearly Report.

CONTENTS

OVERVIEW

Corporate objective

The investment objectives of Amati VCT plc (the "Company") are to generate tax free capital gains and regular dividend income for its shareholders, primarily through Qualifying Investments in AIM-traded companies and through non-qualifying investments as allowed by the VCT legislation. The Company will manage its portfolio to comply with the requirements of the rules and regulations applicable to VCTs from time to time. The Company's policy is to hold a diversified portfolio across a broad range of sectors to mitigate risk.

Key data

Table of investor returns to 31 August 2017 from a sample of share issues

# assumes full recovery of tax relief (y/e 5 April 2006 - 40%; subsequent years - 30%).

**shares issued to Noble Income & Growth VCT plc shareholders as a result of the asset acquisition.

Table of returns

to 31 August 2017 from shares issued under the Dividend Reinvestment Scheme

*shares allotted under the Dividend Reinvestment Scheme are issued without cost.

#assumes full recovery of tax relief at 30%.

CHAIRMAN'S STATEMENT

Overview

The first six months of the year saw a return of more than 29% and was the strongest in the history of Amati VCT, with the exception of the first half of 2009 when the market was bouncing very strongly off its post-crisis lows.  On this occasion the performance reflects the fact that a significant number of the largest holdings in the portfolio have reported good results and reached new highs during the period. 

The investment strategy of the Company has been simplified and focused over recent years and this has underpinned these strong results.  The Manager seeks to identify the best of the next generation of AIM companies, to provide those companies with valuable early stage capital and to support them as long-term shareholders.  It takes time to build up a portfolio of successful and dynamic businesses which have grown out of the seeds which the Amati VCTs have helped to nurture.  As companies' earnings grow and this is mirrored in their stock market valuations, the portfolio evolves and becomes more biased towards the most successful companies, as those which have grown the fastest in value become the largest holdings.  Over the last few years the concentration of the portfolio in the top ten qualifying holdings has been increasing, and this process has accelerated over the last six months. A good way of illustrating this is by the following chart which has been included for the first time in this report.

Amati VCT Qualifying Portfolio

The bubble chart is created based on the market capitalisation of the individual security (the Y axis), the year purchased by Amati VCT plc (the X axis) and the weight held in the portfolio, shown by the size of the bubble.  This allows a three dimensional view of the portfolio, its largest holdings and best performers.   

The ten largest Qualifying Investments are now all capitalised at more than £100m, with three capitalised at over £400m.  The unweighted average term of these investments is now around six years, and the unweighted average returns from these ten investments, based on our investment price (blended across more than one round where we made follow-on investments), is 678% as at the period end.  These companies represent over 50% of the value of the portfolio and provide an exceptionally strong set of core holdings.

The Manager is seeing a number of new opportunities for Qualifying Investments and expects to be able to make a steady stream of further investments.  During the period under review a total of £3.2m was invested in Qualifying Investments, five of which were in new holdings, details of which are given in the Manager's Review which follows.

Investment Performance and Dividend

The NAV Total Return for the six month period was 29.3%, which compares to a rise of 13.2% for the Numis Alternative Markets Total Return Index.  Detailed comments on the performance are given in the Manager's Review.

The dividend policy of the Company is to pay between five and six percent of year-end net asset value, subject to the availability of liquidity and sufficient distributable reserves. In line with this the Board is declaring an interim dividend of 2.0p per share, to be paid on 8 December 2017 to shareholders on the register on 3 November 2017.

Other Corporate Developments

A series of joint top up Share Issues with Amati VCT 2 was launched in October 2016, and was fully subscribed before the closing date, raising a total of £8.3m of which £4.1m was subscribed for shares in Amati VCT. 

The Company was 84% invested in qualifying holdings at the period end, according to the tests required by the VCT legislation. At the time of the AGM, the Board announced that it intends to launch a larger fund raising this year in the form of a Joint Prospectus Offer with Amati VCT 2, raising up to £10m for each company.  At the same time, the boards of both companies also announced that they consider a merger of the two companies would be in the best interests of shareholders.  The merger process has been held up by a particular aspect of the VCT legislation which could have proven detrimental to some of our shareholders.  We have received assurances from HMRC that this was not an intended consequence of the legislation and both boards expect to be able to proceed with a merger once this area of the legislation has been satisfactorily clarified, with the issue of a Supplementary Prospectus and Shareholder Circulars.   Assuming the merger can proceed as planned, it will create a combined VCT capitalised at over £100m (at the time of writing) and the ongoing expenses ratio will be less than the two VCTs have as separate entities.

The External Environment

AIM, which began in 1995, has been coming of age over recent years, supported as it is by a number of tax incentivised elements, of which VCTs are but one.  There is debate about whether these and other tax incentives to support early stage businesses are good value for money for the tax payer.  Recently, a broad range of questions have been posed by the consultation paper "Financing Growth in Innovative Firms" published by HM Treasury in August.  We believe that AIM-focused VCTs play an important role in providing capital to some of the most innovative firms in the UK at a time when other sources of finance are limited, and that the Company's portfolio bears this out.

Outlook

It is always important to remain realistic about expectations following periods of very strong performance. Markets have a tendency to retrace after periods of above average returns. However, the tangible progress being made by many of our portfolio companies has been impressive and creates a strong platform for continued growth, even in tougher times. The Manager expects to see a healthy level of attractive new investment opportunities and a successful fund raising will enable the Company to take full advantage of these as and when they arise. After the Budget next month, we may have a clearer picture of the future landscape for VCTs following our Offer, which I hope will be fully subscribed.

Peter Lawrence

Chairman

13 October 2017

FUND MANAGER'S REVIEW

Market review

As is almost becoming the norm, a volatile political backdrop dominated the six months under review.  Whether it was the US administration's apparent floundering over policy objectives and chronic instability, combined with an increased military assertiveness overseas, or the astonishing scale of the potential for bad debts in the Chinese banking system or an ill-judged snap UK General Election causing UK market jitters, there was no shortage of talking points for those seeking to form a top down view. The tragic conflicts in Syria and the Yemen rumble on with no apparent end in sight, reminders of the dysfunction which has grown up in international relations with the return of proxy wars and battle for spheres of influence.  It would be reasonable to expect that such a backdrop would translate into elevated risk and volatility.  However, the market's main volatility gauge, the CBOE Volatility Index (the "VIX"), remained stubbornly low, only breaching the 15% level on four occasions.  For reference, the VIX surpassed 40% in January 2009, shortly before the global financial crisis reached its nadir, and again in January 2011 when the Eurozone debt crisis reached a peak and long-term interest rates spiked in Greece and other peripheral states.  There are various explanations for this benign volatility, the most plausible in our view being that continued accommodative monetary policies by the Federal Reserve and European Central Bank have thus far been more important for the direction of markets than the political dislocations which dominate the headlines. 

In the UK, AIM, small and mid-cap indices all outperformed the top 100 index.  AIM was especially strong, with its fortunes dominated by superstar stocks such as Fever-Tree and Boohoo but increasingly by the next generation of AIM stars, of which a number are also held by the Company.

Performance

The VCT's NAV Total Return for the six month period was 29.3%.  This compares to the Numis Alternative Markets Total Return over the same period of 13.2%.  The only losing month during the period was June, when the surprise loss of the Conservative party's parliamentary majority spooked markets.  These losses were swiftly reversed in July.

The greatest contributor to performance over the six months under review was Frontier Developments ("Frontier"), gaining 285% over the period.  Frontier is attracting a wider investor audience as it launches its own new video games franchises.  The period under review witnessed the release of Frontier's original title, Elite: Dangerous, on PlayStation 4; the news that Planet Coaster, its second title, had surpassed the sale of one million units; and the announcement that its third franchise will be Jurassic World Evolution, based on Universal Pictures' Jurassic World, one of the biggest blockbusters in cinema history.  The latter announcement is a major endorsement for a UK video games publisher and Frontier's appeal was recently recognised by Tencent, a leading Chinese internet and interactive entertainment company, which has acquired a 9.9% stake in the business through an investment of £17.7m in the company.  Another player in the video games industry, Keywords Studios ("Keywords"), was the second most significant contributor to performance, its shares rising 129%.  Keywords provides technical services to the video games industry and continued its acquisition strategy, acquiring four businesses, which all fit the template of expanding the group's geographical coverage and service lines.  The most eye-catching of these recent acquisitions were a software development business and a video games content management software provider, both giving Keywords entirely new services to offer their customer base.  Keywords finds itself in an enviable position: its market remains highly fragmented yet customers wish to deal with fewer vendors.  By continuing to consolidate its industry it can present itself to video games publishers as a one-stop solution for all video games support services.  The market for outsourced video games services continues to demonstrate healthy levels of growth which, when combined with earnings enhancing acquisitions, provide a powerful catalyst for shareholder returns.  Tristel, the manufacturer of infection control and contamination control products, gained 79%.  There were two principal catalysts for this movement: the first was its move into the US and the submission for regulatory clearance by the Environmental Protection Agency of its Duo chlorine dioxide disinfectant foam; the second was a trading update announcing that revenues and profits for the year to June 2017 would be ahead of expectations.  The TB Amati UK Smaller Companies Fund generated a return of 16% over the six months under review after another period of strong performance, both relative to its benchmark index (the Numis Smaller Companies Index) and its peer group (IA UK Smaller Companies).  Quixant, the designer of computer systems for casino gaming machines, continued its progress and this was rewarded by a 20% rise in its share price.  Quixant experienced stronger than anticipated trading in the first half of 2017 in both its core gaming division and Densitron, the acquisition that completed in 2015.  Premier Technical Services Group, the provider of access and safety services, gained 68% as the market responded positively to new contract wins across all of its disciplines, including a number of framework agreements with new and existing customers and a high level of existing contract renewals.  Other notable contributors included Faron Pharmaceuticals ("Faron"), a pharmaceutical company focused on the treatment of Acute Respiratory Distress Syndrome, which gained 97% over the period ahead of the announcement of Phase III trial data which is expected over the next few months; GB Group, the supplier of identity verification software; and Hardide, the industrial surface coatings company.

The most significant detractor from performance was Idox, the provider of document management software applications to local authorities and the engineering sector, which fell 16% over the period.  Idox released figures that were in-line with expectations but this did not stop 'profit taking' by investors after a strong share price performance in the lead-up to the results.  Science in Sport ("SiS") also succumbed to share price weakness with a fall of 14% over the six months.  SiS announced a continuation of impressive organic growth through sales of their sports nutrition products to professional athletes and the burgeoning number of 'weekend warriors' participating in endurance events.  FreeAgent Holdings ("FreeAgent"), the provider of accounting software to small businesses and freelancers, fell 26% over the period.  Like Idox and SiS, FreeAgent had enjoyed a period of strong performance prior to this and we believe the company will continue to benefit from the structural growth in the UK 'micro-business' market as well as HMRC's Making Tax Digital agenda, which will encourage more small businesses to adopt software for the management of their accounting.

Portfolio activity

Qualifying portfolio

The Company made eight significant Qualifying Investments during the period.

Faron, a company that we initially funded in September 2016, returned for follow-on finance in March.  The original fundraise was to continue the development of its lead product, Traumakine, which treats Acute Respiratory Distress Syndrome; the more recent raise allows the expansion of pre-clinical and early-stage clinical development of Clevegen, Faron's second product, as well as strengthening the balance sheet in advance of negotiations with potential partners for Traumakine.  We were encouraged to follow our investment in Faron by Traumakine's successful progress through its data monitoring stages as well as the potential of Clevegen which, although some way behind Traumakine in its development pipeline, is showing potential in an important area of cancer therapy (the prevention of inflammation and cancer spread).  Towards the end of the period we also took some profits from our holding, following a dramatic rise in the share price which had increased the position size significantly.  We also made a follow-on investment in Rosslyn Data Technologies ("Rosslyn").  The Company's initial position in Rosslyn was acquired shortly before its IPO in 2014.  Rosslyn has a technology platform that gives businesses the ability to ingest structured data from a wide variety of systems and sources then present this data in software where it can be used to inform management decisions.  Rosslyn failed to meet the expectations that were set at its IPO and could not capitalise on partnerships with key systems integrators, including two of the 'Big 4' global professional services firms.  The original investment performed poorly but we were persuaded to revisit the investment case due to the acquisition of a business called Integritie, which improves Rosslyn's technology proposition by enabling the analysis of unstructured, as well as structured, customer data.  The combined business should benefit from cross-selling opportunities across the enlarged customer base.  The final follow-on investment was completed in FairFX Group ("FairFX"), as part of a target funding round to acquire the holding company of CardOneBanking, one of three agency banks in the UK, as well as for further investment into developing FairFX's corporate card business.  The combination of the two businesses will allow FairFX to expand the range of services it offers to its customers by integrating CardOneBanking's agency banking tools into its core proposition and should facilitate improved buying terms with MasterCard, their payment processor. 

The Company acquired a new position in MaxCyte, a medical devices company with a proprietary technology known as 'flow electroporation', as well as its own pipeline of early stage drugs.  Flow electroporation is a technique which uses electrical charges to allow particular molecules to cross a cell membrane without causing damage.  MaxCyte owns the intellectual property to the only pharmaceutical grade machine for performing this technique, and it is becoming widely used in the burgeoning field of cell therapy.  A new position was also acquired in Byotrol, a developer of antimicrobial technologies and products.  Byotrol has been listed on AIM since 2005 and has been a perennial underperformer against expectations, a legacy that is reflected in its share price chart.  However, a new management team has been turning the business around and recently secured FDA (the US Food and Drug Administration) approval for an important claim over the efficacy of their chemistry, which provides an exciting growth opportunity in the US.  Alongside this opportunity, Byotrol recently acquired a business that gives them direct access to supply the NHS with its alcohol free hand sanitizers, which reduce the skin irritation which occurs following the use of competitor, alcohol-based products. 

Escape Hunt was the first of three IPOs in which the Company participated during the period.  Escape Hunt specialises in 'escape games', a leisure concept that is growing rapidly in popularity.  The concept involves a group of friends, family or work colleagues participating in a problem solving game in order to escape from a themed room.  The game is controlled remotely by a 'games master' who influences the cadence of the event by revealing clues.  Escape Hunt came to AIM to raise capital to evolve from a franchise only model to a site ownership model, building out its own locations to capture the attractive returns that are generated on these sites.  The incoming CEO has excellent 'roll-out' experience having been Global Head of Strategy at Pret A Manger and Managing Director at Harris + Hoole, the chain of upmarket coffee shops.  The Company also acquired a position in Velocity Composites ("Velocity") as part of its AIM IPO.  Velocity produces kits of composite materials for supply to aerospace component manufacturers such as BAE, Meggitt and GKN.  This is an element of the supply chain that the manufacturers are keen to outsource to reduce their capital spend and increase floor space at their facilities as well as to drive improved productivity, quality control and materials traceability.  Composite materials now account for over 50% of widebody (twin aisle) and 20% of narrow body (single aisle) aircraft and composite usage is expected to increase alongside a predicted doubling of aircraft numbers over the next twenty years.  The third IPO in which the Company participated was the listing of appScatter Group ("appScatter"), which provides businesses with a software platform for managing their mobile apps across multiple app stores.  The platform allows app developers and publishers the ability to manage and track compliance of their own apps and competing apps.  appScatter charges customers a flexible monthly fee based on the numbers of users and the number of apps managed on the platform and has already built up an impressive list of clients.

Kalibrate Technologies, the provider of software, data and support services to the fuel retail industry, was sold during the period, having been the subject of a successful takeover approach by a private equity buyer.  We also used the strength of Frontier and Keywords during the period to take some profits and maintain the Company's exposure at sensible levels; however, both holdings remain significant positions in the portfolio. 

Non-qualifying portfolio

Hiscox, the FTSE 250 listed commercial and personal insurance business, was sold in order to raise cash to fund the Qualifying Investment activity described above. 

Outlook

The strategy that has been adopted of concentrating the portfolio in our more mature, cash generative businesses by 'running our winners' has played out to the extent that, at the half year end date, the top ten positions in the Company (including the TB Amati UK Smaller Companies Fund) accounted for 58.9% of the total net asset value.  Far from causing us any anxiety, we are reassured by the fact that we consider these businesses amongst the highest quality investments in the portfolio and we are optimistic about the future prospects for these companies.  Whilst some of these names have experienced extraordinary share price gains lately, our belief is that these are companies that can continue to deliver exceptional levels of revenue and profit growth.  This strong core to the portfolio also gives us the flexibility to invest in attractive new qualifying opportunities and we have been pleased to see a return of good quality 'dealflow', reflected in the accelerated rate of investments completed relative to the prior period.  Whilst we cannot predict the direction of the markets, and are aware that the UK in particular faces many challenges over the next few years particularly arising from Brexit, we remain optimistic about the underlying prospects of the businesses in your Company's portfolio.

Dr Paul Jourdan, Douglas Lawson and David Stevenson

Amati Global Investors Limited

13 October 2017

INVESTMENT PORTFOLIO

as at 31 August 2017

The Manager rebates the management fee of 0.75% on the TB Amati UK Smaller Companies Fund and this is included in the yield.

All holdings are in ordinary shares unless otherwise stated.

appScatter plc not listed as at 31 August 2017. Market capitalisation is as at 5 September 2017 (date of market listing).

Byotrol plc market capitalisation excludes placing shares pending listing on 5 September 2017.

Investments held at nil value: China Food Company plc³; Invocas Group plc¹; Polyhedra Group plc^1,3, Rame Energy plc^1,3, Rated People Limited^1,3 Rivington Street Holdings plc, Sorbic International plc³, TCOM Limited^1,3, TMO Renewables Limited², Vicorp Group plc, Vitec Global Limited¹.

As at the period end, the percentage of the Company's assets raised from all share issues held in qualifying holdings for the purposes of Section 274 of the Income and Corporation Taxes Act 2007 is 84.39%.

PRINCIPAL RISKS AND UNCERTAINTIES

The Company's assets consist of equity and fixed interest investments, cash and liquid resources.  Its principal risks include market risk, credit risk and liquidity risk.  Other risks faced by the Company include compliance and internal controls, economic, investment and strategic, regulatory, reputational, operational and financial risks as well as the potential for loss of approval as a VCT.  These risks, and the way in which they are managed, are described in more detail under the heading Other Matters within the Strategic Report in the Company's Annual Report and Accounts for the year ended 28 February 2017.  The Company's principal risks and uncertainties have not changed materially since the date of that report.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

in respect of the half-yearly financial report

We confirm that to the best of our knowledge:

·     the condensed set of financial statements which has been prepared in accordance with FRS 104 "Interim Financial Reporting" gives a true and fair view of the assets, liabilities, financial position and profit or loss of the Company;

·     the Chairman's Statement and Fund Manager's Review (constituting the interim management report) include a true and fair review of the information required by DTR4.2.7R of the Disclosure Guidance 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;

·     the Statement of Principal Risks and Uncertainties above is a fair review of the information required by DTR4.2.7R, being a description of the principal risks and uncertainties for the remaining six months of the year; and

·     the financial statements include a fair review of the information required by DTR4.2.8R of the Disclosure Guidance 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.

For and on behalf of the Board

Peter Lawrence

Chairman

13 October 2017