Half Year Results
In accordance with DTR6.3 the Company releases the full text of its Interim
Report for the six months ended 31 March 2009 (unaudited). The interim report
will be available shortly on the website at www.bee-plc.com
INTERIM REPORT
Baring Emerging Europe PLC
For the six months ended 31 March 2009
CONTENTS
Investment Objective 1
Financial Highlights 1
Performance 1
Chairman's Statement 2-3
Report of the Investment Manager 4-7
Geographic Exposure 8
Twenty Largest Equity Holdings 9
Income Statement 10-11
Balance Sheet 12
Reconciliation of Movement in 13
Shareholders' Funds
Cashflow Statement 14
Notes to Interim Accounts 15-16
Interim Management Report 17
ISA and Savings Scheme 18
Share Price 18
Directors and Officers 19
INVESTMENT OBJECTIVE
The investment objective of the Company is to achieve long term capital growth,
principally through investment in emerging European securities.
FINANCIAL HIGHLIGHTS
At 31 March At 31 March At 30 September
2009 2008 2008
Shareholders' funds (£ 164,562 383,167 280,414
000)
Net asset value ("NAV") 435.48p 942.09p 711.41p
per share
Share price 395.00p 858.00p 630.50p
Discount of share price 9.3% 8.9% 11.4%
to NAV
Six months Six months Year ended
to 31 March to 31 March 30 September
2009 2008 2008
Total return per share (275.26)p 20.51p (205.56)p
Dividend per share* - - 9.00p
* See note 2 on page 15.
PERFORMANCE
Six months Six months Year ended
to 31 March to 31 March 30 September
2009 2008 2008
Net asset value per -38.8% +2.2% -22.8%
share
Benchmark# -36.6% -3.0% -24.8%
Share price -37.4% +2.7% -24.5%
# The benchmark is the MSCI EM Europe 10/40 Index.
CHAIRMAN'S STATEMENT
PERFORMANCE
The bear market in almost all asset classes continued with a vengeance during
the six months under review. Emerging Europe was no exception and our benchmark
index fell by 36.3%. Our own performance was marginally worse than this with
the share price declining by 37.4% and the net asset value by 38.8%. Moves of
this magnitude can present opportunities to add significant value relative to
the benchmark but in practice we failed to take advantage as there were few
places to hide. On the other hand, we do draw some consolation from the fact
that we have avoided small companies and less liquid markets, which have
suffered disproportionately during the decline.
SHARE CAPITAL
The discount averaged 7.2% during the period. The Board's policy is to
constrain discount volatility and to this end 1,627,675 of its ordinary shares
were bought back for cancellation at an average discount of 9.3%. Since 31
March 2009 a further 293,240 shares have been bought back at an estimated
average discount of 11.6%.
GEARING
It has come to no surprise to the Board to see the improvement in the banks'
pre-provision earnings. The cost of our US$10 million unsecured loan and
overdraft facility with State Street Bank and Trust Company is expected to
increase and we have been unable to secure funding for a modest tactical
gearing facility which we would have liked to have had in place at current
market levels. It remains our intention to introduce this latter facility once
the banking climate has improved.
ANNUAL DIVIDEND
At the Annual General Meeting held on 13 January 2009 shareholders approved the
payment of an annual dividend of 9.0p per share on 4 February 2009 to members
on the register at the close of business on 9 January 2009.
VAT ON MANAGEMENT FEES
Progress has been made with the recovery of VAT on past management fees and the
Investment Manager has submitted a claim to HM Revenue & Customs for part of
the reclaim. As there is still no certainty as to the amount that will be
recovered and the timing of any recovery no asset is as yet being recognised.
STOCKBROKER
Following UBS's withdrawal from investment trust broking we have appointed
JPMorgan Cazenove as the Company's brokers after conducting a review of the
alternatives.
OUTLOOK
We share the Manager's view that investors should continue to be attracted to
Emerging Europe over the coming months, drawn by the superior growth outlook
and attractive share price valuations. The case for Russia is underpinned by
its natural resource wealth, a healthy export surplus, and large currency
reserves, while companies in Central Europe should benefit from improved price
competitiveness following currency weakness. The year so far has undoubtedly
been very difficult for investors, but we are encouraged by the recovery seen
in the markets since February and believe that the long term prospects for
Emerging Europe are very good.
Iain Saunders
Chairman
12 May 2009
REPORT OF THE INVESTMENT MANAGER
for the six months to 31 March 2009 -
BACKGROUND
Against the backdrop of a collapse in the oil price, and a significant
deterioration in economic conditions, Emerging Europe underperformed other
emerging markets in the early stages of 2009. Over the twelve months to the
stock market low on 25 February this year, the MSCI Eastern Europe Index
declined by 74% in US dollar terms, compared with falls of 56.5% and 48% in the
MSCI Emerging Markets and MSCI World Indices respectively. Investor sentiment
towards the EMEA region became very negative as concerns mounted about the
ability of some countries in the region to access credit.
Since then, however, Emerging European equities have rallied by more than 30%,
outperforming developed and emerging market indices. The Russian market led
this recovery, adding 45% in US dollar terms, and making it the best performing
European index year to date and one of the best performing markets globally.
We believe the recovery in the Emerging European market was driven by three
factors:
1. clear signs of commitment by organisations such as the International
Monetary Fund and the European Central Bank to the region, alleviating concerns
about the ability of some countries to refinance short-term debt as it falls
due, and helping to improve investor sentiment towards the region;
2. the stabilisation of commodity prices; and
3. a series of downgrades from analysts on GDP and corporate profits growth
forecasts, which helped to align investor expectations with reality, and left
little scope for further negative surprises.
THE REFINANCING SITUATION IN EMEA
As a number of commentators have pointed out, Emerging Europe does have a high
level of foreign currency indebtedness relative to other peers in the emerging
market universe. However, the commonly quoted figure of US$450 billion of
private sector and sovereign debt due in the next twelve months is rather
misleading.
First, it does not take into account the level of foreign reserves. Russia, for
example is practically debt free at the sovereign level, and still has US$400
billion of foreign reserves to draw on as needed. Second, the figure is no more
than many Western countries borrow routinely: US$450 billion is coincidentally
the amount of public debt the Republic of Italy needs to refinance in 2009.
Third, the debt is concentrated in the larger economies in the EMEA region, and
split between corporate and public borrowers. Much of the need for refinancing
on the corporate side comes from the banking sector. Many of the banks are
foreign owned, and able to draw upon the parent company or a syndicate arranged
by the parent for short-term debt financing.
Furthermore, the absolute levels of external debt are not as high as have been
suggested when compared to the size of the underlying economy. Our analysis
suggests that the short-term external debt of Russia and Turkey accounts for no
more than 10% of GDP, even after assuming GDP contraction and adjusting it down
further for currency depreciation. The figure is higher for Poland and the
Czech Republic at 20% of GDP but, again, we do not believe this is excessive by
comparison with many other emerging markets or, indeed, developed markets these
days.
Evidence that concerns about the outlook for Emerging Europe may be exaggerated
is starting to come through. For example, the Turkish banking sector managed to
re-finance short-term debt at a reasonable premium of 150 to 200 basis points
over Libor in November and December 2008.
Even in an extreme scenario where it becomes entirely impossible to refinance
external debt for corporates, central banks across the EMEA region have the
power to provide the necessary liquidity for periods of up to a year, in most
cases. While this sort of intervention would not be sustainable in the long
run, it does show that there is an emergency mechanism in place if needed.
Over the coming months, we expect to see the extension of lines of credit from
the various supranational bodies such as the International Monetary Fund to
some of the smaller Eastern European economies, such as the Baltic and Balkan
states, Ukraine and, to a lesser extent, Hungary and Kazakhstan. These
countries have assumed more foreign borrowing, with a lower level of reserves,
than the larger countries in the region, and are now at a greater risk of
recessionary shock.
From an investment perspective, we do not invest in the smaller markets in
South-East Europe, the Baltic countries or Ukraine which we believe are most
exposed in this environment. Our exposure to the banking sector is concentrated
in highly capitalised, liquid banks which we believe are well positioned to be
able to survive the crisis and strengthen their market position.
CONCLUSION
The unparalleled global nature of the financial crisis means that the magnitude
of adjustment and the duration of the crisis in Emerging Europe will remain
highly contingent on a recovery in the developed world. It is, however,
important to analyse the economic situation for each individual country, since
the degree of export dependency and liquidity risk vary substantially between
countries.
On the positive side, we believe Russia stands out by virtue of its healthy
export surpluses and large currency reserves - the third largest in the world.
It stands in stark contrast to some of the Baltic countries, which we believe
will be severely impacted by the current situation. With regards to the large
Central European economies, we believe the fact that domestic consumption is a
significant component of Polish economic activity will be beneficial in an
environment where export volumes drop sharply.
The Czech Republic's high levels of domestic liquidity, and the fact that
households and businesses have little in the way of non-domestic borrowing, put
the country in a much better situation than, for example, Hungary, where
consumer confidence is significantly depressed by high levels of foreign
currency debt. Central European companies should also start to benefit from
currency weakness, which has improved export competitiveness.
Considering equity market valuations, it is important to highlight that most
Central European markets trade at a significant discount to developed markets
or emerging market peers, even after the recent rally. We believe that the
combination of a superior growth outlook for the region and attractive share
price valuations will continue to attract investors to the region.
Following our investment process, we have been able to find attractive
investment opportunities for Baring Emerging Europe plc in consumer-related
fields such as mobile telephony, retailing and healthcare. We are also very
positive on a number of investments for the Company in commodity-related
companies in Russia and Kazakhstan, which we believe are well positioned to
benefit from superior assets and substantial cost advantages over rivals.
Baring Asset Management,
London
12 May 2009.
TWENTY LARGEST EQUITY HOLDINGS
at 31 March 2009
Market value %
Security Country of £000 of Portfolio
listing
1 Lukoil Holdings Russia 18,210 11.2%
2 Gazprom Russia 17,731 10.9%
3 Rosneft Russia 15,221 9.3%
4 Mobile Telesystems Russia 13,804 8.5%
5 CEZ Czech Republic 13,144 8.1%
6 Garanti Bank Turkey 7,541 4.6%
7 Sberbank Russia 5,851 3.6%
8 Norilsk Nickel Russia 5,778 3.5%
9 PKO BP Poland 5,646 3.5%
10 Tupras Petrol Turkey 5,224 3.2%
11 Oriflame Cosmetics Sweden 4,901 3.0%
12 Vimpel Comm Russia 4,869 3.0%
13 Enka Insaat Turkey 4,730 2.9%
14 Bank Pekao Poland 4,431 2.7%
15 Turkiye Halk Bankasi Turkey 3,741 2.3%
16 Globe Trade Centre Poland 3,730 2.3%
17 Turkiye Vakiflar Turkey 3,594 2.2%
18 Eurocash Poland 3,003 1.8%
19 Komercni Banka Czech Republic 2,628 1.6%
20 KGHM Polska Poland 2,345 1.4%
146,122 89.6%
Other holdings 16,991 10.4%
Total investments 163,113 100.0%
INCOME STATEMENT
(incorporating the Revenue Account*) for the six months to 31 March 2009
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Audited) (Audited) (Audited)
Six months Six months Six months Six months Six months Six months Year Year Year
to to to to to to ended ended ended
31 March 31 March 31 March 31 March 31 March 31 March 30 30 30
2009 2009 2009 2008 2008 2008 September September September
2008 2008 2008
Revenue Capital Total Revenue Capital Total Revenue Capital Total
£000 £000 £000 £000 £000 £000 £000 £000 £000
(Losses)/ - (105,506) (105,506) - 10,151 10,151 - (87,107) (87,107)
gains on
investments
held at fair
value
through
profit or
loss
Income 687 - 687 2,150 - 2,150 10,147 - 10,147
Investment (667) - (667) (1,607) (1,544) (3,151) (3,142) (128) (3,270)
management
fee and
performance
fee
Other (527) - (527) (628) - (628) (1,393) - (1,393)
expenses
Net return (507) (105,506) (106,013) (85) 8,607 8,522 5,612 (87,235) (81,623)
before
finance
costs and
taxation
Finance (6) - (6) (4) - (4) (8) - (8)
costs
Net return (513) (105,506) (106,019) (89) 8,607 8,518 5,604 (87,235) (81,631)
on ordinary
activities
before
taxation
Taxation (51) - (51) (151) - (151) (1,449) - (1,449)
Return (564) (105,506) (106,070) (240) 8,607 8,367 4,155 (87,235) (83,080)
attributable
to ordinary
shareholders
Total Total Total
Return per (275.26)p 20.51p (205.56)p
ordinary
share
*The total column of this statement is the profit and loss account of the
Company.
All revenue and capital items in the above statement derive from continuing
operations. No operations were acquired or discontinued during the period.
The supplementary revenue and capital columns are both prepared under guidance
published by the Association of Investment Companies.
A Statement of Total Recognised Gains and Losses is not required as all gains
and losses of the Company have been reflected in the above statement.
BALANCE SHEET
as at 31 March 2009
(Unaudited) (Unaudited) (Audited)
At 31 March At 31 March At 30 September
2009 2008 2008
£000 £000 £000
Fixed assets
Investments at fair 163,113 377,640 270,697
value through profit
or loss
Current assets
Debtors - 1,183 8,978
Cash at bank and in 2,057 11,358 5,878
hand
2,057 12,541 14,856
Creditors: Amounts (608) (7,014) (5,139)
falling due within one
year
Net current assets 1,449 5,527 9,717
Net assets 164,562 383,167 280,414
Capital and reserves
Called-up share 4,111 4,436 4,273
capital
Share premium account 1,411 1,411 1,411
Special reserve 61,418 79,917 67,745
Redemption reserve 677 352 515
Capital reserve 119,498 320,846 225,004
Revenue reserve 1,017 641 5,036
Own shares held (23,570) (24,436) (23,570)
Total equity 164,562 383,167 280,414
shareholders' funds
Net asset value per 435.48p 942.09p 711.41p
share
RECONCILIATION OF MOVEMENT IN SHAREHOLDERS' FUNDS
For the six
months ended
31 March
2009
(unaudited)
Share Own
Called-up premium Special Redemption Retained shares
share account reserve reserve earnings* held Total
capital
£000 £000 £000 £000 £000 £000 £000
At 30 4,273 1,411 67,745 515 230,040 (23,570) 280,414
September
2008
Buy back of - - (6,327) - - - (6,327)
own shares
for
cancellation
Transfer to (162) - - 162 - - -
capital
redemption
reserve
Net return - - - - (109,525) - (109,525)
for the six
months to 31
March 2009
At 31 March 4,111 1,411 61,418 677 120,515 (23,570) 164,562
2009
For the six
months ended
31 March
2008
(unaudited)
Share Own
Called-up premium Special Redemption Retained shares
share account reserve reserve earnings* held Total
capital
£000 £000 £000 £000 £000 £000 £000
At 30 4,436 1,411 79,917 352 313,323 (17,251) 382,188
September
2007
Buy back of - - - - - (7,185) (7,185)
own shares
held in
treasury
Net return - - - - 8,164 - 8,164
for the six
months to 31
March 2008
At 31 March 4,436 1,411 79,917 352 321,487 (24,436) 383,167
2008
For the year
ended 30
September
2008
(audited)
Share Own
Called-up premium Special Redemption Retained shares
share account reserve reserve earnings* held Total
capital
£000 £000 £000 £000 £000 £000 £000
At 30 4,436 1,411 79,917 352 313,323 (17,251) 382,188
September
2007
Buy back of - - - - - (13,422) (13,422)
own shares
held in
treasury
Buy back of - - (5,069) - - - (5,069)
own shares
for
cancellation
Cancellation - - (7,103) - - 7,103 -
of shares
held in
treasury
Transfer to (163) - - 163 - - -
capital
redemption
reserve
Net return - - - - (83,283) - (83,283)
for the year
to 30
September
2008
At 30 4,273 1,411 67,745 515 230,040 (23,570) 280,414
September
2008
*Retained earnings comprise capital reserve and revenue reserve.
CASHFLOW STATEMENT
for the six months to 31 March 2009
(Unaudited) (Unaudited) (Audited)
Six months Six months Year ended
to 31 March to 31 March 30 September
2009 2008 2008
£000 £000 £000
Operating activities
Income received from 3,576 2,858 7,901
investments
Interest received 16 269 343
Investment management (771) (1,636) (3,241)
fees paid
Other cash payments (663) (607) (1,349)
Net cash inflow from 2,158 884 3,654
operating activities
Servicing of finance
Interest paid (6) (4) (8)
Taxation
Overseas tax paid (51) (151) (1,449)
Capital expenditure
and financial
investment
Purchases of (49,186) (103,893) (204,638)
investments
Sales of investments 54,049 108,361 212,460
Net cash inflow from 4,863 4,468 7,822
capital expenditure
and financial
investments
Equity dividends paid (3,455) (203) (203)
Net cash inflow 3,509 4,994 9,816
before financing
Financing
Buyback of ordinary (7,330) (7,185) (17,487)
shares
Net cash outflow from (7,330) (7,185) (17,487)
financing
Decrease in cash (3,821) (2,191) (7,671)
NOTES TO INTERIM ACCOUNTS
1. ACCOUNTING POLICIES
These financial statements are prepared under the historical cost convention as
modified by the revaluation of fixed asset investments and in accordance with
applicable United Kingdom accounting standards and with the Statement of
Recommended Practice 2003 (revised 2005) regarding the Financial Statements of
Investment Trust Companies. The accounting policies applied to these interim
accounts are consistent with those applied in the accounts for the year ended
30 September 2008.
2. DIVIDEND
No dividend is payable in respect of the six months to 31 March 2009.
Consideration will be given to an annual dividend in respect of the year ended
30 September 2009 at a Board meeting to be held in November. An announcement
will be made shortly after that meeting.
3. COMPARATIVE INFORMATION
The figures and financial information for the year ended 30 September 2008 are
an extract from the latest published accounts and do not constitute statutory
accounts. Full accounts for that period have been delivered to the Registrar of
Companies and included the report of the auditors which was unqualified and did
not contain a statement under Section 237 of the Companies Act 1985.
The accounts for the six months ended 31 March 2009 and for the six months
ended 31 March 2008 have been neither audited nor reviewed by the auditors.
4. SHARES IN ISSUE
As at 31 March 2009 there were 41,107,037 ordinary shares of 10p each in issue
(30 September 2008: 42,734,712 and 31 March 2008: 44,359,906) which includes
3,318,207 ordinary shares held in treasury (30 September 2008: 3,318,207 and 31
March 2008: 3,687,738) and treated as not being in issue when calculating the
net asset value per share. Shares held in treasury are non-voting and not
eligible for receipt of dividends. During the period 1,627,675 ordinary shares
were bought back to be cancelled at a cost of £6,327,000. A further 293,240
ordinary shares were bought back to be cancelled during the period 1 April 2009
to 12 May 2009.
5. TAXATION
The taxation charge of £51,000 (30 September 2008: £1,449,000 and 31 March
2008: £151,000) relates to irrecoverable overseas taxation.
6. RECONCILIATION OF TOTAL RETURN ON ORDINARY ACTIVITIES BEFORE FINANCE COSTS
AND TAXATION TO NET CASH INFLOW FROM OPERATING ACTIVITIES
(Unaudited) (Unaudited) (Audited)
Six months ended Six months ended Year ended
31 March 31 March 30 September
2009 2008 2008
£000 £000 £000
Total return before (106,013) 8,522 (81,623)
finance costs and taxation
Capital return before 105,506 (8,607) 87,235
finance costs and taxation
Increase/(decrease) in 2,905 977 (1,903)
accrued income
(Decrease)/increase in (240) 1,490 22
sundry creditors
Decrease in debtors - 46 51
Management fee capitalised - (1,544) (128)
Net cash inflow from 2,158 884 3,654
operating activities
7. POSTING OF THE INTERIM REPORT
The interim report will be posted to shareholders on or around 20 May 2009. It
will not be advertised in newspapers, but copies will be available from that
date at the Company's Registered Office at 155 Bishopsgate, London, EC2M 3XY.
INTERIM MANAGEMENT REPORT
The Company is required to make the following disclosures in its half year
report:
Principal Risks and Uncertainties
The Board believes that the principal risks and uncertainties faced by the
Company continue to fall into six broad categories:
• Investment strategy.
• Accounting, legal and regulatory.
• Loss of investment team or investment manager.
• Discount.
• Operational.
• Financial.
Information of each of these is given in the Report of the Directors in the
Annual Report for the year ended 30 September 2008.
Related Party Transactions
The Investment Manager is regarded as a related party and details of the
management fee payable during the six months ended 31 March 2009 is shown in
the Income Statement on pages 10 and 11. There have been no other related party
transactions during the six months ended 31 March 2009.
Directors' Responsibility Statement
The Directors are responsible for preparing the half-yearly financial report,
in accordance with applicable law and regulations. The Directors confirm that,
to the best of their knowledge:
• The condensed set of financial statements within the half-yearly financial
report has been prepared in accordance with the Accounting Standards Board's
statement "Half-Yearly Financial Reports"; and
• The Interim Management Report includes a fair review of the information
required by 4.2.7R (indication of important events during the first six months
of the year) and 4.2.8R (disclosure of related party transactions and changes
therein) of the FSA's Disclosure and Transparency Rules.
For and on behalf of the Board
Iain Saunders
Chairman
12 May 2009
ISA AND SAVINGS SCHEME
The Company's shares can be purchased through the BARING EMERGING EUROPE ISA
AND SAVINGS SCHEME. The Scheme provides an easy way to purchase the Company's
shares and caters for regular and/or lump-sum savers.
Full details of the ISA and Savings Scheme are available on the Company's
website,www.bee-plc.com, or may be obtained from the Company Secretary.
SHARE PRICE
The ordinary share price of the Company is quoted in the Financial Times under
the heading "Investment Companies" in the "London Share Service" section.
DIRECTORS AND OFFICERS
Directors
Iain Saunders, Chairman
Steven Bates
John Cousins
Josephine Dixon*
Saul Estrin
Jonathan Woollett
*Chairman of the Audit Committee
Secretary
Michael Nokes, F.C.A.
Registered Office
155 Bishopsgate
London EC2M 3XY
Company Number
4560726
Investment Manager
Baring Asset Management Limited
155 Bishopsgate
London EC2M 3XY
Administrator
Northern Trust Global Services Limited
50 Bank Street
London E14 5NT
Stockbroker
JPMorgan Cazenove Limited
20 Moorgate
London EC2R 6DA
Telephone: 020 7155 5000
www.cazenove.com
Auditors
KPMG Audit Plc
8 Salisbury Square
London EC4Y 8BB
Custodian
State Street Bank & Trust Company Limited
20 Churchill Place
Canary Wharf
London E14 5HJ
Registrars and Transfer Office
Capita Registrars
Northern House
Woodsome Park
Fenay Bridge
Huddersfield HD8 0LA
Telephone: (UK) 0870 664 0300 (calls cost 10p per minute plus network extras)
Overseas: +44 208 639 3399
Email: shareholder.services@capitaregistrars.com
Website
www.bee-plc.com
155 Bishopsgate, London EC2M 3XY
Telephone +44 (0)20-7628 6000
Facsimile +44 (0)20-7638 7928
Internet www.baring-asset.com
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